Taxation: UAE creates tax framework as GCC moves toward VAT

The United Arab Emirates published a framework for VAT and excise duties due to be introduced by the six Gulf Cooperation Council states in January 2018, reports Bloomberg.

The GCC states have agreed to introduce value-added tax at 5 percent on goods and services from January as they seek to replace declining revenue from oil, which dropped from more than $114 a barrel in June 2014 to around $50 a barrel today.

Federal Law No. 7 of 2017 for Tax Procedures, issued by UAE President Sheikh Khalifa bin Zayed Al Nahyan, “sets the foundations for the planned UAE tax system, regulating the administration and collection of taxes and clearly defining the role of the Federal Tax Authority,” according to a July 31 announcement on the Finance Ministry website. The authority was established in 2016 following the UAE’s ratification of the Common VAT Agreement and Common Excise Tax Agreement adopted that year by the GCC states.

Sheikh Hamdan bin Rashid Al Maktoum, the deputy ruler, minister of finance and FTA chairman, hailed the law as “a significant milestone towards establishing the UAE’s tax system and diversifying the economy.”

In the announcement, he described the legislation as “an all-encompassing legislative framework that lays the groundwork for the UAE’s plan to implement taxes as a means to ensure sustainability and diversify the government’s revenue streams. The increased resources will enable the Government to maintain the momentum of its development and infrastructure for a better future.”

The Law regulates tax evasion, tax procedures, tax audits, objections, refunds, tax collection, and obligations—which include tax registration, tax-return preparation, submissions, payment and voluntary disclosure rulesin addition to tax evasion and general provisions. Once it enters into effect, all UAE-based businesses will be required to keep “accurate” records for five years.

The law also sets penalties for noncompliance, as well as “clear processes for appeals which align with international best practices, and establishes a fair and transparent environment for the FTA to carry out its mandate,” said the ministry announcement.

“The move by the GCC countries to diversify and stabilize their revenue sources is driven by the fall in oil revenues and also a broader desire to diversify their economies away from a reliance on hydrocarbons,” David Stevens, VAT implementation partner at EY in Dubai, said in an emailed comment Aug. 1. The Gulf economies need to restructure “to better cope with economic fluctuations and the spending requirements necessary for a diversified economy.”

The law currently applies only to VAT and excise duties but allows the UAE to levy more taxes in the future.

“It’s drafted in a way that goes beyond VAT, which I think is probably sensible,” Jeremy Cape, tax and public policy partner at London law firm Squire Patton Boggs, said in a phone interview Aug. 1. “I don’t think you can imply or infer from that the UAE is going to be introducing other taxes, but it’s part of setting up a tax authority that would not be limited to VAT if they decided to go beyond.”

But Cape said it’s unlikely the UAE would want to shed its reputation as a haven from income tax. “I suspect they’d go to corporation tax before they go to taxing individuals,” he said.

He said companies would need to consider their pricing to determine who would absorb the extra 5 percent cost of goods and services. “Business is going to have to grapple with those questions in an environment which hasn’t needed to address those questions in the past. I think that’s a big ask of business, and although it’s helpful to have this with five months to go, the more useful thing would be VAT legislation that we can actually work with business to ensure that they are properly prepared to comply,” he said.

Cape said the 5 percent rate agreed across the GCC might be raised, and not necessarily in unison. “The best practice of VAT is to introduce it at a low rate and then increase it. The framework agreement does give each country to the right to apply VAT slightly differently in the way the EU also does. I don’t think it’s necessary for VAT to work in the same way across the Gulf. My sense is that as the oil-producing states look to broaden their tax base, the expectation would be that the rate would increase from 5 percent in the fairly near future.”

While the new framework isn’t directly relevant to the OECD’s Action Plan on Base Erosion and Profit Shifting, the law would apply if a federal corporate income tax is introduced in the future, Stevens said. He added that the new reporting requirements shouldn’t be an undue burden on major corporations.

“Multinationals will be treated just like local companies in terms of the requirements of this law and the proposed excise tax and VAT laws,” he said. “There will not be any distinction drawn between the two. Most multinationals are used to complying with record-keeping, tax compliance and possible audits in other jurisdictions, so the introduction of them in the UAE shouldn’t come as either a surprise or major change from international practices.”

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