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. 

First Quarter of 2015- Dubai one of the worst performing property markets

According to a recent report, during the first quarter of 2015, Dubai’s real estate sector performed badly since the average price of houses decreased by approximately 4%.

More specifically, Dubai was ranked 53^rd amongst the 56 property markets that were included in Knight Frank's Global House Price index which evaluates the annual price growth of property. The countries that performed worse than Dubai were China, Cyprus and Ukraine. Ukraine marked a 15.5% drop while Cyprus and China recorded a smaller decline of 8.2% and 6.4% respectively. Based on the index, Dubai’s annual price growth dropped by 6.1%.

Nevertheless, the statistics revealed that during the previous quarter Ukraine’s annual price growth fell even more, while Dubai dropped of 4.6%.

Dubai’s real estate market has been amongst the most unstable over the last ten years, fluctuating constantly. Following the 2008 real estate crash, where prices were at their peak and crashed, the value of property climbed again and is now dropping.

Hong Kong, Turkey and Ireland were the three countries that marked the most increase regarding annual price growth. Hong Kong was ranked first with an increase of 18.7%, while Turkey and Ireland proceeded with an increase of 18.6% and 16.8% respectively.

Additionally, the index revealed that seven out of the ten leading countries ranked according to annual price growth of property are European countries.

The Global House Price index increased by only 0.3% until March 2015, which in fact is the least it has increased out of the last three years.

The Global House Price index takes into account the GDP of the countries included in the evaluation since more developed countries like the US or China have a greater impact in contrast to smaller countries like Malta.

Even though larger markets such as China, France and Japan are all going through a slump regarding the price of property, a larger number of smaller markets are experiencing small yet stable increases.

Three-thirds of the countries evaluated by the index either remained stable or marked a positive annual price growth during the first quarter of 2015. Three years ago, less than half of the countries recorded stability or an increase. 

Dubai’s State of Foreign Investments

In the past Abu Dhabi depended on Dubai as a re-export hub. After Dubai’s oil was discovered, the city developed into a top-notch and luxury destination as well as one of the top business hubs in the world.

The once desert-like area is now over-flowing with luxury hotels, impressive skyscrapers and state-of-the-art shopping malls. Dubai is now considered as one of the top urban jurisdictions in the world and a city that continuously expands and develops.

Even before Dubai discovered its oil in 1966, it was a leading trade hub within the Middle East as well as amongst a variety of  European countries. Dubai’s city life developed immensely after its oil fields were uncovered. Dubai produces more than 65 million barrels of oil annually. Once Dubai’s International Finance Center was launched in 2002, globally recognized financial institutions including Standard Chartered, Credit Suisse, HSBC as well as Citibank set up branches.

General Outline

Based on a study conducted by Dubai-based investment firm, FDI, the emirate attracted more than $7.5 billion worth of foreign direct investment in 2014. Almost 80% of foreign investment was attributed to tourism, information technology, business management, renewable energy, real estate and financial services industries.

Foreign investors from all over the world including Germany, India, Italy, the UK, the Netherlands as well as the USA invested approximately Dhs23.9 billion in 2014. The aforementioned countries comprised approximately 84% of the total 2014 FDI and nearly 60% of projects. It is estimated investments will increase significantly by Dubai Expo 2020, as the event is considered to be one of the most prestigious and prominent exhibitions.

Furthermore, Dubai is viewed as the ideal jurisdiction to do business due to its simple business procedures as well as business-friendly environment.  For the purpose of attracting more investors to the UAE, Dubai FDI teamed up with SHARJAH Investment and Development Authority.

Finally, the most recent A. T Kearney Global Foreign Direct Investment Confidence Index ranked Dubai 14^th internationally. The index measures the present and potentially future foreign direct investments.

Dubai and Investments:

Dubai is internationally renowned as being an investment haven! Investors are presented with endless investment options including infrastructure.

Furthermore, the emirate’s Dubai International Airport is not only considered the fastest growing airport in the world but it has also been ranked as the sixth busiest international airport. Dubai’s airport handled 41 million passengers in 2009. Well above one-hundred international airlines fly to Dubai. leading airlines including United Airlines, British Airways, KLM, Lufthansa, Singapore Airlines as well as the UAE’s local Emirates are some of the airports top air carriers.

Dubai is also home to the world’s largest and busiest man-made port, Jebel Ali Port. The port caters to more than 240 shipping lines recording 19% growth rate. Additionally, Dubai is also home to a variety of Free Trade Zones where each operates within particular industries, infrastructure as well as tax incentives. Some of these include Biotechnology and Research, Media and Technology, Healthcare, Textiles and Logistics, Education, Dubai Free Zones and Outsource Zones as well as Financial Services and Commodities.

Dubai’s Free Zones offer businesses spacious office spaces, warehouses, factories and simple procedures when it comes to obtaining licenses. Dubai Metro is one of the most advanced railways in the world, which run with automatic trains. The metro system links popular tourist destinations, shopping malls and the airport.

 Tourism is another popular industry that attracts investors. During 2014, 11.12 million tourists holidayed in the emirate. In 2013, 10.16 million tourists visited the city. Dubai’s hospitality and tourism industry contributes to 20% of its Gross Domestic Product (GDP).

Dubai’s trade and investment data reveal it is a top jurisdiction for investments as well. During the first three financial quarters of 2014, Dubai’s non-oil based foreign trade generated DH988 billion out of which Dh621 billion, Dh86 billion and Dh86 billion were attributed to imports, exports and re-exports respectively.

Out of one-hundred and sixty countries, Dubai was ranked as the 15^th best location to enjoy quality of life and the first throughout the MENA.

Obviously, based on the above information and statistics, Dubai is considered as the ideal jurisdiction to invest and attract foreign investments. Although, some may under-rate the emirate at the present, Dubai is destined to develop into a world-class city in the near future.

IMF Estimates a 2.3% Fiscal Deficit for UAE in 2015

In contrast to private-sector predictions, the International Monetary Fund (IMF) forecasts the United Arab Emirates (UAE) will experience a 2.3% financial deficit.

The UAE’s Government budget deficit has been anticipated due to the decrease of oil prices. It is the first time since 2009 that the UAE will experience a shortfall in the Government Budget. During the previous year, oil cost approximately $100 per barrel whereas this year, oil has slumped to approximately $60 per barrel.

The IMF predicts that the UAE’s Gross Domestic Product (GDP) will drop by 2.3% in comparison to the 5% surplus it experienced in 2014. The IMF also forecasted that the UAE’s non-oil based sector economic growth rate will increase by 3.4% while inflation rate is also expected to rise by 3.8% due to increased rents regardless of the fact residential prices have stabilised in Dubai. A complete IMF report will be released during the following month which will include all of its forecasts.

Additionally, according to IMF the UAE’s economic growth rate will increase by 3% during 2015 marking a drop of 1.6% in comparison to the previous year’s growth rate which was recorded at 4.6%. On a bright note, the IMF commended the UAE government on continuing to invest on infrastructure as well as implementing innovative policies which eased the negative impact of decreased oil prices. 

Numerous economic predictors within the private sector have forecasted that the UAE will experience a higher shortfall than the 2.3% predicted by the IMF. Even though the IMF has made its predictions based on the UAE’s expenditure plans, it does not mean that its predictions are more precise than those of the private-sector due to the fact the IMF does not take into consideration future oil prices.

Abu Dhabi Commercial Bank predicts the UAE will experience a 4% fiscal deficit during this year. The forecasted deficit is viewed as modest in comparison to the country’s large financial reserves. According to the bank, due to the government’s policies and reforms implemented during the past few years the UAE’s non-oil GDP rate will remain healthy.

Additionally, the government’s focus on housing, transportation, tourism, healthcare as well as education and energy projects in Abu Dhabi and Dubai will support and sustain the UAE’s economy

Although the IMF commended the UAE government for its innovative policies and budget spending it has made some suggestions so as to help regulate the deficit. According to the IMF, the UAE government must sustain investment spending, ease off on subsidies, regulate the public wage bill, increase non-oil profits and minimise transfers towards state-linked entities.

Most of the aforementioned measures are currently being endorsed. The IMF also calls that the financial community of the UAE and the government to be more transparent especially concerning state-linked entities as well as state debts.

According to an Abu Dhabi-based investment company, the National Investor, the UAE’s spending patterns and reforms rely on whether the price of oil will even out or fluctuate. In the past, the UAE government was practical and sensible as it restricted government spending at times when oil prices dropped. In contrast, the UAE government has not followed the same tactic this time and carries on spending. The reason remains unclear as to whether it is due t the fact the state believes oil prices will pick up or whether due to the fact it has implemented new reform policies.

Currently, the UAE government has large amounts of reserves to manage the drop of oil prices as well as to deal with the small shortfall in its budget. However, if oil prices remain low, the government will have to make long-term plans and introduce new policies as a precaution.

The IMF reflects the same views and will include details concerning the UAE’s spending in its report in the following month.

Foreign Labor Influence on the UAE Economy

The United Arab Emirate (UAE) dependency on foreign workers is a subject that dominates any discussion concerning the UAE’s economy. This fact implies that in the occasion that foreign workers depart from the UAE, its economy would be influenced negatively. Some do not realize that an economy is influenced by a variety of important features, not only the labor force.

This article will outline the relation between the economy and foreign labor and to what extent the latter influences the UAEeconomy and its economic growth. The economic cycle of 2002-2012 was quite eventful. The UAE’s economy started to thrive in 2003 where it reached its peak in 2006. After 2006, the UAE’s economy went into a crisis until it finally returned to normal by the end of 2012.

Population Growth

During 2002-2012, the population rate of the UAE seems to follow its economic growth rate, whereby population reached its peak in 2007 and then dropped rapidly to just above 0%. This reveals that the percentage of labor relies on the economy, which is more logical since an economy draws foreign workers as it develops and expands. At times when the economy experiences downfalls, foreign workers decrease.

Emiratis and UAE Residents

A country’s Gross Domestic Product (GDP) per capita is more during times whereby the economy expands and thrives. In reference to the UAE’s GDP, statistics show that following the international financial crisis, the country’s GDP dropped by 40% only to jump up again in 2004.

The above trend reveals that as the UAE expands, foreign labor supports the growth by being employed in positions. Confined labor policies smother the UAE’s economic growth since these restrict the supply of employees. This is especially the case in the UAE’s knowledge-based segments.

On the other hand, during times where economic growth declines or even is in crisis, the workforce adjusts automatically and evens out the GDP. Due to the fact that foreign workers are able to save large proportions of their income during the time where the economy expands as well as the fact workers are not subject to Income Tax means that they have enough saved to use in times when economic growth declines. Overall, foreign workers are interested in working in the UAE until its GDP becomes stable. 

On the other side, during recessions all public services experience budget cuts. This does not necessarily mean the public services sectors do not offer high quality because during recessions, there are less people to cater to so the quality of the services remains the same.

The same supply and demand trend applies in the private sector of the economy. There is less supply which matches with consumers’ decreased demand. Imagine there are 10 opticians throughout the country and people cannot afford to spend money on examining their eyes and purchasing glasses. Thereby, 5 of these opticians leave the country, which means the 5 remaining opticians sustain their business activity and quality of services. In basic terms, the workforce adjusts automatically to the demand and supply of the economy. 

Dubai’s economy growth increased in 2014

Dubai’seconomy grew by 3.8% in 2014 according to Dubai Statistics Centre (DSC). Dubai’s real Gross Domestic Product (GDP) marked AED338 billion by the end of 2014. Dubai’s government officials commend and congratulate the city’s excellent economic performance. According to Dubai’s government, the city’s economic growth is attributed to its diversified economy.

According to the DSC’s report, all Dubai’s economic sectors developed in the previous year leading to increased growth rates, which consequently led to an increased GDP. Government officials assert that Dubai’s increased economic growth reveals that the emirate’s non-oil based sectors are also marking continuous growth. T according to the statistics, the emirate’s non-oil based economy contribution increased by 98.7% during 2014. In fact, Dubai’s oil-based sector contributed an amount of AED4.4billion whereas its non-oil sector’s contribution amounted to AED333.5billion.

These statistics confirm that Dubai’s overall economic diversification, whereby the city focuses on both service and industrial activities, is paying off.  The statistics also showed that 34% of Dubai’s GDP is attributed to the emirate’s communication, storage and transport sector that developed greatly from 2013 to 2014, marking an increase in growth rate of 8.6%. 

New index Measures Dubai’s Economy

According to the new index, Emirates NBD Dubai Economy Tracker, implemented to measure Dubai’s the economic growth rate of its non-oil sector; the emirate marked a slight decrease during April.

The new index was officially introduced by the emirate’s banks a few days ago, and it said to cover more than 600 companies within Dubai’s private sector. The purpose of the index is to measure the performance of Dubai’s private non-oil based sector on a monthly basis.

Dubai’s new index is founded on the Purchase Manager Index, which has been adopted by a variety of other countries. According to Markit, the assembler of the index, all of Dubai’s private companies, regardless of size, will be monitored in order to measure the emirate’s economic growth. The aim to create a precise and accurate picture of the performance of Dubai’s non-oil based economy.

Besides measuring Dubai’s economic performance, the DubaiBusiness Activity Index also records the emirate’s employment rate. According to the index, Dubai’s employment rate dropped slightly from March to April from 60.6 to 57.2 respectively. However, even though the employment rate dropped, it is still above 50.0 indicating the emirate’s economy is expanding rather than contracting.

The index has revealed that although the slight slump Dubai has experienced, its private sector growth rate is resilient and strong when compared to other international economies. It must also be taken into account that the emirate’s economy remains strong regardless of the drop in oil prices that has influenced other oil-based economies.

The Real Estate Tracker results also reveal that Dubai’s property market will experience a slight strengthening. The tracker, which measures the rate of growth of the emirate’s property market, is conducted every two months. The tracker surveys around 600 domestic properties and 70 real estate agents. According to the property tracker, property values will show a small increase in value as well as demand.