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Policy Brief
Introducing Value-Added Tax
in the United Arab Emirates
April 2016
Issue 03-31032016

In association with

www.ihs.com

Policy Brief
Introducing Value-Added Tax in the United Arab Emirates

Contents
Executive summary 

Context and importance of the problem 

Critique of policy options 

Policy recommendations 

Appendix 

Sources consulted or recommended 

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Executive summary
The Supreme Council of the United Arab Emirates

is a serious concern for the private sector. However,

resolved to introduce a value-added tax with a

a carefully crafted communication strategy will help

tax rate of 5% by January 2018. The new tax will

the public and the corporate sector to understand

broaden the governments revenue base and reduce

the new tax. The relatively long lead time suggests

the dependence on oil, which is a prerequisite for

that households and companies should be able

sustainable finances. The new tax will also provide

to prepare for the introduction of the tax and thus

for a transparent and reasonably fair system to

mitigate negative effects. That having been said,

finance the government budget. At the same time

the government and monetary authorities still

the new tax will trim households purchasing power

should safeguard the introduction with contingency

and potentially reduce the countrys attractiveness

measures to avoid second-round effects on price

for tourists. Moreover, survey evidence suggests that

inflation or an ill-timed dampener for demand in

some small-and-medium-sized enterprises might be

times of weak growth.

particular adversely affected by the new tax, which

Context and importance

of the problem

With oil prices at their lowest in years, the need

to develop alternative sources of revenues have
become a top priority for Gulf Cooperation Council
(GCC) countries, where state budgets depend
primarily on hydrocarbon revenues. Meanwhile,
global financial-market uncertainty and political
transitions throughout the Middle East make a
reconsideration of national public finance all the
more necessary.
Recognizing the importance of economic reform,
including finding new sources of revenue that could
offset growing fiscal deficits and public debts, in
December 2015, representatives of the six GCC
countries agreed in Riyadh on key issues regarding
the implementation of a value-added tax (VAT) in
the region.

150

Number of countries with VAT implemented

Implemented in approximately 150 countries
worldwide and in every nonUS OECD country, a
VAT system requires businesses to pay taxes on the
difference between their total sales and the cost of
their purchases of inputs. That difference between
the sellers purchased price and the retail price
represents the value added to a specific product or
service by each firm in the value chain. VATs differ
from retail sales taxes in that they are typically
collected at each stage of production and serve as
an overall consumption tax.

2016 Abu Dhabi Chamber of Commerce & Industry

Policy Brief
Introducing Value-Added Tax in the United Arab Emirates

While the GCC framework agreement on the

implementation of a VAT is not expected until June
2016, the six GCC countries, including the United
Arab Emirates (UAE), were left to develop their
individual plans for implementation beginning in 2018.
In the UAE, where there is federal income-tax
legislation for general business, Minister of State for
Financial Affairs Obaid Humaid Al Tayer announced
in February that a 5% VAT will be go into effect on 1
January 2018.
This rate falls on the lowest end of the spectrum
for OECD countries where, as of 2015, the rates
spanned from 8.0% (Japan) to 27.0% (Hungary) and
had an average rate across all OECD countries of
18.7% (see table1).
The VAT will create a critical foundation for a nonoil
tax system that will be less subject to both oil-price
movements and production declines, define clearer
roles and responsibilities for both the government
and its citizens, and provide tools that can enable
efficiency, equity, and long-term economic stability.
The following pages summarize these benefits
as well as the challengesassociated with the
introduction of a VAT.

Critique of policy options

A new source of revenue

True to its intention, a VAT provides an opportunity

for diversifying the fiscal revenue base and has the
potential to raise substantial revenue, which could
then be used to support essential investments in
infrastructure, healthcare, and education, as well
as targeted social assistance for poor or vulnerable
populations.
A key metric for estimating VAT revenue is the socalled yield ratio. The VAT yield ratio is defined as
a percent share of GDP that can be raised for each
percentage-point rise in the VAT tax rate. Usually,
the yield ratio is given without considering costs of
policies intended to compensate households for
purchasing power lost in the VATs introduction.

April 2016

Table 1: Standard VAT rates for OECD

countries, 2015
Country

VAT rate

Australia

10

Austria

20

Belgium

21

Canada

Chile

19

Czech Republic

21

Denmark

25

Estonia

20

Finland

24

France

20

Germany

19

Greece

23

Hungary

27

Iceland

24

Ireland

23

Israel

18

Italy

22

Japan

Korea

10

Luxembourg

17

Mexico

16

Netherlands

21

New Zealand

15

Norway

25

Poland

23

Portugal

23

Slovak Republic

20

Slovenia

22

Spain

21

Sweden

25

Switzerland

Turkey

18

United Kingdom

20

Source: OECD

2016 IHS

The yield ratio varies wildly across countries,

reflecting the efficacy of the tax administration and
degree of tax avoidance. A low yield ratio of 0.21
for Mexico or a high ratio of 0.58 in New Zealand
means that for each percentage-point increase
in the VAT rate, tax revenue equal to 0.21% and
0.58%, respectively, is generated.
In the UAE, provisional estimates showed the

tax could raise up to USD6.5 billion by 2019

equivalent to 1.5% of UAE GDP. This would be
similar to the yield ratio estimated for the Brookings
Hamilton Projects proposal for a VAT in the United
States, which estimated that a VAT of 5%, when
paired with subsidies to offset the regressive effects,
could raise about 1% of GDP per year.
Among non-US OECD members in 2009, the VAT
raised 6.4% of GDP in revenue and accounted for
19.2% of revenue raised at all levels of government.

Efficient, easy to administer

In the most common implementation of the VAT,
producers are taxed based on their total output, then
receive credit for taxes they have paid on purchases
to other firms. By offering a tax credit in addition to
the tax liability, this system encourages compliance.
Moreover, as a lump-sum tax on existing wealth
(rather than income), these consumption taxes can
be designed to eliminate household distortions in
economic choices and allow revenue to be earned
regardless of the point of sale (e.g., retail location,
online order, etc.).
While the current UAE plan to exempt a number of
food, health, transportation, education, and other
social service items will affect how efficiently the
tax can be administered, the more broadly the VAT
is applied uniformly on all goods and services,
the less it will distort relative prices among
consumption goods.

In OECD countries VAT has raised 6.4% of

GDP in revenue and accounted for 19.2% of
government revenue
and projections. To this latter point, professor of
economics at New York University Abu Dhabi,
Christian Haefke, explains, Through VAT,
policymakers will have much better ways of
measuring economic activity because they will have
more real-time insights into economic activity.
Notably, a VAT does not necessarily hurt tourists
across the board and for all goods purchased in the
UAE, since many countries offer the option to rebate
the VAT on exports at the border. Meanwhile, by
taxing imports at the VAT rate, a country can ensure
an even playing field across imported and domestic
consumption goods.

VAT: regressive or proportional?

Despite their consistent rate across products
and services, VATs are not always viewed
as progressive and, in fact, might be seen as
regressive if the tax burden is measured as a share
of current household income. Alternatively, the tax
is considered proportional if it is instead evaluated
based on the amount households are taxed as a
percentage of their current level of consumption, or
with respect to the percentage of lifetime income
spent on consumption.

By implementing transparent and nonnegotiable tax

systems, governments have the opportunity to more
clearly define the relationship between the citizen and
the stateand demonstrate the roles that each play
in maintaining its well-being and future prosperity.

Moreover, the potentially regressive nature of the

tax, which could hurt disadvantaged populations
such as the elderly, youth, unemployed, or low-wage
earners, can be counteracted either by exemptions
to critical goods and services or through cash
transfers, rebates, or income-tax credits that offset
the damage from the VAT.

By broadly publicizing its 5% VAT, the UAE will

not only prevent perceptions of unfairness due
to corruption but can also introduce a more
accurate and regular line item in public reports
or communications regarding fiscal revenues

For example, in the Hamilton Projects proposal for

a VAT in the United States, the 5% VAT would be
paired with a cash payment of about USD450 per
adult and about USD200 per child to offset the
cost to low-income families. In this proposal, the

A fair and transparent system

2016 Abu Dhabi Chamber of Commerce & Industry

Policy Brief
Introducing Value-Added Tax in the United Arab Emirates

Chart 1: Tax revenue by category in selected MENA countries (percent of nonoil GDP)
>46%

15%

Property
Trade

10%

Corporate income
Personal income
Excise

5%

VAT
Goods and services

0%

Bahrain

Egypt

Jordan

Oman

Kuwait

Qatar

Saudi Arabia*

Note: Owing to discrepancies between the latest data point across categories or incomplete information, components may not add up to the total
*Does not include revenue from zakat

Brookings Institutions William G. Gale and Urban

Institutes Benjamin H. Harris estimate that this
cash payment would be the equivalent of annually
refunding each two-parent, two-child household the
VAT paid on the first USD26,000 of consumption.
The UAE proposal for a VAT, which would share
the burden among all who benefit from the
purchase of goods and services beyond essentials,
can be viewed as more progressive than the
personal income-tax systems implemented in other
parts of the Middle East, which have low top-tier
rates for the highest income earners (and taxes
on capital gains or other nonwage earnings are
excluded). Compared with corporate income taxes,
VATs are much less likely to discourage business
formation or growth (see chart 1).

Other reasons for caution

Some further downsides should be acknowledged
and either mitigated or monitored closely.
The first is inflationthe creation of an add-on VAT
will create upward pressure on prices, which could
further exacerbate price increases resulting from
the UAE utility subsidy cuts that began in 2015. It is
currently difficult to foresee with enough certainty
how high price inflation will be at the point when
the VAT is implemented. It may or may not be an

April 2016

Tunisia

UAE

Source: IMF 2016 Abu Dhabi Chamber of Commerce & Industry

ill-timed step. If it exacerbates price pressures too

much, countervailing policies should be considered
as an option (see chart 2).
The second is the perception that it will threaten (or
at least dampen) economic competitiveness and the
corresponding growth it drives. A widespread concern
is that the VAT could make the Gulf less attractive for
foreign companies. In their proposal for a 5% VAT
in the United States, the authors acknowledge that
theory and evidence suggest that the compliance
burden would likely fall more heavilyas a
percentage of saleson smaller businesses.
In fact, one 2010 survey conducted by Intuit in the
United Kingdom found that more than one-third of
small business owners (39%) were absorbing the
additional cost of the VAT increase, rather than
passing it on to their customers. This signals that
the VAT might hurt the private sector in particular.
However, 67% of small businesses that responded
to the UK survey stated that the VAT increase did not
affect their business, indicating that the tax may be
less harmful to competitiveness than critics claim.

Policy recommendations

As Abu Dhabi fleshes out its plans for the

implementation of the VAT in 2018, there are several
considerations it might keep in mind:

Chart 2: Consumer price inflation for Abu Dhabi

14.9% 0.8% 3.1% 1.9% 1.1% 1.3% 3.2% 5.4%

2008

2009

2010

2011

2012

2013

2014

2015

Source: SCAD 2016 Abu Dhabi Chamber of Commerce & Industry

Education: helping the public

understand the purpose of the VAT
and the importance of compliance
For a populace that has not been exposed previously
to state taxes, a carefully crafted communication
strategy will be essential to making sure that citizens
and residents understand the nature and cost of
public services provided using tax receipts and the
necessary steps required for VAT compliance and
effective policy implementation. The communications
will need to include everything from how, when, and
where the tax will be applied; to how the VAT will
advance equity, close the fiscal gap, and contribute
to necessary improvements in health, education,
and social services; to how to file for a credit or
rebate. In communications about all these topics,
transparency will be key, as well as understanding
which messages resonate with stakeholders and the
appropriate channels for communication.

Timing
While the introduction of a VAT in the UAE is
currently planned for 2018, it should be carefully
timed so as to not derail the regions economic
growth path, especially in a scenario where the
UAEs growth momentum slackens more severely
as a result of low oil prices and cascading effects.
Moreover, policymakers must closely guard against
ballooning price inflation in order to avoid harmful

100

Number of food items which are currently planned

to be exempt from VAT
second-round effects on consumer prices.

Keep tax base broad; avoid further

complexity
Since an all-encompassing tax prevents consumers
from trying to substitute between tax-exempt and
taxable purchasesand policymakers from trying to
determine the necessities of the populations they
are trying to protectthe more goods and services
that are subject to the VAT, the greater the expected
efficiency. While the GCC countries have already
agreed to exempt health, education, bicycles, social
services, and 100 food items from the VAT, as the
UAE develops its own plans for the VAT rollout in
2018, it can avoid adding additional exemptions
or preferential tax rates, since these would create
further complexity, thereby limiting VAT efficiency
and perceived fairness. As mentioned previously,
providing tax credits, refunds, or cash transfers
can be an alternative to preferential tax policies
and ultimately have the same effects on vulnerable

2016 Abu Dhabi Chamber of Commerce & Industry

Policy Brief
Introducing Value-Added Tax in the United Arab Emirates

Appendix: MENA: VAT main exemptions under current laws

Country

VAT rate

Algeria

Bread, milk, certain pharmaceutical products, newspapers, periodicals, books, sports materials produced in
Algeria and acquired by the national sports federation

Egypt (applies only to general

sales tax)

Restaurant foods (outside hotels), books and magazines, local dairy products, pasta and bread, meat and
fish, domestic fruits and vegetables, baked sweets

Jordan

Bread; wheat; olive oil; construction steel bars; fuel derivatives; vehicles; medicines and medical supplies;
valuable metals (gold-made jewelry, diamonds, precious stones); electricity; water; education; construction
and real-estate activities; mobile phone subscriptions; financial intermediation and insurance

Iran

Unprocessed agricultural products, flour, bread, meat, sugar, rice, cereals, soya, milk, cheese, vegetable oil,
baby food, books and notebooks, medical products and services, education services, pet food

Lebanon

Medical services, education, agricultural farm supplies, all raw food, bread, flour, meat, fish, yogurts, rice,
sugar, salt, vegetable oil, books, magazines, newspapers, gas for household use

Mauritania

Medical services, basic foodstuffs, including bread, meats, vegetables, etc.

Morocco

Basic foodstuffs and items for which prices are regulated; newspapers, periodicals, books, and educational
audio-visual products

Tunisia

Basic foodstuffs such as bread, milk, flour, etc., and items for which prices are regulated; pharmaceutical
products; newspapers, periodicals, books and educational materials

Yemen

Books, newspapers, periodicals, medical services, transportation of individuals

Source: IMF

2016 IHS

Transparency, education and timing are critical for

successful implementation
populations or targeted business types.

Consider VAT in relation to broader

system of public finance
Last, at a time when well-designed fiscal policy is
critical, the VAT should not be seen as a cure-all
for the regions public finance concerns. Already on
the lowest end of the VAT spectrum among OECD
countries, a VAT may be just one of several tools the
UAE ultimately employs to balance its budget and
create a fair and enduring system of public finance.

Sources consulted or
recommended

Gale, William G. and Harris, Benjamin H., 15

Ways to Rethink the Federal Budget -- Proposal
10: Creating an American Value-Added Tax, The
Hamilton Project, Brookings Institution, February
2013.
Jewell, Andrew, Mansour, Mario, Mitra, Pritha, and
Sdralevich, Carlo, IMF Staff Discussion Note: Fair

April 2016

Taxation in the Middle East and Northern Africa,

International Monetary Fund, September 2015.
Adam Bouyamourn, Introduction of VAT in UAE
and Gulf region likely to hit economic growth,
The National, http://www.thenational.ae/business/
economy/introduction-of-vat-in-uae-and-gulfregion-likely-to-hit-economic-growth, retrieved 26
February 2016
Babu Das Augustine, UAE to implement 5
per cent VAT from January 2018, Gulf News,
http://gulfnews.com/news/uae/government/
uae-to-implement-5-per-cent-vat-fromjanuary-2018-1.1678703, retrieved 15 March 2016
Vicky Kapur, UAE confirms no income tax
yet, but 5% VAT is coming, Emirates 24/7,
http://www.emirates247.com/business/uaeconfirms-no-income-tax-yet-but-5-vat-iscoming-2016-02-25-1.622208, retrieved 25
February 2016
UAE said to implement 5% VAT from Jan
1, 2018, Arabianbusiness.com, http://www.
arabianbusiness.com/uae-said-implement-5vat-from-jan-1-2018-622778.html, retrieved 24
February 2016

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