Is the era of VAT and corporate tax upon us?

The UAE is taking fiscal consolidation to the next level. As oil prices are unlikely to increase significantly anytime soon, the UAE is under increased pressure to diversify its revenue sources.
The International Monetary Fund (IMF) suggested fiscal consolidation, focusing on introduction of VAT at a rate of five per cent, and 10 per cent corporate tax on both national and international companies.
There are also talks to implement vehicle duty to further boost revenue; the suggested rate is 15 per cent. The plans are still being discussed and are unlikely to be introduced in early 2016.
However, certain measures have already been implemented to reduce government expenditure. For example, removal of fuel subsidies which is expected to save about $7 billion (Dh25.7 billion) per annum.
Corporate tax
Corporate tax, at the rate of 20 per cent, is currently imposed on branches of foreign banks. There are also taxes on oil and gas companies at rates specified in the relevant concession agreement. The suggested measure to bring the rate down to 10 per cent and extend it to national companies should ensure fair competition, encouraging more international businesses to set up their offices in the region.
Financial services is one of the most profitable non-oil sectors in the UAE; therefore, if more banks establish their offices here, the tax revenue will increase.
On the other hand, shareholders of businesses that are currently not taxed would not like to see their profits drop. They are likely to shift the burden to employees and consumers. Salary growth might slow down and prices are likely to go up.
At the same time though, the government will have more money to put in place schemes helping those on lowest incomes. This could offset the negative impact of corporate tax introduction.
The IMF estimated that corporate tax at 10 per cent would yield 4.1 per cent of non-hydrocarbon GDP. Additionally, the likelihood of implementing general income tax on individuals would be reduced.
Are price increases likely?
With regards to VAT, the main concern is how this might affect prices as businesses are not going to take a hit and will shift the burden to consumers. However, if a five per cent rate (as per the IMF's suggestion) is introduced, customers' spending ability should not decrease significantly. This rate is very low, especially compared to some European countries such as the UK, where VAT is currently at 20 per cent.
It is also expected that necessities will be exempt from the scope, or zero rated, enabling businesses to reclaim input VAT. This will avoid putting the poorest individuals at a disadvantage. Extra revenue should be generated from wealthy visitors coming to the UAE. Their purchasing power is very high and they are unlikely to be affected by such low VAT.
The key concern when it comes to sales tax is that it has to be implemented in adjacent countries. Cheaper goods across the border would reduce the UAE's competitiveness and increase the risk of smuggling.
Vehicle duty
The IMF also suggested implementing a 15 per cent excise duty on cars to help the government deal with expenses related to road maintenance and infrastructure development. Poor road networks lead to traffic jams and as a result decreased productivity, whereas car pollution causes health problems.
These indirect consequences of underdeveloped infrastructure are a point of a growing concern within the region. Imposing vehicle duty would shift some of the burden on car owners. Undoubtedly, automobile purchasers will be affected by a price increase; however, it seems only fair for them to share some of the responsibility for the damaging impact of cars.
Building new roads provides employment opportunities, and newly developed infrastructure will boost productivity and tourism.
In just over a year, hydrocarbon prices have declined by more than 50 per cent. Oil-exporting economies are under increased pressure to diversity their revenue. Not only they are losing income from the cost of the commodity itself but also because of decreased tax income.
The UAE is setting an example, showing how an agenda for fiscal consolidation can help address the problem. Exact details are still under review, but considering certain steps have already been taken, it is obvious that the UAE takes the problems seriously.
The short-term impact might potentially be negative as businesses will have to comply with new laws and regulations which would add to their administrative burden. The prices of goods, services and cars will increase and salaries might be on the decline in relative terms.
However, heavy oil reliance is unsustainable. So, it is encouraging to see that the UAE is thinking ahead, preparing for further fluctuations in commodity prices.
The writer is regional director for the Middle East, Africa and South Asia at the Institute of Chartered Accountants in England and Wales. Views expressed are his own and do not reflect the newspaper's policy.