While global markets fluctuated in 2016 due to the combined impact of international disputes, falling oil prices, and political shocks, the UAE has been able to avoid major economic setbacks thanks to its continued development of non-oil based industries. Indeed, the diversification of the UAE’s economy away from oil-based industries has led to steady growth at a time when the global economy has struggled. U.S. companies have continued to be part of this growth story, and the two countries have continued to develop their excellent business relationships.
Economic diversification has certainly been a focus for Emirati leadership, with the UAE government planning to increase the contribution of the non-oil sector to its national GDP to 80 percent by 2021—a rise of 11 percent from its current level as stated by the UAE’s Minister of Economy, Sultan bin Saeed Al Mansouri. The Ministry’s most recent Annual Report showed that the non-oil sector’s contribution to GDP in 2015 was 69 percent at the current price.
The current discussion on tax reforms—notably the soon-to-be-deployed VAT and excise taxes, which are earmarked to be GCC-wide—is the start of a process to enable the UAE to build a long-term fiscal policy that will give it a predictable and secure increase in revenue. This policy, which will see the widespread implementation of taxes for the first time in the UAE, will further enable the Emirates to realize its long-term economic and development goals.
Implementing a System the Economy Trusts
Introducing taxes to the UAE has the fundamentally important objective of creating healthy economic revenue that is sustainable year on year, with serious measures being implemented to guarantee compliance from businesses and maintain a strong economy.
However, the introduction of new tax schemes in a country that has previously remained largely tax free can be highly challenging, not only for governments and private businesses, but also for economic experts and the financial services sector. There is also a very real possibility that the introduction of an Excise Tax could unintentionally encourage tax evasion, illicit trade, and the smuggling of goods.
Having said that, there has been a lot of positive movement over recent months towards the establishment of a well-developed plan for a moderate implementation of taxes in the UAE. The creation of a Federal Tax Authority, which was announced in October 2016, is a great step towards bringing new taxes into the country without scaring investors. In the long term, it is clear that by having a system of slow and carefully monitored tax implementation, financial experts within the Ministry of Finance will be able to secure and predict stable and regular revenue from the soon-to-be-introduced taxes. Overall, the UAE has sought to understand and implement internationally recognized best practices in these areas.
In previous examples, the mismanagement of excise taxes and excessive introductions of taxes has had unintended consequences, meaning the UAE’s policymakers are wise to look toward implementing an excise tax that is easily monitored and does not encourage tax evasion.
Establishing Key Solutions for the UAE
A recent policy paper by the IMF titled How to Design and Enforce Tobacco Excises? highlights some of the issues that could potentially arise if commodities such as tobacco, alcohol, and sugary drinks are subject to substantial hikes in prices. Sudden tax hikes have been known to cause counterfeit products, illicit trading, and smuggling. This can be avoided with moderate implementation of an excise tax in line with international best practice.
International best practice also dictates that countries that have not implemented an excise tax previously should consider a specific excise tax rather than an ad valorem tax for a number of reasons. These include the fact that a specific excise tax is easier to administer. There is also sufficient data to show that a specific excise tax provides higher returns and more consistent revenue when implemented for the first time.
While the introduction of excise taxes on tobacco, alcohol, and other products is an important step—because it will allow for the UAE government to continue to develop revenue—introducing an ad valorem tax version of this excise tax can cause disruption as prices can fluctuate from product to product, as outlined in the IMF report. Fiscal experts from the IMF have also raised concerns about the risk of inflation when countries use ad valorem taxes as opposed to specific excise taxes.
The IMF’s report on enforcing tobacco excises also dealt with the issues surrounding health and taxes, specifically noting that the health effects of tobacco use are proportional to quantity consumed and not to the value of the product, which makes specific excises a more favorable framework to use for ensuring the health of UAE citizens and residents.
Of course, many American companies are interested in how the implementation of taxes in the UAE will affect their bottom lines. It is up to policymakers in the UAE, as well as U.S. organizations such as the U.S.-UAE Business Council, to continue to encourage investment and quell fears during a time of such change and uncertainty.
As it stands, the UAE is making positive headway in setting out its tax agenda and there seems to be a lot of serious thought going into how best to implement taxes so that negative repercussions are not felt across industries, both in the UAE and within the surrounding GCC countries.
With current VAT and excise tax plans aimed at encouraging the development of non-oil related industries in the UAE, we are confident that government policymakers will decide to move forward with a suitable framework for this rapidly growing region by supporting stability and reliability.
Danny Sebright is the President of the U.S.-UAE Business Council