The UAE is establishing a tax authority, here’s what you should know

Yes, it’s happening. Taxes are closer to becoming a reality in the United Arab Emirates, with President Sheikh Khalifa Bin Zayed Al Nahyan decreeing this week the creation of a new authority to collect data, information and statistics related to federal taxes.

Here’s what you need to know about the significant change and how it will affect you, whether you’re Emirati or residing in the UAE.

The Federal Tax Authority will create and maintain records of the taxes paid by taxpayers, while also creating guidelines and information about federal taxes and fines. The UAE cabinet will issue a resolution to appoint a minister and board members to oversee the authority, which will also represent the country in all regional and international meetings relating to taxes.

Tax revenues and fines collected by the authority will first be deposited in an independent account before being distributed appropriately throughout the local and federal governments.

The cabinet will decide how the money should be divided, based on recommendations from the tax authority and agreements between the branches of government.

After an important meeting with International Monetary Fund (IMF) chief Christine Lagarde in February, GCC countries announced that they would begin to implement a 5 percent value added tax (VAT) starting on Jan. 1, 2018. The UAE will take the lead and other GCC countries will follow suit by Jan. 1, 2019 at the latest.

Some 100 food items, health, education, social services and bicycles would all be exempt from the newly created tax. Looks like it’s time to start biking to work?

Five percent is relatively small compared to most countries (in the UK it is around 20 percent, for example), the tax could generate as much as 12 billion dirhams ($3.27 billion) in the UAE during its first year of implementation.

With the announcement of the VAT, UAE Minister of State for Financial Affairs Obaid Humaid Al Tayer confirmed that no plans of implementing income taxes were in the works. But, potential plans for instituting other taxes are a distinct possibility.

The country is also drafting a corporate tax law. 

After the game-changer meeting between the GCC representatives and the IMF’s La Garde, the IMF chief advised the Gulf to begin setting up a tax infrastructure to prepare for the imposition of income taxes.

“…Continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income taxes,” she said.

Oil revenues have plummeted and budget deficits have widened as a result. The GCC is counteracting this by raising revenue (the taxes) and cutting expenditure by slashing energy subsidies. 

“We need to think about major reforms to make the budget less dependent on the oil price, and to build an economy that is vibrant but also taking advantage of the lower oil prices,” UAE’s Energy Minister Suhail Al Mazrouei said in January.

Recently, Saudi Arabia announced 20 percent pay cuts for all ministers and 15 percent pay cuts for Shura Council members. They also switching to the Gregorian Calendar in effort to save 11 days of payments to public sector employees. Bonuses and other perks were also targeted.

In February, Lagarde voiced strong support for taxes throughout the GCC, stressing the importance of raising non-oil revenues. She also highlighted the successful steps the UAE has already taken to greatly diversify its economy.