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Tue 1 Nov 2005 04:00 AM

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Heavy metal tax gives Jafza tenants the blues

Last month, a number of companies in Jebel Ali found a very nasty surprise in their PO boxes: a tax bill.

|~||~||~|Last month, a number of companies in Jebel Ali found a very nasty surprise in their PO boxes: a tax bill. The letter from Dubai Customs was sent to all of the scrap metal dealers in the free zone, around 1000 companies, asking not just for taxes on future exports, but for back payment on exports made over the last 12 months as well. The scrap dealers, all of whom had moved into Jebel Ali because of its tax free status, were naturally stunned, especially as some of the bills touched the US $1 million mark.

The tax was seemingly driven by the UAE's desire to boost the supply of scrap metal, especially steel, in the local market by deterring exports. Assuming this was the reason, which is unclear, then it highlights a significant problem with the region's tax-free economies. Governments here are often encouraged by outside agencies to implement tax as a way of diversifying their revenue base away from oil. However, the scrap metal story also shows another purpose of taxation, as an influencer, which is often overlooked in these discussions. Tax is not just a good way of making companies export less scrap metal, but also of making them use less fuel, for instance, or of deterring people from smoking. None of these are possible though in a tax free economy, especially if neighbouring countries just a short hop away refuse to go along with the plan.

The other side of the story is the poor communications that has been endemic throughout it. Because of the lack of an explanation about the tax, all companies in the UAE's free zones are starting to wonder if they will one day find a tax bill in their PO boxes as well. This may be unlikely, but the situation needs to be clarrifed urgently before the lure of more assuredly tax-free free zones elsewhere in the Gulf becomes too strong.||**||

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