The UAE plans to
implement a Corporate Tax and Value Added Tax (VAT), which has fueled many
discussions on what changes the new taxes will bring to both the residents and
the country as a whole.
Some argue the
introduction of the new taxes will benefit the country’s economy while others
hold a different view.
The basic reason the
UAE is planning to introduce new taxes is to compensate on the loss of oil
revenue the decline of oil prices has brought. The UAE federal government does
not generate profits from the sale of oil since it does not sell nor own oil.
Abu Dhabi is the UAE’s largest oil-holder; therefore, the fluctuation of oil
prices influences the city’s local revenue and not the entire UAE.
Thus, the revenue the
federal government will generate from the new taxes will be additional funds
that can be used to invest in the country. Finally, the increased federal funds
will benefit the country as a whole expand even further.
Simultaneously, a
combined approach from all seven emirates towards enhancing the UAE’s economy
is beneficial and can only generate profits, as the total amount the new taxes
will yield will be more than each emirate would generate individually.
Most experts argue
that the introduction of the VAT on goods will not influence consumer-spending
patterns and demand levels will remain steady. Therefore, the VAT will not
influence the economy in a negative manner.
In general, when
consumer demand drops, consumer spending also falls, leaving producers with
less revenue. The aforementioned theory is based on three assumptions, which do
not apply in the UAE’s case.
Firstly, it is
generally suggested that consumer spending will decline since they will not
afford to purchase the same amounts they did before. However, this is only the
case when individuals are unemployed or lose many funds in the stock market or
investments. The above case does not apply to the UAE. VAT will be imposed on
luxury goods and alcohol, therefore the individuals who already afford these
goods will still afford them after the VAT is added.
Secondly, most assume
that the VAT will increase the general prices of goods and services and that
the consumer will have to pay more to cover the tax. However, sellers want to
remain competitive, thus cannot increase prices greatly. Therefore, sellers absorb
most of the difference the VAT will bring in order for prices to remain steady.
Thirdly, the standard
economy model applies to economies where most of the production is domestic.
This does not apply to the UAE because the majority of the production is
imported from abroad. For instance, if the demand for luxury cars declines in
Germany, car manufacturers will go bankrupt.
In basic terms, the
revenue generated from taxes will not be transferred out of the economy. The
funds simply transfer from the private to the public sector within the economy.
If the government uses this money to empower the government, then introducing
the taxes is a bad idea. However, if the tax revenue is consumed to expand the
country’s infrastructure and social services, than introducing the taxes is a
good idea.
When taking into
account that the emirates individual governments continuously invest in their
economies, experts are positive that the federal government will use the tax
funds to enhance the UAE’s economy and general growth.
Other countries impose
high tax rates to aid their economies recover from financial difficulties and
obstacles. The UAE intends to implement a low VAT and its economy is one of the
steadiest in the world. Thus, it is believed the introduction of the VAT will
further enhance the country’s competitive level.
