Will looming VAT, corporate tax hurt UAE workers?

For millions of expats working in the country, the fear of having to pay levies is very real, observes Saad Maniar…

Dubai, 02 September, 2015: Over the years, one of the big attractions of working in the UAE has been its tax regime: it charges no income tax on salaries. However, today, for millions of expats working in the country, the fear of having to pay taxes is very real.

Recently, speculation over the dreaded possibility of income tax has grown, after reports that the federal Government is drawing up plans to introduce a value-added tax and a corporation tax.

There is currently no personal income tax in the UAE. However, there are other tariffs, like the municipality service charges, which are levied on individuals living and working in the UAE, and the service charges of 5-10%, charged on food purchased in restaurants. Hotels charge 10-15% service charge per night on room rates.

This is the latest move by the UAE authorities, seeking to bolster state revenues.

Oil-price deregulation

The government recently moved swiftly to safeguard against oil-price shocks, by deregulating gasoline and diesel prices. Beginning August 1, the Ministry of Energy implemented a new pricing policy, linked to global oil levels. Up until last month, UAE residents enjoyed some of the lowest domestic fuel prices in the world, due to heavy government subsidies that helped to keep prices low.

Saad Maniar, the Managing Partner of the DIFC branch of Crowe Horwath audit and advisory firm, says the introduction of tax rates on UAE corporations, combined with the looming taxation on goods and services (VAT), impacts employees paycheck in several ways - some would argue, negatively.

“The introduction of VAT, which would make goods and services more expensive, will affect the ability of people to save money. Similarly, corporate tax deductions will have a significant impact on companies’ bottom lines, and eventually, its employees and shareholders will also be impacted. How? There’s a likelihood that shareholders’ returns would decrease, and staff’s annual salary increases may be scaled back,” he warns.

For many companies, investing and saving revenues for future growth is always a prudent decision. However, Saad observes that the major challenge that companies will now have with the introduction of corporate taxes is that, savings for the business will be impacted negatively, since the revenues that the business has kept aside for future sustenance would incur more taxes.

“This may discourage business owners to invest in the UAE, as their return on investment would diminish,” he says.

The economies of the GCC countries rely heavily on revenues from oil and hydrocarbon products. In the recent months, these countries’ budgets have suffered a dent, battling plunging oil revenues compared with a couple of years ago, when oil prices were over $100 per barrel compared with around $45 currently.

The six-member nations, in a meeting recently in Doha, Qatar, all agreed to push toward the introduction of a VAT and corporate tax around the region, in a sign that low oil prices may be strengthening support for the tax idea.