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VAT not on UAE’s horizon

Contrary to earlier reports, the UAE has ruled out introducing VAT next year, while Gulf Cooperation Council (GCC) states have indefinitely delayed plans to introduce the tax.

Younis Haji Khouri, undersecretary of the UAE Ministry of Finance, told Al Khaleej newspaper the GCC has decided against introducing VAT until all member states have implemented the necessary internal systems and have the specialised staff.

Only last month, Khouri said that the UAE is working on plans to introduce a 5% VAT in conjunction with other members of the GCC.

Now Khouri says that the UAE will not impose any new tax in 2012.

"It is well known the GCC countries have been thinking about it for a long time, but it’s complicated to introduce a uniform system," said Justin Whitehouse, a tax partner at Deloitte.

Ahmad Emisham, author of Fiscal Reforms in the Middle East: VAT in the Gulf Cooperation Council, believes that introducing VAT would enable the GCC to reduce taxes on foreign trade.

“This is about getting a more efficient tax system, so that governments can move away from distortionary taxation,” he said.

Whitehouse, however, points out that the UAE does not have a history of using taxes and there will inevitably complications of how to administer VAT, should it be introduced. He also notes concerns over VAT's impact on inflation and the political concerns of introducing a tax that hits the pockets of individuals in a volatile region, especially in light of the Arab Spring.

"It would be surprising if countries didn’t carefully consider introducing a tax that affects individuals and the GCC will no doubt be keen to protect the welfare of its citizens," said Whitehouse. "You only have to look at the EU or the US to realise that in order to reach agreement one has to usually move at the pace of the slowest member."

Increasingly countries around the world are looking to indirect taxes to raise much-needed revenue and cash strapped Gulf states, too dependent on fluctuating oil and gas prices, may well look to introducing VAT in the future. But while VAT may be only a matter of time for the GCC, that time is not now.

"It is likely to be later than 2013," said Whitehouse. "Most countries take around two years to introduce new taxes after the political decision and announcement has been made. The UAE is generally keen to be business friendly as well and it is normal to give at least 12-18 months notice to allow businesses to prepare. As a result I expect VAT will not be introduced until at least 2015."

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