Will the UAE's VAT revenue live up to the expectation?
The panic around VAT witnessed in 2017 is less tangible now, but beware of the coming storm
I try not to get obsessed by how many, or how few, people read or share the articles I write on international tax and VAT. That said, it was most pleasing when my inaugural column on VAT was the most-read article on The National’s website for about 24 hours, and I proudly told anyone who would listen - my mother - that this was the case.
This, I can confidently predict, is unlikely to be the most-read article for even 24 minutes. Why?
In the last quarter of 2017, there was tangible panic in the UAE surrounding the imminence of VAT, particularly after the legislation was belatedly published, and January 1 2018 was confirmed as the go-live date.
The panic is less tangible now. Consumers groan, with some justification, that retailers have used the introduction of VAT to increase prices by more than 5 per cent, but there’s not very much they can do about it, except spend less or move elsewhere.
Businesses that have registered for VAT and are receiving tax invoices from their suppliers and issuing similar invoices to their customers, largely seem to be coping with this new element.
This means that an article on VAT is not the click bait it was in 2017.
However, if life were a film, we would find ourselves in the part of the story arc when the storm clouds were starting to gather, or when spooky and unexplained things started to happen.
The rate of failure to register for VAT is potentially as high as 20 per cent. While more than 275,000 UAE businesses have registered for VAT, this is significantly less than the 350,000 businesses the Federal Tax Authority estimated would need to register last July.
In this regard, Khalid Al Bustani, the director general of the FTA told The National: “We will not tolerate tax evaders, and those people violating the rules and misusing the system. It is public knowledge that the UAE has a VAT, and all companies have an obligation to pay it".
There’s little to argue with in that comment from Mr Al Bustani. The concern is that it sets the tone for the wider dealings with businesses in relation to VAT. Interpreting and applying VAT laws is a complex matter, and VAT is the source of extensive dispute and litigation in the countries that have introduced it. A business that is evading VAT by not registering or by not putting all its sales through its books is very different from the business that takes, or has been advised to take, an interpretation of the legislation with which the FTA does not agree.
There are, for example, some positions the FTA takes on certain technical matters that I don’t agree with (and, for what it’s worth, neither does the European Court of Justice in respect of identical wording in EU legislation, although of course the UAE courts are not bound by its interpretations). So, will the FTA accept that its interpretation could be wrong, or will it allege “evasion” at every turn? It’s important that an initial high rate of non-registration does not create a culture in which the FTA concludes that every business that pays less than the FTA thinks it should is a VAT evader.
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The National also reported last week that the FTA has a “98.8 per cent compliance rate on VAT returns filed to date”, noting that it is one of the highest compliance rates in the world. I have no idea what this means or how the FTA, barely three months into the introduction, can determine the percentage. I assume it means that 98.8 per cent of VAT returns were not rejected. But all this means is that they were consistent on their face – it doesn’t mean that VAT has not been under-reported by the business, or that an invoice on which the business is claiming for credit was correctly issued to that business, and not another business in the group.
Ultimately, the important figure in determining the success of VAT will not be the compliance rate on returns, or the number of registered businesses, but whether the revenue from VAT is close to the estimated amount. The UAE was predicted to raise approximately Dh12 billion in 2018, or 1.5 per cent of GDP. If that amount turns out to be, say, Dh10bn, not only will it leave a gap in the UAE’s budget, but it could again lead the FTA to argue a VAT liability where none, as a matter of law, arises, simply to fill a fiscal black hole.
Finally, Mr Al Bustani told The National that one of the main challenges the government faced in the initial stages of VAT implementation was around consumer rights. He said that “people were complaining that products were more expensive. But the tax is set at the lowest [global] rate of 5 per cent so there was no excuse for retailers to hike prices,” he said.
Well, up to a point. There was a perfectly good excuse for retailers to hike prices by 5 per cent. And if retailers wanted to use the introduction of VAT to increase prices by more than 5 per cent, there was generally no law preventing them from doing so. The government could have introduced such a law (other countries have done so previously), but this would be inconsistent with the liberal capitalist regime that makes the UAE such an attractive place to do business.
I’ve noticed a large number of consumer-facing businesses that, in breach of the law, are failing to display prices inclusive of VAT, and are adding them at the till, or when the bill is brought to the table. This is unfortunate, and it would be expected that the FTA will look to bring proceedings against persistent offenders.
The fact the UAE has reached the position it has in relation to VAT has is to be commended. But look out for the coming storm. And those ghosts.
Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape
Updated: April 17, 2018 01:32 PM