The International Monetary Fund (IMF) has concluded discussions with the United Arab Emirates (UAE) under Article IV of its articles of association and on 4 August 2015 published a report and a selected issues paper. The IMF notes that government expenses have risen significantly in recent years and this presents a risk for fiscal sustainability in the medium and long term especially if oil prices remain low. The IMF considers that the UAE needs to consider measures to contain government expenditure and raise more non-hydrocarbon revenue to reduce fiscal vulnerabilities.
The non-hydrocarbon revenue collected by the UAE amounts to about 20% of total government revenue. Around half of the non-hydrocarbon revenue is collected in Dubai, with the Federal Government of the UAE collecting almost all the rest.
Currently a corporate income tax of 20% is levied on banks in Dubai; and there is a municipal property tax at 5% of rental value; a 10% tax on hotel services; fees and charges for government services; and revenue from customs duties. The customs duties are charged at the 5% common external tariff for the Gulf Cooperation Council (GCC) which has a harmonized customs regime, with higher rates of duty of 50% on alcohol and 100% on tobacco.
The IMF notes that the UAE does not currently gain revenue from value added tax (VAT) or excise duties. In the view of the IMF this is a missed opportunity to diversify government revenues and thereby strengthen its fiscal position.
The IMF considers that sustainable fiscal measures should include a fair, simple and effective tax system to ensure that non-hydrocarbon revenues are raised to strengthen sustainability and equity. As the hydrocarbon revenue is currently showing a significant surplus the tax system should be characterized by low tax rates and a broad tax base. This would ensure that the effects on investor and consumer behavior are limited and would be consistent with economic diversification.
The tax reform should also give attention to strengthening the capacity of the tax administration. Attention needs to be paid to the administrative costs of collecting taxes and the introduction of taxes that are efficient and cost-effective to administer.
A corporate income tax could be introduced with broader coverage than the current tax on banks and with a lower tax rate, for example 10%. The scope of the tax could include foreign, GCC and domestic companies operating outside the free zones. The tax could also be extended to cover unincorporated entities, thereby reducing the need for a general income tax on individuals.
The IMF also suggests that a VAT with a broad base and low rate such as 5% would provide a stable revenue source without affecting the level of investment in the country. A VAT would raise revenue efficiently as there are relatively low administrative costs for the government in collecting the tax. Progress in implementing a VAT depends on the agreement of relevant frameworks among the GCC countries which are moving forward together to implement a VAT in the medium term.
Other possibilities for raising more tax revenue are excise taxes on passenger vehicles. This would shift the costs of maintaining and extending the road network and of the extra pollution to the owners of the vehicles. An ad valorem tax of 15% on automobiles is suggested. The IMF also emphasises that fees for government services are not a substitute for taxes, as they distort supply and demand, are not transparent and are more expensive than taxes to administer.
