Tax-free UAE lured many but future tariff law worries expats, businesses

The UAE has long toyed with the idea of introducing taxes, especially with last year’s plunge in oil prices

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For many years, the UAE lured many businesses and expatriates who wanted an escape from their home countries’ hard-hitting taxes.

But after hearing the recent news that the UAE is in the process of drafting corporate tax and value-added tax (VAT) laws for consideration in the third quarter of this year, many expatriates and businesses owners are worried.

Roya Rodriguez from India, who has made Dubai his home over the past 24 years, said he can only imagine the worst if the tax laws come into force.

“I can tell you that most Western and Asian expats come to Dubai primarily for the tax free living. And if that doesn’t exist anymore the whole idea of leaving family and friends to start a life in Dubai doesn’t seem too appealing anymore… and that applies to all men and women of all household incomes,” said Rodriguez, who works both as a senior TV planner and manages his own fashion design business.

There is no detailed information on how the proposed change in tax law would affect those living in UAE. The UAE already has more than 38 Free Zones, which are isolated lands with a special tax, customs and imports regime and governed by their own framework of regulations.

But the country has long toyed with the idea of introducing taxes, especially with last year’s plunge in oil prices, pushing the Gulf state to consider new ways of raising revenue.

“A lot of companies set up their regional HQ in the Gulf region and will probably move them to avoid taxes. A VAT or [goods and services tax] GST would work out much better and avoid a lot of corporate tax issues,” Jai Surendra, who is a Dubai-based businessman from New Zealand, said.

Corporate tax ‘remains unlikely’?

Jonathan Friedman, Middle East analyst at Stroz Friedberg, a global risk consultancy, said “every so often, the UAE floats the idea of establishing formal taxes.”

But “this time may be different,” according to Friedman.

The analyst dubbed “continued low oil prices” as posing long-term threat to state revenues.

International companies who have taken UAE’s no-tax policies for granted will take note, and be monitoring developments closely

The International Monetary Fund also projected that the UAE would post its first consolidated fiscal deficit - where the country’s income is less than its outgoings - since 2009 this year and predicted a 2.3 percent fiscal deficit for the Gulf country, which is down from a 5.0 percent surplus last year.

“However, corporate taxes remain unlikely in the near term,” he said. “Most foreign companies are registered in free zones, which have issued multi-decade guarantees against instituting corporate taxes. That means the brunt of such a tax would fall on Emirati-owned businesses, threatening political backlash.”

Setting up a company in the free zones is already benefiting the government as license and registration fees are being paid to the government, which makes the introduction of corporate tax as less likely.

But the value added tax or VAT, an indirect tax which is applied to products and services sold, “would hit a far broader base and is far more likely to come into effect,” Friedman said.

“Still, international companies who have taken UAE’s no-tax policies for granted will take note, and be monitoring developments closely.”

Younis Haji al-Khouri, under-secretary at the Finance Ministry, told Reuters that authorities were still evaluating the social and economic impact of the laws. But he declined to comment on the proposed tax rates or when they might take effect.

UAE ‘careful’ not to hurt its edginess

However, for Rosi Kern, a security and political risk consultant and founder of Phoenix Acumen, the UAE will be most likely be “careful” when drafting the law to “ensure not to hurt its competitiveness.”

“Meaning taxes imposed are still expected to be lower than elsewhere in the world,” she said.

Kern also described tax evasion as not the only reason why international businesses choose to be in the Gulf region.

“The GCC is considered to be the part of the Middle East where ‘the money is located’ and where good business can be done, as long as businesses and investors feel this way, they are likely to remain there,” she added.

Also, regardless of taxes, the local business culture requires foreign businesses, who seek to operate in the GCC to have presence in the region not only “to conduct business successfully and to earn credibility…one more reason for businesses and investors are to stay and not leave.”

Among the GCC countries, the UAE will most likely remain the most attractive place for foreigners to work and live in

The UAE remains committed to keeping its investment allure, compared to other Gulf states such as Qatar.

“Some GCC countries are already in competition. For example those who choose to do business in the UAE, are not preferred in Qatar. Or foreign investors tend to say you have to pick between either of the two,” she said, adding “because if one is doing business in the UAE already, getting a foot in the door in Qatar is much more difficult, if not impossible.”

Iran is another regional competitor the UAE has to watch out for, especially if the U.S. and Western powers lift sanctions imposed on the Islamic republic.

“Having taxes implemented in the UAE could very well cause Iran to offer ‘tax breaks’ to foreign businesses and to use this as a way of portraying themselves as a more attractive business place,” Kern said.

The UAE especially, with the widely-felt glamorous allure of the city of Dubai is a destination for regional and international tourists alike.

“Among the GCC countries, the UAE will most likely remain the most attractive place for foreigners to work and live in, since the UAE is the most lenient and least restrictive among the Gulf countries. And offers foreigners more entertainment,” she added.

But for Dubai residents such as Rodriguez, the fear of having to pay taxes is very real.

“Businesses may limit their investment and expansion in Dubai. Overheads would be so high that fewer people would be hired. Inflation would soar through the roof,” Rodriguez said while Surendra expects foreign direct and local investments to be lower as the return on investment will also fall.

But whatever the outcome of the draft law, in the UAE, the time it takes to enact a law could take months if not years.

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