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  • With a New VAT, is the UAE Still the "Place to Be"?

    Commensurate with its Gulf Cooperation Council (GCC) obligations, the United Arab Emirates (UAE) will fully-implement the Federal-level imposition of a Value Added Tax (VAT) of 5% on most goods and services, and associated registration and reporting requirements, along with Excise Taxes on certain goods (50% on "fizzy drinks" & 100% on energy drinks and tobacco products), effective January 1, 2018.

    Some industries are exempt from responsibility for VAT by statute, such as certain transportation services and basic healthcare providers.  Real estate transactions within the first three years (thus far) of the law's enforcement are also exempt from VAT in the UAE.

    Companies doing business in any of the Emirates who are not in an exempted industry and whose turnover exceeds the statutory threshold (AED 375,000 over a period of 12 months) were required to register for VAT by December 4, 2017, or face a penalty.  In future, companies whose turnover does not yet exceed the statutory threshold will have to become compliant within one month of achieveing such turnover during a 12 month period.  Companies who are not yet required to register and report for VAT may apply to do so voluntarily, provided their 12 month turnover exceeds AED 175,500.  If a company anticipates exceeding the mandatory threshold in the future, then voluntary registration may be advisable so that a future 30 day deadline will not present potential difficulties.

    Initial estimates are that approximately 350,000 companies will have registered for VAT in the UAE by the statutorily stipulated date.  An exact figure is not yet available.

    Reporting/ filing of returns will be performed on a quarterly basis.  This may precipitate retaining Registered Tax Agents (and, JHI recommends that reporting companies retain such professional services). 

    Naturally, being a new law, regulations, clarifications and other factors affecting implementation of and compliance with the new laws (UAE Federal Laws 7, 8 & 13 of 2017) remain subject to change at this stage.  The UAE Ministry of Finance provides this page to provide basic information, timely updates and a starting point for researching and tracking the new tax regime:

    https://www.mof.gov.ae/En/budget/Pages/VATQuestions.aspx 

    One issue that begs for near-term clarification is the question of taxability of Free Zone entities. At the time of this writing, the responsibility for actual payment of VAT by entities established in Free Zones, including "Financial Free Zones" (such as the Dubai International Financial Centre, or DIFC; or, the Abu Dhabi Global Market, or ADGM), remains somewhat unclear.  For example, following current guidance from the Federal Tax Authority (FTA), the agency with primary responsibility for the enforcement of VAT, such entities should be registered for VAT if their turnover exceeds the mandatory threshold. On the other hand, by Emiri decree (issued under a recent Constitutional provision), a 50 Year Tax Holiday has been established for the ADGM (measured from the effective date of the underlying law).

    The UAE Cabinet has not yet issued its decision identifying any "Designated Zone" (wherein established entities may receive at least some partial or limited form of exemption from VAT) as the law empowers it to do, and the issue of responsibility for payment by companies in Financial Free Zones involves something of a Constitutional question. However, as stated above, it is hoped that additional clarifications may be issued by the relevant authorities in the near future.  It is also worth noting that the FTA's determinations/ decisions can be challenged through the courts, provided there is a credible legal basis for such a challenge.

    Being a brand new area of law, such gray areas are to be expected.  The drafters of the new laws concerning VAT certainly seem to have expected this, as certain mechanisms - such as the ability to challenge FTA policy decisions in court - are built into the new tax regime to ensure transparency and fairness (important factors in any healthy business environment) as and when important issues are sorted.

    Thinking more globally, one wonders what this may do to the famously business-friendly reputation the UAE has enjoyed for decades.  After all, "the (tax-free) UAE is the Place to Be" in the Gulf region.  JHI believes that the imposition of the VAT, in and of itself, will not severly impact the UAE's positive business environment. 

    The imposition of VAT is a GCC-wide program, agreed upon by the member states.  The level of tax will be 5% across the board, and goods and services exempt from the tax will be similar almost to the point of being mirrored from jurisdiction to jurisdiction.  Compliance steps and associated costs should be roughly equal in each of the member states.  And, the timing of full VAT implementation in the member states should coincide (the Kingdom of Saudi Arabia, for example, is also introducing its new VAT in January of 2018).  So, this should not significantly reduce the attractiveness of the UAE for investors, nor does it seem likely to impact the UAE's role as a gateway into the other GCC economies (such as Saudi Arabia - the largest economy in the GCC).

    As a GCC member state, the UAE has agreed, and is obligated, to impose VAT. With recent fluctuations in the price of oil and the recent military build-up, in addition to the maintenance of basic services, additional revenues are needed to keep the national debt at a sustainable level.

    The broadening of the UAE's economy in recent years has provided an opportune situation wherein the imposition of VAT (as opposed to other taxes and/ or fees) makes sense.  On paper, it seems the best available method of helping to keep the UAE's fiscal ship steady.  Although it will contribute an additional layer of expense onto the costs of living and doing business in the UAE, the UAE enforces no other tax and the compliance costs associated with the UAE's regulatory environment are among the least burdensome in the world.  As to the pre-VAT cost of living and doing business in the UAE (such as real estate, some services and many goods), much of this is due to high demand brought about by a decades-long strong international interest in participating in the UAE market.

    Further, the UAE, with a low-cost regulatory environment and a mere 5% VAT, seems poised to remain the gateway to one of the fastest growing regional economies in the world.  JHI believes that for businesses who view the GCC as an attractive area for investment, the UAE will continue to flourish as a "starting-off" or set-up point for such investment, and at a time when the economies of the GCC may be poised for potentially explosive growth during a revolutionary time of profound reforms throughout the region, particularly in Kingdom of Saudi Arabia.

    JHI will continue to monitor the situation, and track legal developments concerning the implementation of the VAT, in the UAE and throughout the GCC.

    Jason Huf, Principal, JHI, Law Firm, NYC, KSA, Jeddah, Saudi Arabia, UAE, VAT, Excise, Tax, Finance, International, Middle East, Law, Legal   (Mr. Huf gratefully acknowledges the contributions to this brief note by his good friend Sreekumar Radikrishnan of Goodwins Law Corporation's Abu Dhabi office. Mr. Huf calls Prof. Radhakrishnan his "top Go-To guy" in the UAE - especially on new tax matters:  http://www.goodwinslaw.ae/about-us/our-team/sreekumar-radhakrishnan

    This website and its contents - taken in whole or in part - are a law firm advertisement.  As with all other entries in the blog section of JHI's website, this article is intended to contribute to public discussion and is published for and distributed to a rather general audience.  This article is not legal advice and should not be mistaken for such.

    In the event legal advice is needed on the subject of VAT in the UAE, Mr. Huf & JHI will be happy to introduce and refer any such client to Prof. Radhakrishnan & Goodwins for his personal attention.

    Finally, Mr. Huf also wishes to make clear that any opinions expressed herein are solely those of Jason Huf & JHI.)

  • A Deal's a Deal. Right?

    In the Middle East, the old joke among Western lawyers goes something like this:  “First you negotiate the contract, then you close the contract. And then, you renegotiate the contract… ”

    All good jokes are rooted in the truth.  While there certainly are some local parties in the Middle East who are committed to keeping their word and sticking to the deal they negotiated, there does exist this unfortunately common dynamic wherein the local party will test, stretch and even flat-out ignore the terms of an agreement they just executed.  One might even lose money betting against a breach occurring before the ink dries.

    And yet, throughout the Gulf Cooperation Council (GCC) region, billions of (US) dollars worth of business is successfully transacted each and every year by and between foreign and local parties.  How does that work?

    It starts with understanding what local businessmen already know:  going to court, dumping your local agent (or, colloquially speaking, your “sponsor”), etc, are usually your last best options.  You can see your company effectively frozen out of the market if you make such a move without an almost perfect sense of deftness.  And, even if eventually successful, should your company go this route, you have embarked on a long, aggravating and expensive disruption of business that will give rise to discussions that start with, “Why don’t we just pull out of there?”

    We will talk about arbitration clauses (and, the enforceability of them in GCC jurisdictions) in a subsequent posting.  For now, you also need to understand that the local sponsor, or other local parties with whom your company does business, who busies himself with stretching the terms of your agreement is primarily (if not entirely) in the business of sponsoring foreign enterprises (or otherwise makes his money conducting business with foreign parties).  Maintaining sponsorships or other replationships with foreign investors (and, protecting their reputations and pride) tend to be the top priorities of local companies.  So, when such companies appear to breach their agreements, what do they hope to gain by playing around?

    Usually, more money.  And, usually, not much more.  More often than not, you can settle the matter by amending a couple of terms and (slightly) goosing up their sponsorship “fee” (or, whatever other payment, profit or compensation they may be receiving).

    What about the law of contracts?  Why can’t I look for a new sponsor and/ or seek judicial recourse?

    Remember that the laws requiring you to obtain a sponsor in the first place are protectionist in nature.  On an unofficial level, shopping around for more pliant for cooperative sponsors isn’t designed to be easy.

    Also, while consideration, reliance and other concepts are necessary to show a promise made in contract is enforceable under the laws of the United Arab Emirates (UAE), such is not the case to show the existence of an enforceable contract in Saudi Arabia (KSA).  In the KSA, if you make a promise, you’re stuck with it.

    Isn’t the other side stuck with it, too???

    Well, in the Middle East, there is the law the way it is written, and the law the way its enforced.  And, to further complicate things, that which is enforced is not always written, and that which is written is not always enforced.  If you wind up in a KSA court, you may have a judge whose primary concern is sending a signal to his government, more than adjudicating a dispute between the parties before him.  In the UAE, much may depend on whether the judge enjoyed his breakfast, or if he is miserable from a belly ache, as he reads your company’s brief… (And, keep in mind, the UAE imports its judges from other countries – those judges tend to be mindful of who gave them their jobs.)

    As to getting another sponsor, while the UAE and the individual Emirates therein may not employ “black lists” per se (as does the KSA), you should nonetheless do your best to avoid running afoul of bureaucrats at relevant ministries and other governmental offices who may have a cousin, friend, or other acquaintance who may just happen to be your soon-to-be former sponsor or other business partner/ associate.  Business licenses have to be renewed every year, and your specific business may well depend on successfully bidding on government tenders; and, while Abu Dhabi and Dubai, for example, may look like big cities, they still very much operate as “small towns” on many different levels.

    That’s not to say successfully changing your sponsor and/ or winning a contractual dispute with a local party in the Middle East is impossible.  Such has been known to happen in Abu Dhabi, and even in Jeddah (where arbitration clauses are less likely to be deemed enforceable by local courts, even though the KSA is a party to the New York Convention).  Accordingly, you should protect yourself in the governing documentation the way you would in any other international agreement.

    Have the standard choice of law, venue, and language clauses, as well an arbitration clause (which can be something of a contract unto itself) and, especially, a (carefully written) termination clause.  If an American-based company (or, even if you are based in another Western country but have operations in the US), make sure the documentation includes language concerning your refusal to violate the provisions of the US Foreign Corrupt Practices Act (over the last several years, the trend has been increasingly robust enforcement of the FCPA).  American companies might also think to include a so-called “anti-boycott” clause in the agreement, given the on again/ off again enforcement of boycotts against Israel by some Arab states.

    Although the general mood in the GCC seems to favor a direction wherein the laws are being changed to relax the hold local parties (especially those deemed “sponsors”) have over foreign direct investment in their respective markets/ jurisdictions, it is usually best to try to renegotiate when a breach occurs.  Such renegotiation should, generally speaking, settle upon a slight increase in the amount of earnings the local party derives from the deal.

  • The City of Dreams, or the Emirate of Reality?

    From time to time, a trial balloon is floated in one GCC jurisdiction or another concerning the imposition of a new tax, whether it be an individual income tax, corporate tax or a value added tax.  The most recent of these is now floating over Dubai, which is still grappling with the residual effects of the 2008 crash while maintaining high levels of infrastructure spending.

    A prominent Emirati businessman based in Dubai publicly raised the idea of a corporate income tax in Dubai and voiced his general support for such an idea.  This is easily to understand, given the depletion of Dubai's oil reserves, the reversal of 2008 and resulting cash crunch, and the Emirate's continued high level of spending.  However, it would be somewhat akin to Killing the Goose that Laid the Golden Egg.

    Dubai rose up from the desert, transforming itself from a small trading post adjacent to Sharjah into the "City of Dreams", on the basis of its business-friendly laws, easy access to the oil-rich Gulf region, an unburdensome regulatory environment, quick access to financing and investment capital, and clever marketing revolving around the fact that the Emirate is Tax-Free

    While there are numerous government fees, paid annually, along with payments to sponsors, exceedingly high rental costs and other expenses one could say amount to a sort of taxation, companies and individual entrepreneurs from all over the world continue to flock to Dubai, drawn to the City of Dreams by the prospect of Tax-Free wealth.  Imposition of a corporate income tax could threaten this influx and inspire existing businesses to relocate elsewhere in the Gulf.  Even if such a tax were quickly repealled, reestablishing Dubai's image, carefully crafted and astutely marketed for many years, might be next to impossible.  And, isn't the real "Dream" not quick wealth, but having a broad-based economy not entirely dependent upon oil in the very heart of the Gulf region? 

    If Dubai is the City of Dreams, the "Green Capital" of the United Arab Emirates, Abu Dhabi, has been the Emirate of Reality.  With much of the UAE's energy resources, over half the country's population and land mass (much of it still undeveloped), and a very similar body of business law and regulations, and a robust banking industry, Abu Dhabi is also Tax-Free Abu Dhabi may not be known for a miraculous boom of the sort that made Dubai famous, but it has enjoyed steady, broad growth that has withstood the 2008 crash.
     
    Today, and not accidentally, Abu Dhabi is a leading target for foreign direct investment.  A corporate income tax in Dubai would not only enhance the relative attractiveness of Abu Dhabi to newcomers to the region, it might also encourage some of Dubai's existing businesses to take a two-hour drive and check out why the Emirate of Abu Dhabi is "green" in more ways than one.