The International Reporting (and Life) Adventures of Vivian Salama

Consumers facing a taxing time

Posted by vmsalama on August 20, 2008

Vivian Salama

The National | August 20. 2008 

For many, the adage “a penny saved is a penny earned” is nothing more than wishful thinking. Food prices are up, rents are going through the roof, and salaries are not keeping up with inflation.

Hundreds of thousands of people from around the world who have flocked to the UAE in search of prosperity find themselves cutting costs and struggling to stay afloat. And on top of all that, the one thing the country’s residents have collectively celebrated – a tax-free society – could soon become a thing of the past, as early as 2010.

The issue of whether or not to implement a value-added tax (VAT) in the UAE has sparked its fair share of support and criticism, particularly in the past six months as the inflation rate has risen above 11 per cent and is forecast to keep climbing.

“Now is not the right time to seriously discuss introducing a VAT,” said Robert Ziegler, the vice president of the management consultancy AT Kearney in the Middle East. “A lot of people realise there are a lot of fees that essentially translate into taxes here, but there is also a big psychological factor to the idea of the UAE being ‘tax-free’.”

VAT is an indirect levy and taxes individuals at each stage of production and distribution, from food producers and clothing manufacturers, all the way down the supply chain to the end user – as opposed to a retail sales tax that is collected solely at the point of final purchase.

VAT is a key component in the tax system of about 130 countries, generating a total of more than US$18 trillion (Dh66tn) in global tax revenues, according to a report by the Tax Policy Centre. On average, it accounts for 25 per cent of national governments’ revenues. Like the UAE, the US is one of a handful of non-VAT countries.

Although the standard rate of VAT is 17.5 per cent in the UK, the average rate worldwide is approximately 20 per cent. Some countries such as Denmark, Norway or Sweden have a rate as high as 25 per cent.

The proposal on the table here is not nearly as high – an issue that will delight the 80 per cent of the population made up of expatriates who have come here to live and work on a tax-free basis. According to Ahmad Butti Ahmad, the director general of Dubai Customs, the agency behind the eventual introduction of VAT, proposals submitted to the UAE’s federal authorities suggest anywhere from a three to five per cent tax as a starting point. Ideally, it would serve a number of purposes. Principally, it would compensate for the import tariffs lost to any future free trade agreements, whether with the EU, China, India or the US, although no agreements have been signed with these countries so far. A VAT levy would also boost Government coffers, money that could be spent on welfare.

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