More than two centuries ago, Adam Smith praised the virtues of “peace, easy taxes and a tolerable administration of justice” as components of statecraft. Christine Lagarde, the managing director of the IMF, quoted his words in a speech in Abu Dhabi on February 22. The virtues of peace and good administration of justice are plain, but what of these “easy taxes”?
If you want to go back to the source material, most of what Adam Smith had to say about taxation back in the 18th century is in Book V, Chapter II, Part II of Wealth of Nations.
Smith saw the essential requirements of a tax system as involving equity, or fairness; certainty, which includes simplicity; convenience; and economy, which in this context means efficiency, neutrality and effectiveness. In the parlance of Georgian England, those characteristics combined to make for “easy taxes”.
The reasons for the present discussion are obvious. Arabian Gulf economies depend on natural resources. Oil and gas are finite commodities with volatile prices. Price volatility, especially the likelihood of low prices for an extended period, plays havoc with budgets.
Prudent governments must plan ahead now for the post-oil economy when resources run low.
The results are now taking shape. As Obaid Humaid Al Tayer, the Minister of State for Financial Affairs, confirmed late last month that a GCC value-added tax framework agreement is likely to be concluded by June this year. Corporation tax is being considered.
Although Gulf oil and gas reserves will be around for a long time to come, that is no cause for complacency. The need has arisen for action to reduce spending and increase revenue by taking, as Ms Lagarde went on to say, “a unique opportunity to design tax systems that emphasise fairness, simplicity and efficiency”, Smith rules.
The GCC states have already taken steps to seize that opportunity, and recently the tempo has stepped up.
GCC finance ministers met in plenary session in April last year to work on the framework agreement, and met again with the governors of the region’s central banks in November last year. Many other high-level meetings will have taken place around those focal points.
Talk of tax provokes a predictable negative reaction. Few, if any, enjoy paying it. But that is a selfish approach.
“The ability of countries to generate robust government revenue is the lifeblood of modern states” as Ms Lagarde said in her speech in Abu Dhabi. “The policeman on the beat, the nurse who is attending to a patient, the teacher who is inspiring young minds, the scientist who is conducting cutting-edge basic research; these are some of the people who could not do their work without reliable government income.”
Public goods must be funded on a simple and fair basis. “Those who consume more should pay more” is a straightforward maxim that can be used. VAT, as a tax on consumption, is an easy means of doing so. Notably, the VAT proposed for the GCC will not be applied to consumer spending on public goods and food essentials.
The US president Calvin Coolidge (1923-29) once said: “Economy is the method by which we prepare today to afford the improvements of tomorrow.” His immediate successor, Herbert Hoover (1929-33), observed ironically: “Blessed are the young, for they shall inherit the national debt”.
In other words, good government should not only be concerned with the present, it should also have an eye to future sustainability and betterment.
In speaking of “intergenerational equity”, modern jargon loses the directness of those presidential statements, but the idea is the same. Fair use of resources and assets must have regard to the interests of future generations.
VAT, a tax on consumption of resources and assets, is a present-day levy that will provide for investment in the future.
Ms Lagarde’s prescription starts with the introduction of “a harmonised regional VAT”, advocates “greater emphasis” on corporate income tax, property tax and excises, and recommends continuing investment in building tax administration capacity: “strong fiscal institutions and public financial management are essential.” The GCC has already embarked on the first step (and the second step in part); the remainder is under active review.
Building administrative capacity is one element that is essential to effective implementation. It will be a challenge, but it must be done.
Other elements must also be brought into play. Coordination and cooperation between all interested stakeholders (governments, advisers, practitioners, academics, business leaders, media consultants and the general public) will be paramount.
As Mr Al Tayer noted: “A lot of groundwork needs to be done before implementing VAT. The private sector will need time to prepare for complying with tax rules. That is the reason we are giving enough time”.
It is reassuring to see governmental recognition of the scale of what needs to be done. If done well, stakeholders will be convinced of the merits of fair taxation, both for the present and for the future.
Michael Patchett-Joyce is a commercial lawyer and arbitrator based in London and the UAE. VAT has been a specialist part of his practice for more than 15 years.
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Michael J Mazarr
Public Affairs
Dh67
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.”
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Villains
Queens of the Stone Age
Matador
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Pakistan squad
Sarfraz (c), Zaman, Imam, Masood, Azam, Malik, Asif, Sohail, Shadab, Nawaz, Ashraf, Hasan, Amir, Junaid, Shinwari and Afridi
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MATCH INFO
Manchester City 1 (Gundogan 56')
Shakhtar Donetsk 1 (Solomon 69')
Short-term let permits explained
Homeowners and tenants are allowed to list their properties for rental by registering through the Dubai Tourism website to obtain a permit.
Tenants also require a letter of no objection from their landlord before being allowed to list the property.
There is a cost of Dh1,590 before starting the process, with an additional licence fee of Dh300 per bedroom being rented in your home for the duration of the rental, which ranges from three months to a year.
Anyone hoping to list a property for rental must also provide a copy of their title deeds and Ejari, as well as their Emirates ID.
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The specs
Engine: 6.2-litre supercharged V8
Power: 712hp at 6,100rpm
Torque: 881Nm at 4,800rpm
Transmission: 8-speed auto
Fuel consumption: 19.6 l/100km
Price: Dh380,000
On sale: now
Founder: Ayman Badawi
Date started: Test product September 2016, paid launch January 2017
Based: Dubai, UAE
Sector: Software
Size: Seven employees
Funding: $170,000 in angel investment
Funders: friends
Israel Palestine on Swedish TV 1958-1989
Director: Goran Hugo Olsson
Rating: 5/5
Meydan racecard:
6.30pm: Handicap | US$135,000 (Dirt) | 1,400 metres
7.05pm: Handicap | $135,000 (Turf) | 1,200m
7.40pm: Dubai Millennium Stakes | Group 3 | $200,000 (T) | 2,000m
8.15pm: UAE Oaks | Group 3 | $250,000 (D) | 1,900m
8.50pm: Zabeel Mile | Group 2 | $250,000 (T) | 1,600m
9.20pm: Handicap | $135,000 (T) | 1,600m