Is Oil to Blame for the End of Tax-Free Living?

For decades UAE citizens have enjoyed life without taxation. All that ended in 2018, however, when the first ever value-added tax (VAT) came into force on January 1^st. What led to this change? It coincides with the ongoing oil slump, leading many to believe the two are linked. Read on for more on the new VAT and its oil background.

About the tax

Despite coming into force at the turn of the year, the new VAT didn’t come completely out of the blue. It was announced back in February 2017, when the UAE Minister of State for Financial Affairs spoke at a press conference alongside Christine Lagarde of the International Monetary Fund (IMF).

The new tax will apply to a variety of purchases, including food, electronics and utility bills. However, certain things will remain exempt, such as home rental, transport, healthcare and education. It’s not just the UAE either, Saudi Arabia has also changed its tax-free policy.

Similar to the UAE, they have allowed tax-free living for years, but in 2018 have introduced a 5% tax on most goods on services – including utilities and food. They have also frozen a number of construction projects, put a wage freeze on civil servants and cut the salaries of cabinet ministers in attempts to balance their budget.

Oil slump

So, why are Arab countries having to forfeit their no tax approach? Unfortunately, it is down to oil. The IMF has continually called for these countries to diversify away from oil. This has become more prominent in recent years, with oil prices slumping as supply outpaced demand and oil companies being forced to cut their budgets such as finding more cost-effective methods of analysis.

With abundant oil reserves, countries across the Gulf have been able to offer tax-free life for many years. It has been their number one source of income by some margin. Over 80% of the UAE economy is based on oil exports, to countries including China, Japan and India. The UAE is by no means the worst either. It’s actually the most diversified Gulf economy, with Saudi Arabia’s oil sector accounting for over 95% of export earnings.

Are there other taxes?

Another focus for diversification is tourism. The UAE has put tourism at the forefront of its plans, with growth projections of nearly 5 percent year on year. Earnings from this sector will be further boosted by a tourism tax in Dubai known as the Tourism Dirham. As for other countries, the rest of the Gulf are also planning similar tax introductions. However, the likes of Bahrain and Kuwait were not prepared for the 2018 launch as originally planned.