[In Focus] How Much VAT is Worth to the UAE?

Many foreign nationals decide to work and live in the Middle East, partly due to the fact that no personal income tax applies to one’s salaries across any level of work in the country.

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There is, however, a different kind of tax that applies the UAE as well as fellow GCC country Saudi Arabia, the Value Added Tax (VAT). This kind of taxation is imposed on the consumption or use of goods and services levied at each point of sale, so a closer look at this system would reveal that the end-consumer ultimately bears the cost. Businesses collect and account for the tax on behalf of the government. But exactly how much VAT is worth in the UAE?

Understanding VAT in the UAE

VAT is a form of indirect tax and is used in more than 180 countries around the world. VAT was first introduced in the UAE on 1 January 2018, by which the current rate is at 5%.

According to the UAE government, VAT will provide the UAE with a new source of income which will be continued to be utilised to provide high-quality public services. It will also help the government head towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue, which has been the case for many decades already.

In relation to this, the UAE Cabinet has approved the distribution of the value-added tax (VAT) revenues totalling about AED27 billion ($7.4 billion) between the federal and local government, as shared in a report by WAM.

Based on the decision, 30 percent of the revenue will go to the federal government and 70 percent to the local governments.

This setup will ensure sustainability and the quality of government services and contribute to the development of economic and social projects and public services.

The UAE does not solely decide as to how VAT will be collected, used, or modified, even as it imposes the system to its own jurisdiction. Simply put, the UAE coordinates VAT implementation with other GCC countries because of ‘The Economic Agreement between the GCC States’ and ‘The GCC Customs Union,’ that governs the taxation system in the Gulf region.

VAT has been implemented in the UAE as an adjunct source of revenue as per advice of the International Monetary Fund (IMF). This system aims to reduce the country’s dependency on oil resources for revenue. It will create a new and stable source of income for the government, which will be utilized to provide better and more advanced public services. Therefore, the end-goal of VAT is to ultimately benefit the public in the long run.

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