12 February 2017
UAE finance ministry official says there may be VAT exemptions for some strategic sectors

By Yasmine Saleh and Tom Arnold

Policy makers in the six-nation Gulf Cooperation Council are aiming to introduce a 5 percent value-added tax at the start of next year, despite administrative and technical obstacles, a senior United Arab Emirates finance official said on Sunday.

The GCC, its finances strained by low oil prices, has long planned to adopt the tax in 2018 as a way to increase non-oil revenues, but economists and officials in some countries have said privately that totally simultaneous introduction in all countries may not be feasible.

That is because of the complexity of creating the administrative infrastructure to collect the tax and the difficulty of training companies to comply with it, in a region where taxation is minimal.

However Younis al-Khouri, under-secretary at the UAE finance ministry, said in an interview that GCC governments were planning for early, simultaneous adoption.

"By 2018, January 1, we are aiming to adopt 5 percent VAT across the GCC," he said in a joint interview with Zawya and Reuters, both Thomson Reuters companies.

Possible exemptions

Asked whether some sectors in the UAE might be exempt from the tax to reduce the drag on the economy, Khouri said the government was aiming for a 5 percent rate across the board, though parts of seven sectors - education, healthcare, renewable energy, water, space, transport and technology - might get special treatment.

"There might be areas where we will adopt the zero-rated but currently, as the Ministry of Finance we are not aiming towards exemptions, which could create some leakages, some confusion."

Khouri said the government expected to obtain around 12 billion dirhams ($3.3 billion) of revenue from the tax in its first year. That would be about 0.9 percent of the UAE's gross domestic product of $371 billion in 2015, according to official data.

From the start, authorities will seek to register all companies with annual revenues exceeding $100,000 for the tax, and anticipate 95 percent or more of companies will comply in the initial stage.

Revenues from the tax may increase gradually with economic growth but the government is not at present considering any increase of the tax above the 5 percent amount, and would not raise it in the future without a thorough study of the economic and social impact, Khouri said.


Debt law

To broaden its fund-raising options, the UAE has been working on a federal debt law that would allow the federal government, not just the seven individual emirates, to issue sovereign bonds.

Khouri said authorities had aimed for the law to pass by the end of last year but unspecified issues within the ministry had prevented this. "The sooner for the UAE, the better it will be for the country," he said of the expected timeframe.

Once the law is passed, the federal government will aim to start issuing debt within six months, but its minimal budget deficit means the debt will not be used to fund the budget. Instead, it will be issued in conjunction with the central bank to manage liquidity in the banking system, he said.

For more information and analysis click here to read Zawyas Special Coverage on the introduction of VAT in the GCC

(Writing by Andrew Torchia)

Zawya 2017