UAE Ministry of Finance will allow an 18-month grace period when VAT is introduced

The United Arab Emirates (UAE) Ministry of Finance (MoF) recently announced that the government will allow an 18-month grace period with the introduction of the Value Added Tax (VAT).

The reason the UAE government is planning on introducing a VAT as well as a Corporate Tax is because the country needs to increase its state-budget and compensate from the loss of oil-prices. The MoF confirms that the general public will be informed once a final decision is made. Following the introduction of the VAT, the government will allow an 18-month period to all sectors and entities concerned to carry out their tax obligations in accordance to the VAT Law.

Furthermore, even though the VAT will make goods and services more expensive, the government confirms that the increase will be imposed according to the GCC’s Custom Union framework.

The draft VAT agreement has not yet been finalised because the GCC countries have not yet agreed on a VAT tax rate and what goods and services will be exempted from taxation.

The GCC state members had priory agreed to implement a VAT at the same time. Nevertheless, the UAE government intends to introduce new taxes gradually so as not to influence the country’s competitiveness or discourage investors or businesses from either investing or setting up new businesses. The fact is the UAE has successfully attracted millions of expatriates looking to maximise business profits over recent years.

Economists claim that the country’s competitiveness level will be impacted in the event the UAE decides to introduce an Income Tax.

Concerning the introduction of a new Corporate Tax, the MoF confirmed that it has not been finalised. Once the new Corporate Tax is finalised and introduced, the government will allow a grace period of approximately one year. Currently, each of the seven city-states of the UAE has its own corporate tax regime. The rate of corporate tax is very low and at times non-existent.

Economists believe the UAE will not introduce the new Corporate Tax within 2015. However, the fact that the UAE plans on introducing the new tax reflects the government’s concerns that low oil prices may be the new normal. Following the decrease in oil prices, the UAE has also decreased its energy subsidies. Additionally, the UAE government raised the price of petrol to mirror the international price of energy in August.

During the past year the UAE’s oil revenue has declined by almost a half. Sixty percent of the UAE’s Federal budget relied on oil revenues.

Finally, due to the drop of oil prices, many financial institutions such as Standard Chartered, the International Monetary Fund (IMF) as well as HSBC have revised the predictions they had made concerning Arabian Gulf countries and their economies. The new predictions concerning growth rate are lower than their initial ones.

As a result of the drop, many economists, including those at HSBC and Standard Chartered and the IMF have lowered their growth forecasts for Arabian Gulf countries this year.