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IMF recommends UAE increase corporate income tax and impose a new vehicle excise duty

The United Arab Emirates should increase corporate income tax to 10% across a broader range of companies and introduce a 15% excise duty on cars plus 5% VAT, the International Monetary Fund (IMF) has recommended. 11 Aug 2015

The new taxes could help to replace some of the $42 billion that the UAE expects to lose through a fall in oil export revenue this year, the IMF said.

The IMF said that a move to raise more revenue from non-hydrocarbon sources is important in diversifying the country's income.

The UAE is a mostly tax free country, with only a 20% tax on branches of foreign banks, hotels, courier companies, and oil, gas and petrochemical producers. The IMF recommends that this should be broadened, said Zeine Zeidane, IMF advisor on the Middle East and Central Asia in a conference call to discuss the report.

"We are recommending a move towards [a corporate income tax] that is applicable to everyone, foreigners and domestic banks, but also to other corporates," Zeidane said.

Asked whether this would impact the tax-free model that has made the UAE successful, Zeidane said while any measures should only be implemented after research into their likely impact, "our policy advice is to continue to diversify revenue sources for the UAE".

Any tax could be set at a very low rate to begin with, Zeidane said, "because the issue is not about the income. It's a way to start diversifying revenue, to put in place a tax administration, and to increase transparency in the economy overall".

The IMF also recommended that salary increases in the public sector should be tied to productivity gains, and that energy and water subsidies be removed.

The IMF said the UAE’s outlook remains positive. 

"Lower oil prices are eroding long-standing fiscal and external surpluses, but the UAE has continued to benefit from its perceived safe haven status and large fiscal and external buffers that have helped limit negative spill overs from lower oil prices, sluggish global growth, and volatility in emerging market economies," the report said.

"The economic outlook is expected to moderate amid lower oil prices. Non-oil growth is projected to slow to 3.4% in 2015, before increasing to 4.6% by 2020, supported by the implementation of megaprojects and private investment in the run-up to Expo 2020," it said.

Reports earlier this month said that the UAE has already begun to draft laws on corporate tax and VAT.

Ian Anderson of Pinsent Masons, the law firm behind, said: "The newsflow on the introduction of VAT in the UAE, and more widely across the GCC, continues unabated. However we are no closer to finding out when it is to be introduced, the overall structure of the regime and the rate."

GCC officials are believed to have agreed a draft VAT framework agreement that will form the basis of the GCC VAT regime, Anderson said, but each country will develop its own separate laws.

"The Ministry of Finance annual report 2014 makes reference to developing a corporate income tax regime but again gives no indication of a likely start date. It is to be hoped that for both VAT and corporation tax there is a sufficient lead time for businesses to prepare properly," Anderson said.