The UAE is preparing to launch VAT in 2018. The headline motivation - which has earned the endorsement of many leading global organisations, such as the IMF - is that the tax will diversify public revenues.
Oil represents around 80 per cent of the government’s income, making it highly volatile, which in turns impedes long-term investment. Will VAT help diminish the dependence of state finances upon the “black gold”?
In terms of simple accounting, then the answer is surely “yes”: VAT is likely to generate considerable revenues (although making a precise estimate is treacherously difficult due to the policy’s unprecedented nature), in a time when oil revenues are quite stable.
However, the problem with simple accounting is it treats the economy as the arithmetic sum of various sectors and ignores the deep-seated interdependencies that exist between different types of economic activity. This crucial point merits elucidation.
Suppose that the government currently earns US$80 from oil, and $20 from other sources (these are implausibly small figures, but they are good for an example), reflecting oil’s 80 per cent contribution to the budget. After VAT, the government earns an additional $20, meaning that oil now only represents 67 per cent of total revenues. Accountants would proclaim: “mission accomplished”, as a $10 decrease in oil revenues would previously have meant a 10 per cent decrease in total revenues, whereas now, it only represents a 8.3 per cent decrease.
This simple calculation, however, assumes that the $10 decline in oil revenues has no impact on the rest of the economy. Given the way the UAE economy works - and how all economies work, in fact - this assumption may be quite misleading. To see why, note that VAT is applied to hotel services, including conference hosting services. When oil revenues fall, the government is likely to respond by trimming expenditure, including how much ministries spend on events in hotels, leading to a concomitant decrease in VAT revenues, too.
Thus, taxing an activity that is downstream of an activity that is itself dependent upon oil revenues blunts efforts at diversification. Effective diversification requires the taxation of activities that are independent of oil, or, preferably, that move counter-cyclically. For example, when oil prices fall due to a weakening of the global economy, gold prices tend to rise as it is considered a safe haven; therefore, investments by the sovereign wealth fund in gold mines - and the taxation thereof - will constitute successful diversification.
This simple accounting problem is not caused by accountants; it is the result of asking accountants the wrong question. Instead of enquiring: “What percentage of revenues are accounted for by oil?” we should be asking: “What happens to total government revenues when oil revenues decline by one dollar?” Answering this latter question is substantially more difficult, but it is much more informative for a government seeking to diversify.
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In the specific case of the UAE, to what extent will VAT represent a diversification of revenues, vis-à-vis merely an increase in indirectly procured oil revenues? Economists, including various experts working in the UAE Government, build complex models of the economy to answer questions such as this. Their results are not typically released to the general public, primarily because the models are proprietary assets, due to their sophistication. Moreover, until VAT actually goes into effect, and crucial data become available, many of the modelling assumptions will be quite arbitrary.
Nevertheless, we can be pretty confident in two things.
First, VAT will offer some diversification of government income, especially in light of the genuine diversity exhibited by the economy of Dubai. For example, falling oil prices lead to lower air fares, meaning greater demand for international travel, thereby boosting multiple sectors in Dubai’s economy, and the associated VAT earnings.
Second, VAT will offer less diversification than basic accounting would suggest. Many important sectors in the UAE are indirectly dependent upon oil, meaning that a contraction in the price of oil will lead to a parallel decline in VAT earnings in those sectors. For example, falling oil prices have decreased the Saudi government’s propensity to give bonuses to its public sector employees, and to hire people, meaning that the disposable income of Saudi Arabians has declined. Saudis are a key component of tourists in the UAE, meaning that VAT earnings from restaurants frequented by Saudis will suffer whenever oil prices fall.
Admittedly, because the effects of the sectoral interlinkages take time to surface, VAT income can be more stable than direct oil income, which is also one of the motivating factors cited by the UAE Government. However, it is worth noting that there are alternatives, most notably international credit markets. The UAE has an excellent credit rating of Aa2, with a stable outlook. It is possible that the Government sensed the end of the recent, protracted era of low interest rates, and preferred to pursue domestic income alternatives to debt markets. Yet this has to be balanced against the non-trivial cost of implementing VAT, both for the Government and small businesses.
Ultimately, however, beyond financial and diversification considerations, the UAE Government was likely aware that virtually all advanced economies have advanced tax systems in place, and that the UAE’s time has come.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
Name: Brendalle Belaza
From: Crossing Rubber, Philippines
Arrived in the UAE: 2007
Favourite place in Abu Dhabi: NYUAD campus
Favourite photography style: Street photography
Favourite book: Harry Potter
Specs
Engine: Dual-motor all-wheel-drive electric
Range: Up to 610km
Power: 905hp
Torque: 985Nm
Price: From Dh439,000
Available: Now
Kanye%20West
%3Cp%3EYe%20%E2%80%94%20the%20rapper%20formerly%20known%20as%20Kanye%20West%20%E2%80%94%20has%20seen%20his%20net%20worth%20fall%20to%20%24400%20million%20in%20recent%20weeks.%20That%E2%80%99s%20a%20precipitous%20drop%20from%20Bloomberg%E2%80%99s%20estimates%20of%20%246.8%20billion%20at%20the%20end%20of%202021.%3Cbr%3EYe%E2%80%99s%20wealth%20plunged%20after%20business%20partners%2C%20including%20Adidas%2C%20severed%20ties%20with%20him%20on%20the%20back%20of%20anti-Semitic%20remarks%20earlier%20this%20year.%3Cbr%3EWest%E2%80%99s%20present%20net%20worth%20derives%20from%20cash%2C%20his%20music%2C%20real%20estate%20and%20a%20stake%20in%20former%20wife%20Kim%20Kardashian%E2%80%99s%20shapewear%20firm%2C%20Skims.%3C%2Fp%3E%0A
Other acts on the Jazz Garden bill
Sharrie Williams
The American singer is hugely respected in blues circles due to her passionate vocals and songwriting. Born and raised in Michigan, Williams began recording and touring as a teenage gospel singer. Her career took off with the blues band The Wiseguys. Such was the acclaim of their live shows that they toured throughout Europe and in Africa. As a solo artist, Williams has also collaborated with the likes of the late Dizzy Gillespie, Van Morrison and Mavis Staples.
Lin Rountree
An accomplished smooth jazz artist who blends his chilled approach with R‘n’B. Trained at the Duke Ellington School of the Arts in Washington, DC, Rountree formed his own band in 2004. He has also recorded with the likes of Kem, Dwele and Conya Doss. He comes to Dubai on the back of his new single Pass The Groove, from his forthcoming 2018 album Stronger Still, which may follow his five previous solo albums in cracking the top 10 of the US jazz charts.
Anita Williams
Dubai-based singer Anita Williams will open the night with a set of covers and swing, jazz and blues standards that made her an in-demand singer across the emirate. The Irish singer has been performing in Dubai since 2008 at venues such as MusicHall and Voda Bar. Her Jazz Garden appearance is career highlight as she will use the event to perform the original song Big Blue Eyes, the single from her debut solo album, due for release soon.
Ammar 808:
Maghreb United
Sofyann Ben Youssef
Glitterbeat
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
TRAP
Starring: Josh Hartnett, Saleka Shyamalan, Ariel Donaghue
Director: M Night Shyamalan
Rating: 3/5
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
Crazy Rich Asians
Director: Jon M Chu
Starring: Constance Wu, Henry Golding, Michelle Yeon, Gemma Chan
Four stars
'The Woman in the House Across the Street from the Girl in the Window'
Director:Michael Lehmann
Stars:Kristen Bell
Rating: 1/5
The bio:
Favourite film:
Declan: It was The Commitments but now it’s Bohemian Rhapsody.
Heidi: The Long Kiss Goodnight.
Favourite holiday destination:
Declan: Las Vegas but I also love getting home to Ireland and seeing everyone back home.
Heidi: Australia but my dream destination would be to go to Cuba.
Favourite pastime:
Declan: I love brunching and socializing. Just basically having the craic.
Heidi: Paddleboarding and swimming.
Personal motto:
Declan: Take chances.
Heidi: Live, love, laugh and have no regrets.
