Gulf States surrender tax-free status by charging VAT

27 November 2017

The tax-free status of the Gulf states is about to disappear as the nations ready to introduce VAT.

The region – which covers the United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman – will start charging VAT at 5%, but not all states will phase in the tax.

The UAE and Saudi Arabia will start from January 1, 2018.

Bahrain expects to charge VAT from mid-2018, while the rest are lagging because of legal and technology issues.

The tax will impact expats and as the Gulf region is a customs union, aligning national laws across the states is a major exercise.


Phasing in VAT may lead to chaos


VAT is charged on goods and services and should raise billions of dollars for the Gulf States, which have seen a significant revenue downturn with the falling price of oil over recent years.

The tax is not universal, but tourists and expats will pay at the full rate without any way to claim back the tax when they leave one of the member states.

Basically, goods and services with a ‘social element’ are exempt, like rents on homes, food and health care.

Phasing in VAT could cause some chaos as goods and services will be more expensive in one state, but across the border, they will be on sale at a discount.

The money will be spent on improving public services, such as hospitals, schools, universities, defence and other important aspects of daily life.


Lifestyle tax


VAT is a common tax around the world – with more than 150 countries levying some sort of sales tax.

Consumers carry the burden of VAT as business in the supply chain can set off sales and purchase taxes.

Governments argue that VAT is a lifestyle tax and consumers can choose how much they pay by deciding to spend or save money.

VAT is collected by the business supplying consumers with goods and services.

The business pays the government the difference between the sales taxes collected and the purchase taxes spent every three months.


Calculating VAT


The UAE government says: “VAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.”

The government agrees that the cost of living may rise when VAT starts as businesses adjust prices to account for the new tax.

“Inflation is likely to increase slightly, but this will vary depending on the individual’s lifestyle and spending behaviour. If your spending is mainly on those things which are relieved from VAT, you are unlikely to see any significant increase,” says the government.

From January 1, price tags will include VAT, so consumers know how much they must pay.

Working out VAT is simple – divide the price including VAT by 105 and multiply by 100.

For example, if the price is 2,500 dirhams, the steps are 2500 divided by 105 = 23.80 x 100 = 2,380 dirhams for the price less VAT.

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Tags: tax UAE VAT VAT

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