Arab states gear up for value-added tax

Oil-price dip spurs Saudi, UAE moves

DUBAI, United Arab Emirates — Saudi Arabia and the United Arab Emirates, which have long attracted foreign workers with the promise of a tax-free lifestyle, plan to impose a 5 percent tax next year on most goods and services to boost revenue after oil prices collapsed three years ago.

The value-added tax will apply to a range of items such as food, clothes, electronics and gasoline, as well as phone, water and electricity bills, and hotel reservations.

Elda Ngombe, a 23-yearold college graduate who is looking for a job in Dubai, said there’s one specific purchase she’s planning before next year’s price increase: “Makeup, because I can’t live without makeup.”

“I am scared because everything is actually expensive already in Dubai. The fact that it’s actually adding 5 percent is crazy,” she said.

There will be some exemptions for big-ticket costs such as rent, real estate sales, certain medications, airline tickets and school tuition.

Higher education, however, will be taxed in the UAE. Extra costs parents pay to schools for uniforms, books, school bus fees and lunch will also be taxed, as will real estate brokerage costs for renters and buyers.

Other Persian Gulf countries are expected to implement their own value-added tax systems in the coming years.

Stores, gyms and other retailers are trying to make the most of the remaining tax-free days in Saudi Arabia and the UAE, encouraging buyers to stock up before the value-added tax is rolled out Monday.

Even with a 5 percent jump in prices, the tax rate is still significantly less than the average value-added tax rate of 20 percent in some European countries.

“If you compare with Europe, I don’t think it’s as expensive. Only in rent and food,” said Vera Clement, a mother and assistant manager of restaurants from France who has lived in Dubai for three years.

“We are going to be more careful when we buy something,” she added.

The National newspaper, based in Abu Dhabi, says the cost of living in the UAE is expected to rise about 2.5 percent next year because of the tax. Salaries, meanwhile, remain the same.

As the government adjusts to lower oil prices, the UAE is expected to raise about $3.3 billion from the tax.

Meanwhile, Saudi Arabia recently unveiled the biggest budget in its history, with plans to spend $261 billion this coming fiscal year as the government forecasts a boost in revenue from the introduction of the value-added tax and plans to reduce subsidies. Still, Saudi Arabia is facing a budget deficit until at least 2023.

The International Monetary Fund has recommended oil-exporting countries in the Persian Gulf introduce taxes as one way to raise non-oil revenue. The IMF also recommends Gulf countries introduce or expand taxes on business profits.

IMF Mideast director Jihad Azour said the value-added tax is part of a long-term tax shift to help Gulf states reduce their dependence on oil revenue.

“It is something that will allow the government to diversify revenues,” he said on the sidelines of an event in Dubai, adding that any immediate slowdown in spending by consumers next year will be compensated for with government investments.

In line with IMF recommendations, Saudi Arabia and the UAE this summer imposed a 100 percent tax on tobacco products and energy drinks, and a 50 percent tax on soft drinks.

The value-added tax, however, is by far the most wide-ranging tax to emerge.

A company in Dubai called Katerpillar has held training classes for businesses trying to prepare for the tax’s compliance and accounting rules. Katerpillar said more than 500 people have signed up for their classes over the past three months. Though the Gulf has long been associated with being a tax-free haven, foreign companies — except in Bahrain — pay corporate income taxes.