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.
The Government insists that no concrete plans have been drawn up yet. "VAT has not yet been approved," Saeed Khalifa Saeed al Marri, the deputy director general of the UAE Federal Customs Authority, told Bloomberg this week. The Government is "studying the impact, and wants to know all the positives and negatives, so it might not do it at all - maybe by 2010," he said. Many analysts believe that VAT is inevitable for a country such as the UAE, which enjoys a higher level of per capita income than most. According to a 2001 study by the International Monetary Fund (IMF), countries with high income levels, populations of less than five million people and low agricultural output tend to yield the highest VAT revenues.
The country earns the majority of its revenues from crude oil sales. Abu Dhabi earned 92 per cent of its revenue from oil sales last year, the Abu Dhabi Department of Planning and Economy said in a report on Aug 7. "The UAE is like a baby that is teething," noted Naeem Ghafoor, the chief executive of Skyline Retail Services, a consultancy firm in Dubai. "Taxes are normal and they are part of life everywhere in the world, so it is foolish for us to expect that the UAE was going to last like this forever."
Still, the concept has met a fair amount of resistance. Retailers are especially concerned that Dubai, a city that has built a reputation for itself as a global shopping destination, might take a hit if tourists do not have a tax-free incentive to travel here. "The net profit we make here is similar to what people make in other countries," said Ajay Dayal, the general manager of retail and marketing for Easa Saleh Al Gurg, the holding company with brands including United Colors of Benetton and Siemens appliances. "If VAT comes in, it will reduce the competitiveness of the UAE market vis-à-vis other markets in terms of the price advantages people have here."
Ishwar Chugani, the executive director of Giordano in the UAE, agreed. "Shoppers here have come to expect good deals. With the cost of living, infrastructure, food and everything else already going up in price, this will only make living here even more difficult for people." The skyrocketing cost of living shows no signs of abating. UAE inflation accelerated to a 20-year high of 11.4 per cent last year and will rise slightly to 11.8 per cent this year, a Reuters poll showed. Food, beverage and tobacco accounted for 11 per cent of that rise and, according to the Emirates Consumer Protection Society, a division of the Ministry of Economy, food inflation could rise as high as 40 per cent this year.
The argument, while complex, boils down to one major issue. The burden of the VAT, like that of most sales taxes, tends to be passed on to the consumer. The money that goes to the VAT, while partially redeemable for businesses that put the returns to more supplies or services, are never seen again by the consumer. "We have come to realise that the UAE isn't the cash cow we had expected it to be," said Rebecca Fox, an expatriate of Sydney who moved to Dubai with her husband and two children last November. "We did the numbers before we came here and the fact that it is tax-free was definitely one of the major factors to get us to come here."
What is concerning many retailers now is that the country may enter into such a plan prematurely, without securing the proper mechanisms needed to smoothly carry out a VAT nationwide. Many businesses do not keep accounts and therefore cannot be audited as is often necessary in order to keep track of regulatory taxes. "The system in the market is very fluid right now - you may get a receipt, you may not," noted Mr Dayal. "Nobody is under obligation because you don't have to give a receipt to anybody. That will be a huge exercise."
While a tax of three to five per cent will not have a dramatic impact on higher income households, the already soaring price of many goods will only become harder to afford for those with lower incomes. "Even if it is only three per cent initially, people will look at this and they will think 'this is only the beginning'," noted Mr Zeigler. "This will give people second thoughts about staying here, moving here or spending money here."
"It is not fair for some to say that it will not be felt," added Mr Dayal. "It will hit you at every level, whether you get your hair cut, you buy a bottle of water, you buy a designer bag - you will pay." According to Khaled Zanul Abid, the general manager of Talal Supermarket in Jebel Ali, this is one added burden for those already battling inflationary price hikes. "This will only make the people suffer more than they are now," he said.
Still, some people believe that there is a benefit - if perhaps hidden - of certain tax policies. "I am used to taxes as an American, so a three or five per cent VAT wouldn't impact my decision to live here, unless my salary can't keep up," said Anna Batchelder, a newlywed who moved to the country with her husband this month. "Uncle Sam gave me an education loan because he knew that I'd have to pay him back big time from my salary. That's the way these taxes work."
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