Although the introduction of VAT is a major shift in fiscal policy from a country widely recognised for its low tax status, we consider this a sign of a maturing market, with a diminishing natural resource, taking the long term seriously.
The UAE Government is taking obvious steps forward to further support the country’s progression in strengthening the market by diversifying revenues to plug the hole left by the accelerated decline in oil prices. Although the VAT will necessitate changes to the administration of locally-registered companies, the rate at five per cent is among the lowest in the world and is unlikely to have much of an adverse effect on businesses in the UAE.
The introduction of VAT is unlikely to deter multinationals from establishing a commercial presence in the UAE. Tax would be only one of many considerations a company would evaluate when determining whether a foreign country represents a sound economic decision for the business. Other factors would be geopolitical risk, location, business infrastructure, legal frameworks, availability of a talented workforce and remittances – are they able to take money out of the country. These are all areas in which the UAE scores favourably so we do not think a low tax regime is likely to deter foreign investors.
The VAT is also an indication to foreign investors that the UAE Government recognises offering and implementing world-class infrastructure services comes at a cost.