UAE’s Implementation of VAT will boost its Global Competitiveness Level

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.

UAE Considering Taxes as fiscal reforms

Due to the decline of oil prices, many Middle East and North Africa (MENA) countries have implemented various kinds of subsidy reforms aimed to increase government revenues.

Analysts support the MENA should implement an effective tax regime and cut down on expenditure in order to compensate on the oil revenue losses and increase government funds.

MENA governments are considering introducing new taxes aimed to increase their funds to maintain both economic and social stability. Currently, financial policy ideas aim to increase government revenue, enhance investment concerning projects that generate added value on the existing gas and oil export plans as well as boost investment flows towards non-oil and gas based fields. The majority of MENA countries have undertaken large infrastructure projects including electricity, transport, industrial facilities, water, seaports and rail.

The MENA governments acknowledge the significance of using tax policies to motivate international companies to set up within the region. The decrease in oil prices, and the fact that oil prices may remain low, has influenced countries that usually spend large amounts on infrastructure projects. Countries throughout the region are facing budget deficits because of the loss of oil and gas profits and are now considering introducing new tax schemes to increase their revenue.

GCC countries as well as Egypt are considering introducing VAT. The UAE has recently reported they are working towards introducing a corporate tax and VAT. The GCC have been considering introducing a VAT for many years. Many experts believe that the decline of oil prices, which has led to the loss of revenue, is the incentive the GCC countries needed to introduce a VAT.

It is expected that the new tax regimes will be introduced over the following two to three years. Initially the tax rates will be low and will increase over time. The tax revenues will aid governments make up for the loss of oil revenue.

Countries within the region are concerned that the introduction of taxes will influence their investment inflows and competitiveness. However, experts argue that the implementation of indirect taxes will not affect investments.

Indirect taxes will be added on the price of goods and services. This means the end-consumer will be subject to pay tax on the goods and services he/she consumes. Therefore, the tax imposed will be passed from the business to the consumer, meaning the tax will not influence a business planning to set up in the area. 

UAE a strategic Trading Stop of IT goods

Prior to the glamorous Dubai, we all know or have heard of packed with impressive skyscrapers, artificially manmade islands and effective infrastructure, the emirate was already one of the top trading hubs in the world.

A significant amount of products valued at billions of dollars pass through the emirate before being exported to diverse countries. The main reason most products pass through Dubai is due to its ideal location, which links suppliers and consumers from countries such as Asia, Africa, Russia and many more.

Therefore, as aforementioned, Dubai is not only a preferred stopover for travelers, but also for products that are shipped to Dubai before being exported to a variety of other countries. Besides, from its ideal location, Dubai offers a tax-free jurisdiction with beneficial state laws as well as a variety of trade embargoes. All of these features have aided the emirate to make its mark as an international trade hub.

After completing a research on Dubai’s trading activities, the International Data Corporation (IDC) concluded that there are two essential features that characterize Dubai’s trading trends. The IDC underwent a research to develop a better understanding of the emirate’s trading trends as well as how these influence the trade of IT products.

The first feature the IDC noticed is that Dubai engages in the so-called grey market movement, which essentially describes the action of exporting goods via a country without using the official designated route. In such circumstances, the vendor is unaware of the channels the products take and the shipment usually goes through countries whereby traders purchase and sell goods from a diverse variety of countries. the majority of grey shipments the UAE receives are immediately sent off to their final destination. Nonetheless, a small proportion are left behind of which are either introduced in to the local market or exported again.

The second noticeable feature is re-exporting the goods. This includes products that have already authoritatively been shipped to the UAE or shipments the UAE has received through grey shipment markets, which are then re-exported to a variety of other countries. The shipments, which are re-exported from the UAE, are of considerable volume, therefore these influence the amount of products that UAE consumes in contrast to what was actually imported. Thus, it is incredibly significant to understand this trading pattern, since the seller’s international headquarters usually assumes the demand arises from the UAE market.

The IDC research also revealed how the amounts of goods, which are re-exported, vary according to brand and technology. In general, the research has shown that up to 30%-50% of goods that have officially been shipped to the UAE end up being re-exported.

There are several reasons that explain the cause of these trading trends. First, Dubai seeks to satisfy demand. Dubai has always been regarded as a trading centre and a jurisdiction where many IT products are available for purchase. Therefore, there are always wholesalers who seek to buy these goods from Dubai, even though the same goods are available in their own countries.

Another reason goods are re-exported from the UAE is when specific good are not obtainable or offered in another jurisdiction. Either this is due to the fact sellers have not yet established direct trading channels to export their products to specific jurisdictions, like Asia or Africa, or they have made specific products unavailable to certain countries. Therefore, demand of these goods is met through grey channels.

The final reason is due to the cost of goods and products. Not all goods and products are priced the same, therefore a specific product may be cheaper to purchase in one country than in another. Thus, buyers prefer to import the specific good from a country that offers the cheapest price. Due to the large amounts of shipments the UAE receives, in comparison to other jurisdictions, the price of goods tends to be much lower. In addition, Dubai is within the vicinity of many countries, thus accessibility of goods is made easier. 

Steady and transparent tax policies, effective tax legislations lead to investment

Government officials are required to resolve structural issues the Egyptian economy is facing as the Economic Summit is around the corner. In order for the Egyptian economy to modify and develop its structure, the government is called to enhance investment and stabilize tax policies.

According to the present tax structure, tax rates have soared beyond 40% due to a 5% increase in rate from 20% to 25%. Besides the increase in rate, companies and individuals are subject to an additional 5% surtax on those holding more than EGP 1m. Furthermore, the government has implemented a new 10% tax on dividends. Financial and investor professionals express their concern, believing that the present tax regime in Egypt does not attract investors therefore hindering the country’s investment sector. 

 Assessment of current Egyptian Tax Regime

An effective and efficient tax regime is made up of four parties including the tax policy, tax administration, the tax legislation as well as the taxpayer. Firstly, to improve the Egyptian tax regime, the government must create a comprehensive, long-term steady tax policy that will allow potential investors to make their investment choices founded on transparency and sureness.

It is also suggested that the Egyptian government prepares a five-year tax and financial policy in order to present at the Economic Summit. The government needs to make sure the five-year tax and financial policy will not alter depending on government officials or cabinet. It is crucial that the policy is and will remain stable and developed based on cost benefit analysis to successfully be integrated in to the economy.

Secondly, the government should rethink its tax legislation. A new modified income tax law needs to be issued, which rate and regulations are consistent with that of other countries internationally. The new income tax legislation needs to be outlined clearly and in detail. Additionally, Egypt needs to reevaluate its high tax rates in order to become more competitive and ultimately attract more investors. This is because other countries tax rates are generally lower.

International tax systems

All tax regimes are implemented to enhance three factors within an economy: economic, social and fiscal policies. The fiscal or financial policy aims to generate tax revenues. The economic policy aims to enhance and attract investment whereas the social policy targets to achieve justice and just income distribution in the society.

In regards to Egypt, at present the government is focusing on the fiscal aspect of its tax regime in order to resolve its government budget deficit quickly, although it should focus on revising its high rates and policies.

Companies and Individuals whose income surpasses EGP 1m are subject to an additional 5% tax

In the occasion where all investors were informed that the additional 5% tax would no longer be imposed after a three year period, as prescribed by law. However, after three years have gone by, the tax is still imposed. Therefore, investors realize that the government’s intention was to increase the rate of tax in an indirectly.

Value-added Tax Law

Egypt needs to introduce a new VAT legislation in order to increase its tax revenues. Experts hold the view that the Egyptian government needs to quickly introduce a new VAT law while allowing time to taxpayers to adjust and adapt to the new tax regime. If a transition period were not allowed, the new VAT legislation would not be implemented effectively. For instance, the introduction of a new VAT means that companies and businesses will need time to amend and alter their invoice systems and accounts.

Investors and Law modifications

Taking in to consideration the present financial environment in Egypt, investors feel the Egyptian economy is unstable because of the repetitive modifications made to the legislation. The legislation needs to be consistent and steady. For instance, the law articles concerning tax exemptions and reevaluation profit are not consistent.

At present, the legislation does not benefit Egypt companies concerning taxes. Additionally, a holding company is subject to double taxation when it holds less than 25% of capital and voting rights. This fact discourages potential investors from investing in the Egyptian market, taking their investments elsewhere.

Modified Tax Legislation

Experts believe new tax legislation needs to be implemented in Egypt, by revising two segments of the already established law. They believe the new law should unify law procedures as well as all the procedures involved in sales and income, to reduce the present procedures and evade tax mistakes from being made.   

Government’s Financial Measures

Egypt has been struggling with political and economic difficulties since the Revolution on 25 January. Consequently, the country’s economic volatility, low foreign investment inflow and less tourism has negatively influenced its financial state. Egypt has showed some progress since last June, in terms of its political and economic instability, which is mainly attributed to the new president who came in to office over the summer as well as the $12bn Arab aid it received.  Nonetheless, Egypt remains an instable market due to the terrorist attacks, which influence the economy by discouraging potential investments.

On a positive note, the economy seems to be heading on the right track after several positive changes. The government firstly made alterations within the energy industry and decreased the energy subsidy. EGP 100bn in total was used to subsidize oil products during the 2014-2015 financial years, which is EGP 30bn lower than 2013-2014. It is also anticipated that during 2015 the economy will benefit significantly from several projects, which will be undertaken such as the construction of more than 3000 kilometers of road networks, the Suez Canal axis as well as the land reclamation project.

Economic Growth

During 2015, the economy may strengthen marking a 4% growth rate under the condition the government continues to make economic, financial and tax alterations. Experts are hopeful the country’s GDP will rise to 5% during the current financial year. In order for an economy to prosper it must maintain its growth rate. The previous year’s GDP was marked at 2.2% I contrast to 2012-2013 GDP, which stood at 2.1%. Growth rates were marked at 6.8% and 5.7% during the first and second financial quarters in 2014-2015 respectively, which is a good indicator of growth.

Although Egypt has marked an increase in its GDP, it must make certain that it is equally distributed among all classes of society. In the past, its GDP reached 7% but sue to imbalance of distribution only a tiny section of society benefited.

International trends in growth rates

The question in hand is whether economic growth rates may be attained without taking into account the equal distribution of this growth. In occasions where increased economic growth rates were not distributed equally, only a tiny section of society benefited from the increased economic growth.

When an economy grows, unemployment rates decline therefore inflation also drops investment inflows surge up and obviously, the government’s budget deficits decrease. At present, the Egyptian government aims to decrease its state budget deficit. It hopes that within the following three years the budget deficit will drop to 8% of the country’s GDP.

Government Administrative Reforms

At present more than six million workers are engaged in the public sector of which the majority is temporarily employed. In time, all these employees will be kept on permanently, which is one of the administrative reforms the government intends to implement.  Secondly, altering and modifying the present wage system is also a matter the government needs to address to get rid of corruption, injustice and discrepancies within the public sector.

Furthermore, the administrative alterations made by the government will lead to less inflation regarding the managing and income costs. The government spends more than one fourth of its government spending. Although public employment has increased, quality services are not offered. Experts believe that the public sector may offer better quality of services with less number of employees. 

In addition, the Egyptian government also needs to consider creating a resourceful and proficient system for its employees. For instance, the state may set up early retirement funds, offering employees the opportunity to leave work earlier than intended and be compensated. The government may also promote the private sector so as more job opportunities open for workers and decrease the number of employees in the public sector.

Single-Window System

The government discussed a single-window system approach extensively and introduced the system successfully. The purpose of the system is to make the work of investors’ much easier by reduce both bureaucratic and administrative procedures. The system practiced at present is quite successful and advanced, similar to the system used in Dubai. Therefore, the process of setting up a company will no longer time consuming since everything will be done electronically but also the nearly 80 regulatory units an investor had to go through will no longer exist.

The new system will benefit the government largely since it is anticipated foreign investments will double. During the first quarter of the fiscal year, Egypt’s foreign investments reached $1.8bn, while during the second quarter investments marked an increase climbing to $2bn. Increased direct foreign investments indicate the economy is steadily recovering and on the right path. Furthermore, the introduction of the single-window system will enhance the country’s rankings within business indicator surveys, thus attracting even more businesses and investments.

Single-Window System vs. Corruption

By setting up a single-window system, both bribery and corruption will decrease significantly. Some consider that ineffectiveness and incompetence as a type of corruption which will also fade away. The single-window system carries many advantages, and the greatest of this is that human workers will be replaced by efficient machinery-thus; corruption, bribes, fraud and incompetence will all diminish.

Government Facilitates Procedures

One of the disadvantages of the Egyptian legislation is that procedures outlining both financial and commercial activities are not under one specific law, which does not help when enforcing the laws by creating uncertainty and confusion. The government should therefore unify all the laws relating to investment and add to that more incentives in order to attract more investors.

For or Against Exemptions

Experts do not agree on granting exemptions concerning tax to enhance investments. Additionally, exemptions create distortion within a tax regime. Furthermore, investors do not regard exemptions as an important reason to invest. Investors tend to seek legislative, tax regime, security and economic stability as the most important reasons to invest.