On 18 August 2015, Ministry of Finance (MoF), UAE released an official statement addressing the progress it has made in respect of the Gulf Cooperation Council (GCC) Value Added Tax (VAT) proposal and the potential UAE Corporate Tax introduction. The imminent arrival of VAT and Corporate Tax is understandably causing concern for small and medium enterprises (SMEs) in the UAE who have been used to operating tax-free.
The announcement provides official confirmation that the MoF, UAE has been conducting studies in relation to the implementation of VAT in the GCC along with its fellow GCC member states (Bahrain, Kuwait, Oman, Qatar and Saudi Arabia), and also confirms that UAE has made an agreement to implement VAT simultaneously along with the other GCC member states. This announcement comes after months of increasing press speculation and an International Monetary Fund (IMF) report released at the beginning of August 2015 advising the UAE that ”Expenditure-containing measures and revenue-raising options need to be considered to reduce fiscal vulnerabilities and ensure intergenerational equity.”
The draft UAE VAT law remains under negotiation due to the absence of a final agreement between the respective GCC member states over elements of the GCC VAT framework, including the VAT rate and exemptions. The UAE will make an immediate announcement once a final agreement on the content of the UAE VAT law has been reached. GCC and UAE is planning to announce the law in June, 2016. Businesses will be given approximately 18 months from the date of this announcement to prepare for the implementation, and before being required to fulfil their UAE VAT obligations. This announcement appears consistent with the initial expectation that the UAE will not implement VAT alone, and that the eventual UAE VAT regime will fall under a common GCC VAT framework agreement.
The announcement provides a brief update on the UAE’s progress in respect of Corporate Tax confirming that a draft UAE Corporate Tax law is being studied in relation to the eventual Corporate Tax regime to be implemented. The MoF confirms that it will make an announcement once the law has been finalized, and that businesses will be given no less than 12 months from the date of this announcement to prepare for the implementation, and before being required to fulfil their UAE Corporate Tax obligations.
Europe has witnessed VAT since the 1970s as a truly renaissance taxation that was able to pass on the ultimate burden of tax on value adding supply chain to the final consumer. The introduction of the GCC VAT and federal UAE Corporate Tax regimes has been discussed and speculated upon for a number of years. Many commentators maintain a sense of skepticism around whether actual implementation will eventually materialize, particularly in the short to medium term. However, the MoF, UAE announcement, along with the obvious concerns over oil prices and the recent recommendations by the IMF, provide more support than ever before that tax changes in the UAE are imminent. There could be VAT would be exempted for certain sectors such as healthcare, education, social services, and some food items. The UAE has done a calculation expecting AED 12 billion as VAT collection from the non – exempted sectors. The extension of corporate tax and introduction of income tax present much bigger hurdles. The first threatens to destroy the competitive edge that attracts big global companies to choose the UAE as their regional headquarters and redraw local corporate balance sheets.
For Value Added Tax and Corporate Tax Advisory, you can contact,
Hussain Afkar, Director – Audit & Advisory, Mobile: 0505377026