Commentary by ICAEW
Following last week’s announcement that the UAE plans to prioritise growth of its digital and green economies in its post COVID-19 recovery plan, ICAEW says the country will need to introduce some radical incentive programmes if it is to succeed in staving off a VAT increase in the short term.
In response to Saudi Arabia’s plans to increase its valued-added tax (VAT) rate from 5 percent to 15 percent from July 1 this year, the UAE Ministry of Finance confirmed it would not be doing the same. Instead, it reinforced its commitment to achieve the UAE’s development goals and plans.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), comments:
“We applaud the UAE’s progressive economic vision and forward thinking to further diversify its economy. However, its high dependence on tourism, real estate and global trade means it has a significant challenge ahead to stimulate and support internal demand, while remaining attractive to foreign investors.
“Despite being the most diversified of the GCC economies, the UAE public purse remains dependent on oil revenues, and the crash in oil prices has once again accelerated the need for further diversification of the country’s non-oil sector.
“How quickly the country realises its post-oil future will be the true test. We can expect to see more policies introduced and structural reforms to enhance the UAE business environment. Credit access will be crucial too, especially for SMEs which represent 98 percent of registered businesses in the country, and contribute 52 percent to non-oil GDP.
“This is further compounded by the fact that most of those SMEs are owned by foreign expatriates. To avoid the mass exodus of foreign talent that the country saw during the 2009 financial crisis, financial relief will need to be extended to those in need of assistance.
“But the government needs to be able to recoup those costs somehow, and so it stands to reason that fiscal adjustments in the form of increased taxes is a logical solution.
“Not doing so now is perhaps a psychological win for the UAE. It remains a more attractive business environment than its larger regional neighbour Saudi Arabia. Also, as higher taxes are introduced in more developed markets to cover the cost of Covid-19 relief efforts, the UAE’s low tax environment can remain a draw for foreign investors.
“However, we expect more incentives will have to be introduced to attract the long term commitment of those investors. While this is already happening in the form of Golden Residency Visas for high priority talent, more work will need to be done to provide greater stability for foreign investors and retain talented people.
“Such measures will make it easier to increase or introduce more taxation in the future, something we see as unavoidable and necessary. The Ministry of Finance previously said it wouldn’t introduce tax hikes until 2023. What the UAE does between now and then to boost the economy and support residents will be somewhat of a competitiveness litmus test.
“What the UAE also has in its favour right now is the one year postponement of Expo 2020. Although the economic windfall of Expo will also be delayed, it does present a greater opportunity for success since it will allow participating countries more time to recover and should see the travel and tourism sectors better adjusted to the next normal. This will result in a more significant overall contribution to the economy.
“The UAE is a young and dynamic country that has proven itself resilient to global shockwaves in the past. With continued prudent leadership, there is every potential for increased development of its digital and green economies to leapfrog more mature markets. This reset moment is all about plotting a new course for economic growth.”