Both the UAE and Saudi Arabia have had a longstanding, low tax arrangement which has been used to attract foreign workers and companies. However, due to the fall in oil prices that we’ve seen in recent years, both these countries plan to introduce a 5% tax on the majority of goods and services in a bid to boost government revenue. Other Gulf regions have also suggested that they could follow in the next few years by implementing their own VAT schemes.
The new VAT will apply to both everyday items and larger expenses, including food, clothes, gasoline, household bills, electrical goods and hotels. But will the move put off foreign workers? It’s thought that it might; Elda Ngombe, a 23-year-old college graduate who’s looking for work in Dubai said “I am scared because everything is actually expensive already in Dubai. The fact that it’s actually adding 5 per cent is crazy.”
There will be some exemptions to the new tax, which include rent, house sales, some types of medication and airline travel. The government also plans to exclude school tuition from the tax, but says that higher education will be subject to VAT, as will extra costs associated with school like uniforms, books, and travel costs.
Although a 5% tax increase sounds dramatic, when compared with other countries, including Europe where the average VAT sits at around 20%, it shouldn’t be enough to deter workers from relocating to the region. Vera Clement, from France who has lived in Dubai for three years also commented that “If you compare with Europe, I don’t think it’s as expensive. Only in rent and food. We are going to be more careful when we buy something.”
It’s expected that the new tax, combined with other factors will cause the cost of living in the UAE to increase by 2.5% next year, although salaries are predicted to stay the same. While the government adjusts to the lower oil prices, it claims it must raise extra revenue in other ways. It’s expected that VAT will give them an extra 12 billion dirhams ($3.3bn) next year alone. Saudi Arabia has also reported some of the biggest budget cuts in its history in response to the low oil prices.
IMF Mideast director Jihad Azour said VAT is part of a long-term tax reform that it hopes will reduce Gulf States dependence on oil revenue. He said “It is something that will allow the government to diversify revenues.” He added that any fall in consumer spending in the coming years would be short term, and government investments should make up for the reduction.