VAT key to cutting red tape

Business would be simplified for companies in the UAE if the Government introduced VAT in place of the thousands of different charges and levies currently imposed, according to a tax adviser with PricewaterhouseCoopers.

Business would be simplified for companies in the UAE if the Government introduced value-added tax (VAT) in place of the thousands of different charges and levies currently imposed, according to a tax adviser with PricewaterhouseCoopers (PwC). Sweeping away the many charges and levies companies have to pay and replacing them with a single tax would also help to reduce administrative burdens on the Government, said Dean Rolfe, a tax partner for the Middle East at PwC.

"A consolidation of the charges and levies would make life simpler for the business community and the community at large," said Mr Rolfe. "If you think about how much money it must cost the various government departments to collect the different charges, a consolidation of the process would also make life easier for the government." The UAE has shown interest in introducing VAT, with the Ministry of Finance this year submitting a study on the economic impact of the levy to the Cabinet.

Officials at the IMF have long urged GCC states to introduce the tax as a way of ensuring a reliable inflow of government revenues, safeguarding against volatility in oil prices. Known as a goods and services tax (GST) in Asia and Australia, VAT is a form of consumption tax applied to a product or service whenever value is added at a stage of production or final sale. Although the introduction of any type of taxation in the UAE is likely to be unpopular, VAT levied on consumers should prove less of a financial hit for businesses than corporate income tax. Companies would face the initial costs of implementing the system.

Currently, levies and fees include municipal business tax, registration tax, trade licence fees and staff visa costs. The number of fees and charges in Dubai has been estimated at about 2,000 by the IMF. "The introduction of a single taxation would provide the business environment with more transparency and certainty as it's difficult [at the moment] for businesses to keep a track of paying the different levies," said Mr Rolfe. "It may also mean businesses have to employ less people to pay all these charges."

VAT could also spell the end of outdated Customs duties in place across the GCC. Governments have proposed the introduction of VAT as a means of replacing customs duties being phased out under free trade agreements, said a report released last week by PwC. The introduction of the tax has been estimated as generating a US$1.8 billion (Dh6.61bn) annual windfall for the Government if it were levied at 5 per cent. Nevertheless, the exact amount the Government would net would be determined by factors such as the efficiency of collection and whether free zones would be liable to the levy. It would also depend on the registration threshold, which could be based on company turnover.

The introduction of VAT is viewed by financial experts as more likely than income tax, which the Government is concerned could taint the attractiveness of the region to international business. Other alternatives are taxes on company turnover, labour or property. VAT or GST is an important source of government revenue in EU countries, as well as India, Canada and Australia. Globally, PWC says VAT could act as an exception in a general trend towards governments introducing new forms of taxation rather than raising existing tax rates. In the new UK government's emergency budget last month, ministers announced an increase in VAT from 17.5 per cent to 20 per cent.

Economists agree VAT would be one of the most effective forms of taxation to introduce in the region. "VAT is a broad-based non-discriminatory tax and as a revenue source is not as vulnerable to cyclical volatility as oil prices," said Jarmo Kotilaine, the chief economist of NCB Capital. "When you have a broad-based fiscal system then the government can support the private sector with tax incentives during economic downturns rather than pumping money into the economy."

As a tax on consumption it could also act as a useful tool for the government in encouraging consumer saving, Mr Kotilaine said. [e-mail]