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English News

04-Sep-2017

UAE Economics - VAT law issued, adds c3pp to inflation; a boost to gov’t income diversification but negative for consumption in 2018

Wide-ranging VAT gets the green light

The UAE became the second GCC country, following Saudi Arabia, to approve the value-added tax (VAT) when President Sheikh Khalifa approved the Law on 23 August. Goods and services will be subject to a standard 5% tax rate, likely as of 1 January 2018, except a list of exemptions where UAE insulated key sectors in the economy such as transport, property and hydrocarbons. More details are set to be released later with the executive regulations. The Law will, however, apply on c70% of the consumer basket; hence, we expect the tax to add a significant 2.8-3.2%-pts to headline inflation in 2018 (likely to reach 5.5%) and update our forecasts accordingly.
 
Negative for consumption; slightly reduce GDP growth

VAT will be implemented shortly after the newly-approved excise tax (100% levy on tobacco and energy and fizzy drinks and 50% on sugary drinks) comes into effect on 1 October. Consumers, therefore, will be subject to one-off inflationary wave in 2018; hence, we expect a negative impact on consumption. We reduce our real non-oil GDP growth forecast to 3.2% in 2018 from 3.5% on a wider-than-expected tax base, especially the taxation of food. UAE’s growth outlook remains positive though underpinned by planned investments, whether from a Dubai focused on Expo 2020 or an Abu Dhabi that is easing its fiscal tightening stance. Thus, we still forecast an acceleration in non-oil GDP from an estimated 3.0% in 2017.
 
New tax adds c1.2% of GDP of revenues to gov’t coffers

The gov’t estimates VAT will raise revenue of AED12bn (0.8% of GDP) in 2018 before the ramp-up of the tax boost revenues in 2019 to AED20bn (1.3% of GDP). This will widen the country’s tax base raising tax revenues’ share in GDP close to 4% in 2019, contributing to the budget going back into the black.
 
What about the rest of GCC?

Saudi Arabia already approved the law in July and companies are currently registering. Other countries, however, are lagging and will most implement the tax at a later stage. Oman’s Shura Council is in the early stages of reviewing the tax, and anecdotal evidence indicates the tax is most likely to be implemented at end of the one-year grace period granted within the intra-GCC tax agreement; i.e. by end 2018. Qatar’s cabinet has approved the law though implementation is likely deferred to mid-2018. Kuwait has not shown much signs of progress and the fact Parliament, which has not been supporting fiscal measures before, needs to approve the law hints Kuwait is likely to be the last amongst the GCC to impose the tax.

Mohamed Abu Basha