VAT diversifies UAE revenues with minimum rise in prices
Revenue sharing formula to decide fiscal impact on individual emirates
Introduction of value added tax in the UAE has diversified the government revenues enhancing the country’s institutional capacity to respond to the oil price shock while limiting inflationary impact to the minimum, said credit rating agency Moody’s.
Of the six Gulf Cooperation Council (GCC) states, only Saudi Arabia has introduced the tax on schedule along with the UAE. While the VAT is at a uniform rate of 5 per cent, the level of tax compliance will be clear only when the revenue receipts are announced. Reports suggest that around 260,000-275,000 of an estimated 350,000 companies have registered for VAT so far.
“The implementation of VAT in the UAE also marks a positive step towards revenue diversification. With the introduction of
strict penalties on tax evasion, the UAE expects to achieve high levels of compliance, and could raise up to 1.7 per cent of GDP [Dh24 billion] in additional revenue for the country annually,” said Thaddeus Best, a Moody’s Analyst.
In the early years of adoption, the rating agency expects that realised revenue may be lower because of less than total compliance.
Revenue sharing
Although the UAE government has confirmed that just 30 per cent of the revenues will be retained by the federal government, the tax share of individual emirates is yet to be announced.
“The exact revenue sharing formula for the emirate-level share has yet to be announced by the government, although we expect it will most likely be a based on a combination of GDP, non-oil GDP, and population size,” said Best.
The fiscal impact of VAT on the individual emirates will depend on what revenue-sharing formula is ultimately adopted. For example, assuming full compliance, basing the VAT redistribution on GDP would generate up to 1.2 per cent of GDP for each emirate. However, using non-oil GDP for example would be more favourable for Dubai and Sharjah given the lack of significant hydrocarbons output.