Background
Although the United Arab Emirates (“UAE”) currently has Emirate level tax legislation in place, taxation has, to date, generally only applied to the oil and banking sectors. The last decade has seen the member states of the Gulf Cooperation Council (“GCC”) discuss the imposition of value added tax (“VAT”), applied on goods and services, without any significant legislative action resulting. However, likely influenced by the recent drop in oil prices, the GCC’s Financial and Economic Cooperation Committee (“FECC”) recently approved a draft agreement to impose VAT on a GCC-wide basis. It has been reported that the FECC’s agreement sets out common principles for all GCC states while calling for each GCC state to implement its own system of VAT administration. In addition, the recommendations of the International Monetary Fund (“IMF”) to the UAE have long encouraged economic diversification and the creation of a broader and less oil-dependent revenue source, including the imposition of a standard rate of corporate tax applicable to Emirati and foreign businesses. This year the IMF reported that the UAE will report a budget deficit of 2.3% of GDP, the first negative outcome since 2009 immediately after the financial crisis.

VAT and Corporate Tax
Draft laws in relation to VAT and corporate tax are said to have been approved by the Cabinet of the UAE. It is also envisaged that in connection with this a tax authority will be created although there is no indication of when it will be operational. An official of the UAE’s Ministry of Finance was quoted in the UAE press very recently as saying that he expects studies on the effect of the draft corporate tax law and VAT law to be issued by the third quarter of this year.
This is a development that is likely to generate significant interest. Although the imposition of taxes would allow the UAE government to raise additional revenues to finance investment in infrastructure and boost the economy, it is a significant shift away from the ‘tax free’ environment that companies have benefited from and that has been one of the driving forces behind the development of the UAE as a regional centre for business.

Timing
No changes are expected to come into effect in 2015, although impact studies on tax laws are anticipated to be completed later this year. The movement in oil prices and the lengthy process of bringing draft laws into effect in the UAE are likely to impact the timing of the implementation of any new tax regime.

No Tax to Low Tax?
The introductory rate of both VAT and corporate tax is expected to be low to allow both the UAE administration and population to adjust to any new regime. Some have predicted a GCC-wide VAT starting rate of between 3% and 5%. The FECC is likely to insist upon a uniform rate of VAT across the GCC so as to prevent competition between member states and smuggling of goods across the GCC member states’ borders. To date there has been no official word as to the expected rate of corporate tax.