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UAE May Impose VAT By 2010

by Lorys Charalambous, Tax-News.com, Cyprus

03 July 2007


The United Arab Emirates will have introduced a sales tax by 2010 as the government begins to diversify its revenue base away from its dependence on the oil industry, an IMF official has said.

"It is possible that the tax may be adopted by the UAE government as early as 2010," Mohsin Khan, the IMF's director for the Middle East and Central Asia department, told Zawya Dow Jones by email. "As such, Dubai could provide a model to other member countries on which to base their tax frameworks."

Khan added that the introduction of a sales tax like VAT (value-added tax) would provide the UAE government with a "strong fiscal tool" and give other Gulf Cooperation Council (GCC) countries a "non-oil consumption-based tax system."

"It would also provide them with a valuable tool for fiscal policy given the limitations of monetary policy under the current exchange rate arrangements," he said.

While non-oil revenues increased by 130% between 2005 and 2006, tax receipts only represented 6% of the UAE government's total revenues, according to a UAE Country Report by HC Securities Brokerage, as quoted by the Khaleej Times. The report also noted that this jump in non-oil revenues was triggered by one-off privatisation proceeds and not stable tax revenue streams.

HC Securities also believes that the UAE would be likely to introduce VAT by 2010, and could possibly begin introducing other taxes such as corporate tax and property taxes.

Such is the importance of the oil sector to the UAE government's balance sheet, a 15% fiscal surplus would turn into a 7.8% deficit if oil revenues were removed.

Standard Chartered Bank however, predicts that a sales tax could be introduced in the UAE within the next 18 months at a rate of between 3% and 5% as customs tariffs are removed to comply with trading agreements struck with the world's leading trading nations, the Financial Times reported last week.

Other countries in the Gulf and Middle East regions have also begun recognise that they cannot depend on their oil wealth forever, and last week Bahrain, introduced a 1% social insurance tax on salaries of both nationals and expatriates, to help fund unemployment benefits for all workers.

A comprehensive report in our Intelligence Report series giving background tax and residence information on many of the key offshore jurisdictions is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report4.asp

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