UAE requires broader corporate tax, according to the IMF

In a new update on the financial status of the UAE, the International Monetary Fund (IMF) has advised additional taxation among several options for the UAE government to further strengthen its revenue base in order to minimise dependence on the fluctuating global oil price, reports the Emirates 24/7.

The UAE has already undertaken a number of fiscal reforms over the past years, including most recently the fuel price deregulation that saw retail petrol prices jump 24 per cent and diesel prices decline 29 per cent in the country.

Even as the IMF maintains that the UAE economy is resilient to low oil prices and sluggish global growth thanks to its fiscal buffers and safe haven status, the agency is suggesting the government to undertake additional reforms to boost its finances.

Primary among those suggestions are imposing a value-added tax, imposing an excise duty on the sale of automobiles, as well as a decrease in the corporate income tax levels but applying it to a much broader base.

As of now, the UAE’s tax structure as stated by the IMF report is as follows: A corporate income tax of 20 per cent is levied on foreign banks in Dubai; a local municipal property tax of 5 per cent of the rental value; a 10 per cent local hotel tax on hotel services; the GCC’s common external tariff (a general rate of 5 per cent, 50 per cent on alcohol, and 100 per cent on tobacco) applied locally; and select fees on government services (applied by the federal and Dubai governments).

The IMF has suggested broadening the tax net to bolster government revenue. “The UAE, as other GCC countries does not collect VAT and excises, while collecting corporate income tax only partially, missing an opportunity to diversify its revenues and strengthen the fiscal position,” states the report.

“Our policy advice is to continue to diversify revenue sources for the UAE,” Zeine Zeidane, Advisor of the IMF Middle East and Central Asia department and the mission chief for UAE, said in a conference call with reporters.

“This is something we certainly advise [the UAE] to move ahead with the VAT at the low rate and we advise them to also move forward with the corporate income tax, so incorporating some tax applicable to all companies, not only foreigners, but foreign and domestic companies with also a very low and flat tax,” he said in response to a question.

“Any measures should be certainly preceded by an impact study that looks [at additional taxation]. But again, if you look to the case of Dubai, you already have corporate income tax applicable to foreign banks and not to domestic banks, so that’s something we recommend to have a unified system without any discrimination between investors. We are recommending to move towards the corporate income tax that is applicable to everybody, foreigners and domestic banks, but also to other corporates,” he added.

“A fair, simple, and effective tax system is needed to raise non-hydrocarbon revenues in order to strengthen sustainability and intergenerational equity,” states the IMF.

“Given the UAE’s significant surpluses from hydrocarbon revenues, the main principle for guiding tax policy in the UAE should be low tax rates and very broad bases. Such tax policy generally would limit negative effects on investor and consumer behaviour,” the agency notes.

“This principle would also be consistent with the economic diversification strategy. In parallel, tax reform efforts need to focus on strengthening administrative capacity,” it adds.

The IMF maintains that “the value added tax (VAT) would serve well as a low rate-broad base tax”. VAT is a kind of consumption tax that the end-customer pays while purchasing a product.

“VAT is generally viewed as the most stable revenue source, which has the least detrimental effects on investments,” the IMF states.

“In such a macro-fiscal environment as in the UAE, a low rate, for example 5 per cent, VAT could be considered,” it notes.

“A broad-based consumption tax such as VAT would raise revenue proceeds at a low efficiency cost. At the same time, its equity implications would be relatively insignificant in such a macro-fiscal environment as in the UAE, where taxes are minimal and government expenditures are financed by oil revenue,” the IMF notes.

Nevertheless, VAT will give a “significant and positive boost” to the tax administration, it says, but notes that the final agreement by the concerned GCC countries is yet to be signed off.

“The progress in this area depends on how soon VAT frameworks are agreed within the GCC, which are committed to implement a VAT in the medium term. The estimated yield from introducing the VAT is 2.7 per cent of non-hydrocarbon GDP,” the report states.

In addition, the IMF notes that taxing passenger cars may also be under consideration to boost UAE government revenues. “Excises on passenger vehicles could also be considered for raising non-oil revenue,” it maintains.

“Automobiles impose a number of costs on society. These costs include direct costs such as the cost of maintaining and expanding a network of roads, and indirect costs such as productivity losses due to traffic jams and health costs because of increased pollution,” it explains.

“Imposing an excise tax on automobiles would shift costs associated with the usage of automobiles to the owners. Ad valorem tax of 15 per cent would yield 0.6 per cent of non-hydrocarbon GDP,” the IMF states, adding that “gains from excises on tobacco and alcohol would be insignificant”.

Moreover, according to the agency, a corporate income tax with broader coverage but lower rates would raise additional revenue and would be seen as more equitable by foreign investors.

It suggests halving the corporate income tax rate from the current 20 per cent but applying it to all non-free zone entities.

“The tax rate could be lowered to 10 per cent from the current 20 per cent and the coverage could be broadened by including all companies (foreign, domestic, GCC) except for those located in free economic zones. In addition, a broadened corporate income tax, if applied to unincorporated companies, could provide some progressivity in taxation and would lessen the need to introduce a general income tax on individuals,” it notes.

“This measure is estimated to yield 4.1 per cent of non-hydrocarbon GDP,” the IMF reckons.

If and when VAT is implemented in the UAE and across the GCC, it won’t be the first oil exporters to do so. “Oil exporters in other regions collect VAT from 1.5 per cent of GDP in Algeria to about 8 per cent of GDP in Chile and Norway, and about 4 per cent of GDP in corporate income tax revenue and 1 per cent of GDP in excise taxes (an average for emerging and developing oil exporters),” the IMF elaborates.

Given that global crude prices have declined more than 50 per cent in 14 months, from $107/barrel on June 7 to $51 today, income of global oil exporting countries is obviously on the decline.

However, prudent fiscal policies of the past are benefiting the UAE, which has large fiscal and external buffers to depend on, says the International Monetary Fund (IMF).

According to the IMF, the fiscal break-even oil price of the UAE government is estimated at $72 per barrel in 2015.

While the current global oil price is around $50 a barrel, the IMF reckons that, under the UAE authorities’ fiscal consolidation path, the fiscal break-even oil price would fall below the projected oil price levels next year.

Nevertheless, the global agency maintains that to further steer the UAE’s economy away from oil-price dependence and reduce fiscal vulnerabilities in case of any prolonged periods of low oil prices, there is need for fiscal consolidation.