INSTANT COSTS, DELAYED BENEFITS

UAE, Sharjah 2017 | ECONOMY | FOCUS: VAT

Looking to increase revenues, the GCC is transitioning to a value-added tax system with the hopes that long-term economic stability will be worth the short-term cost spikes—a bet that looks particularly good for Sharjah.

Starting on January 1, 2018, a VAT will be put in place in the UAE, representing a 5% tax paid on most goods and services, sparing basic food products, education, and healthcare. The GCC VAT Framework Agreement, which will be introduced in all GCC countries at the latest by January 1, 2019, is needed in the face of falling revenues from oil prices; GCC governments have lost around USD300 billion from the collapse of oil prices since June 2014.

While 5% is little compared to the rates in the 150 countries that already implemented VAT, it is a small revolution in the Gulf, where taxes on revenue, consumption, or individuals are exceptions more than the rule. The rate is purposefully low to prevent an inflationary spiral and brutal shock on enterprises.
The measure is a much-needed one: since oil prices crashed, budgets have remained unbalanced in the region and are still heavily dependent on oil revenues in most countries. In the UAE, oil companies pay about 55% taxes on their income, while foreign banks pay about 20%. The VAT should bring about USD25 billion in taxes per year to the state budget in the UAE alone. Reinvesting the money in the economy will allow diversification and deepen funding for the public sector, two objectives that the UAE has pursued for years, and particularly Sharjah as it has by far the largest industrial base in the UAE. Untying the fate of the economy to the notably volatile price of oil will also stabilize the economy and make it more shock resistant.

It will also provide a welcome boost to accounting and audit firms. The VAT could create 30,000 jobs in accounting and economist jobs, and the Ministry of Finance is already recruiting tax specialists to prepare for audits and reclamations.

Of course, it will also create additional costs. Firms will have to use more resources toward preparing for tax returns and hiring, resulting in price hikes that will likely discourage consumers. While the bigger firms have more resources and possibly more experience from markets abroad, smaller firms will face added complexity, particularly because VAT could cause cash-flow issues in the short term, while also possibly impacting tourism and consumption in the short term. But, since the VAT will not apply to most basic products, day-to-day spending for residents should not jump drastically.

The Ministry of Finance is preparing for the introduction of the tax, and its main challenge will be to make the transition easy. Technology should help detect fraud and ease bureaucratic requirements; furthermore, businesses will be able to register for the VAT online.

The transition to an entirely different accounting system for most firms, customer scare, and added financial burden are a few of the many challenges of the new tax. But the benefits are worthwhile; the needed diversification of the national economy will bring long-term stability to the economy. The UAE is preparing for a world without oil and making the necessary investments now. While Sharjah, being the UAE manufacturing hub and an already diversified economy, should be more affected in the short term, it is also in a better position to take advantage of the coming changes due to the same factors. In an exclusive interview with TBY, the Director of Invest in Sharjah, Mohamed Al Musharrkh emphasized Sharjah's strategic location in the region and its world-class business infrastructure that make Sharjah a major contributor to the UAE's overall growth. As the industrial and educational hub of the UAE, Sharjah also connects Abu Dhabi and Dubai to the Northern Emirates and is the only Emirate with access to both the Gulf and Indian Ocean, making it a pivotal player in the UAE and the region.