UAE Introduces First Federal Tax System

As oil prices slump for the past year, the United Arab Emirates is setting up a federal tax system to help boost government revenue. The federation of seven emirates is considering corporate tax and value-added tax.

At the federal level there is no corporate income tax. There’s also no personal income tax or value-added tax. Emirate-level personal income taxes exist and Emirates within the UAE can levy corporate income taxes at rates as high as 55 percent, but in practice only apply them to oil and gas companies.

But that system is about to end. According to UAE Ministry of Finance report, establishing federal tax system is a part of a larger goal of “developing and ensuring the sustainability of the federal financial resources.” While tax rates is not specified in the report, it shows that Cabinet has approved the rate and tax policy principles governing the federal tax system.

Declining oil prices is pushing the OPEC member into a fiscal deficit for the first time since 2009. The International Monetary Fund estimated that the deficit would amount to 2.3% of total GDP. Last year, UAE had 5% fiscal surplus. The IMF also predicted that the economy would grow at a modest 3.4% this year, compared to 4.6% last year.

Given the economic outlook, this move is rather unsurprising.