Access: Middle East

This Gulf state is planning a sales tax amid oil slump

The United Arab Emirates (UAE) government has drawn up plans to introduce a new sales tax and corporation tax – the first Gulf state to follow advice to do so – in what is widely seen as a response to low global oil prices.

According to the government-owned newspaper Al Ittihad, the UAE has drawn up plans to introduce the taxes, making it the first country in the Arabian Gulf to introduce a tax on consumption.

Abu Dhabi skyline, UAE
Victor Romero | Getty Images

Value added tax would be levied at a higher rate on luxury goods, alcohol, and tobacco. Basic goods and essentials would be exempt from VAT, the newspaper's English-language sister paper, The National, reported Thursday. The proposals now have to be scrutinized by a number of government departments before becoming law, however.

CNBC contacted the UAE's Ministry of Finance for comment and was waiting for a response.

The winds of change

William Jackson, senior emerging markets economist at Capital Economics, told CNBC Thursday that the move was likely to be a response to low oil prices, which have more than halved since last June from $114 a barrel then to currently trade at $50 a barrel for benchmark Brent crude.

"I think (the move to introduce new taxes) is very much to do with the low oil price," he told CNBC Thursday. "As with the rest of the Gulf, the UAE has relied on oil revenues to finance government spending but now it is likely to run a fiscal deficit."

Jackson said that although there was no immediate pressure to introduce these taxes -- particularly as many Gulf states have large sovereign wealth funds amassed over the years from the proceeds of oil exports -- the UAE was looking ahead and mitigating the risks of a low-price oil outlook.

"The UAE is showing itself to be the government in the Gulf that is most serious about finding ways to improve its fiscal position," Jackson said.

"Last month, they deregulated fuel prices and took away subsidies on fuel, a serious sign that they want to improve their fiscal position and make fiscal reforms."

Jackson also said that the move showed the UAE was following the advice of the International Monetary Fund (IMF) and other organizations which have recommended that the emirate set VAT at or around, 5 percent.

In a report published earlier in August, the IMF said that the UAE's "economic outlook is expected to moderate amid lower oil prices" and that the country was likely to run a deficit in 2015, making raising tax revenues a moot point.

"The overall fiscal balance this year is expected to turn negative for the first time since 2009 to record a deficit of 2.9 percent of GDP, but is expected to return to surpluses from 2016."

Short-term pain

At the start of August, the UAE's ministry of energy announced that fuel prices would be deregulated (no longer subsidized) and a new pricing policy linked to global prices would be adopted.

The UAE's Energy Minister, Suhail Al Mazroui, announcing the decision said it had been taken on "in-depth studies that fully demonstrate its long term economic, social and environmental impact (of deregulation).

The resolution is in line with the strategic vision of the UAE government, he added, "in diversifying sources of income, strengthening the economy and increasing its competitiveness in addition to building a strong economy that is not dependent on government subsidies."

In an interview with The National newspaper, the energy minister conceded that while fuel prices would rise, it would "lead customers to use the finite resources that we have wisely.

While introducing new taxes will help the government's budget, it might cause short-term "pain" to consumers, Capital Economics' Jackson said.

"Someone has to take the hit from this and it will probably affect consumer spending so we might see a bit of a slowdown in consumer spending but it's a positive move over the long-term."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.