x Abu Dhabi, UAESunday 23 July 2017

A taxing issue to test all the Gulf

For a nation in need of foreign expertise, the absence of tax in the UAE has long been seen as a necessary incentive to pull in the right skills.

The French king Louis XIV's finance minister once said the art of taxation was like plucking a goose: you want to obtain the largest possible amount of feathers with the smallest amount of noise. For a nation in need of foreign expertise, the absence of tax in the UAE has long been seen as a necessary incentive to pull in the right skills. Any tax on income would provoke squeals of discomfort from hundreds of thousands of expatriates and would no doubt unleash a torrent of complaints from companies. This explains the apparent movement towards a sales tax, which is seen as less onerous, particularly if it replaces an existing duty on imports for some goods.

Nevertheless, the UAE Government will carefully weigh the benefits of extra revenue against the cost of compromising its tax-free appeal as competition for foreign investment becomes fiercer. It will also consider the impact of VAT on inflation. However unpopular among consumers, a VAT makes sense if introduced with other Gulf states because it would help the region diversify revenues away from volatile hydrocarbons and replace outdated trade tariffs.

It could also help countries in the region to cover the shortfall in budgets at a time of stimulus spending. A VAT would be easier for companies and individuals to swallow than an income tax. It surely makes sense for the GCC to introduce a VAT simultaneously and avoid giving unfair advantage to any individual economy. After all, what is good for the goose is good for the gander. But if the slow progress towards achieving monetary union is any measure, that is unlikely to be achieved without a lengthy debate between member states.

scronin@thenational.ae