IMF suggests VAT, tax on cars and all companies

After the plunge of oil prices, the UAE is seeking ways to make up for the loss of oil revenue. The International Monetary Fund (IMF) recommends the UAE strengthens its financial position and diversifies its revenue flows by introducing a Value-Added Tax (VAT), impose an excise on passenger vehicles as well as inflict Corporate Income Tax on all firms and companies.

In a recent report, the IMF revealed that the UAE has the capacity to earn additional revenues amounting to 4.1% of Non-Hydrocarbon Domestic Product (GDP) by introducing a 5% VAT, 15% tax on cars according to its value as well as imposing Corporate Tax on all companies.

The UAE is renowned as being a tax-free jurisdiction. The UAE does not impose personal income tax nor VAT o its citizens, which has made it an idyllic destination for working expats looking to increase the income they earn.

Nevertheless, Dubai-based foreign banks are subject to 20% tax, 5% property tax is imposed on rentals by local municipals while a local tax of 10% is inflicted on hotel services.

In an effort to expand government revenue flows, particularly after the fall of the price of oil, the UAE has deregulated petrol price, which has driven prices up by 24%.

Based on the IMF, the UAE’s tax scheme does not generate sufficient funds for its economy. Therefore, the IMF suggests other means should be introduced in order to generate revenue for the country. In accordance to the IMF, the introduction of a VAT will generate additional 2.7% revenue of Non-Hydrocarbon GDP.

The IMF also suggests the UAE generates additional revenue by imposing a tax on passenger vehicle owners. The IMF explains that the use of vehicles causes various expenses for the government including the maintenance costs, road work and productivity losses caused by traffic congestions. In accordance to the IMF, by introducing a 15% ad valorem tax the UAE would generate an additional 0.6% of Non-Hydrocarbon GDP.

In order to avoid imposing Income Tax on UAE residents, the IMF recommends the UAE expands the scale of the Corporate Tax. The IMF suggests that the UAE should impose Corporate Tax on all domestic and foreign companies which conduct business activity in the country, with the exceptions of those based and operating within the free zones.  However, the IMF suggests that the tax rate should decrease to 10% instead of 20%. According to IMF, the UAE could generate an additional 4.1% of Non-Hydrocarbon GDP if it introduces the measure.

The IMF report was drafted as a preliminary paper for the occasional discussions between the UAE and IMF. The report did not reveal when the new taxes would be introduced. Most experts claim that many years will pass till the new tax reforms are implemented.

According to expert economists at the National Bank of Abu Dhabi, VAT will not be introduced in the following three years. the UAE, as well as all oil-based countries are going through a shift at the moment, where oil prices are set to remain around $55-$70 during the next few years.

The IMF states that even though the fall of oil prices has caused some financial fear and upheaval, the UAE has successfully limited the negative impact. The UAE’s beneficial image as a safe haven and foreign buffers has helped the country compensate for the negative impact the drop of oil price has brought.

The IMF also revealed that the UAE’s non-oil based economy has marked a growth of 4.8% in 2014. Nevertheless, due to the drop of oil prices, the growth rate of the non-oil sector is expected to drop to 3.4% in 2015, which is presumed will rise again to 4.6% by 2020 as a result of the World Expo 2020 as well as investment inflows and infrastructure projects.