By Shane McGinley
Leading local and international experts consider whether the emirate should relinquish its tax-free status in order to fund its infrastructure projects and what the consequences would be if it did
Benjamin Franklin’s famous quote – that “nothing can be said to be certain, except death and taxes” – is frequently revived whenever the topic of government levies are brought up in this part of the world.
In Dubai, it is commonly believed that any move to relinquish the emirate’s tax-free status would send expatriates rushing to the airport with one-way tickets back home and the only certainty would be that it would likely trigger the death of the economy.
The debate raged to the surface again earlier this month when Damac’s Hussain Sajwani, the boss of one of the largest private-sector real estate companies in the region, addressed the possibility of Dubai giving up its coveted tax-free status.
“If there were tax, I don’t see anything wrong with it,” Sajwani said in an interview with The Sunday Times. “We live in a world where everywhere there is tax. Singapore has taxes. Hong Kong has taxes. Are they failing?
“Dubai has to spend hugely on infrastructure. So, if the government decides to impose VAT and some corporation tax, this is normal. It needs the money. We live in a world-class city, a very safe city with fantastic infrastructure, and the people who enjoy those things say, ‘We don’t want to pay for it.’ Come on, you’ve got to pay.”
Sajwani’s comments generated heated debate among Arabian Business readers: Would such a move lead to an exodus of expatriate workers and companies? Would firms decide to opt for Bahrain or Qatar when looking at the region?
Would locals also be taxed? Should citizenship be awarded to those who pay tax long-term? Would this be a sensible way to help fund the billions of dollars due to be spent on infrastructure in the coming years, especially in the run up to the World Expo in 2020?
We asked some experts for their opinions on the heated issue. While some commentators were reluctant to adopt an opinion on the matter – we’ll refrain from naming and shaming – we managed to align a panel of experts to give us their two cents on some of the pertinent issues and many offered up further food for thought.
The expert panel debating the issue consists of (in no particular order):
Neal Todd, partner and international tax specialist at law firm Berwin Leighton Paisner
Christopher Bovis, professor at Hull University Business School
Jonathon Davidson, chairman of the British Business Council in Dubai
Nicholas Cully, director - head of business development at Dubai-based wealth management firm Sovereign Corporate Services
Sanjay Modi, regional managing director at recruitment firm Monster.com
Abdul Aziz Al Yaqout, regional managing partner at law firm DLA Piper Middle East
Christopher Hennessey, professor of finance at London Business School
Chas Roy-Chowdury, head of taxation at the Association of Chartered Certified Accountants
Shrikanth S, research manager in the business and financial services practice at consultancy firm Frost & Sullivan
Bob Swarup, author and principal at advisory firm Camdor Global
Click on the next page to see why our first expert believes it would be "a bit perverse" for Dubai to go down the tax route...
NO says Neal Todd, Partner and international tax specialist at Berwin Leighton Paisner
“No one would deny that tax is a cost that businesses take into account and that it influences behaviour. We know that very clearly and we know that politicians believe in that strongly, which is why governments go to considerable lengths to use tax as a means to attract business to the jurisdiction whenever they can.
“The UK government recently has been doing the same and has been driving down corporate tax to make the UK more competitive and we see that business has responded to that.
“At a time when governments, in Europe particularly, are finding it hard to collect significant amounts of revenue and have been choosing to reduce corporation tax rates, it does seem a bit perverse to introduce a tax system in countries that have benefited from no tax when it is clearly a winning card.
“Introducing tax will be a cost that businesses in a jurisdiction that is tax-free will not have been used to. If tax is introduced they will say ‘why should I still be here as there are many countries around the world that have zero corporate tax rate?’ so the other factors will need to be a bit stronger.
“Another thought is that corporate taxation is a 19 century concept and many people in the mainstream are questioning whether it is the right way forward and whether we need a radical overhaul of taxation. One wonders whether tax will survive another 100 years.”
Berwin Leighton Paisner is an international law firm which specialises in taxation. It has its headquarters in London but has offices in Asia, Europe and the Middle East.
Agree? Join the debate in the comments section below. Next up is a professor in law, who advises Gulf governments, who believes it is a good move. He also reveals that one Gulf state tried to introduce taxation a few years ago but it failed to take off...
YES says Christopher Bovis, professor at Hull University Business School
“I believe very strongly that Dubai is the stronghold for reform in the Gulf area. Dubai is the first country in the Gulf that created a positive reform of financial services and attracted people to invest in areas such as property.
“I believe if they introduce any form of tax it will be good for the prosperity of the Gulf as it has invested so much in infrastructure that they need some sort of income. It created a very successful company like Emirates Airline, which is a great profit stream, but they also need to move into collecting from businesses.
“I think introducing taxation would be a very positive move that they need to embrace.
It is unlikely that there will be an exodus of companies. My view is that companies that choose Dubai do so not because of the taxes but because of the general regime. Tax is just one of the facets of the entire decision making by a chief executive. It is the regulatory framework and easy access to the market that are key. You will not see a flight of companies from Dubai if there was a gentle introduction of tax or revenue generation
”However, I believe it should be a uniform application. If I was advising them, I would tell them they should be across the board, including nationals and foreigners. The idea has been considered in the region before. Qatar is the second regime that is more conducive to reform after the UAE. It considered seriously introducing something similar to a value added tax (VAT) on goods and services.
“A couple of years ago in 2011/12 they were discussing lessons from the European Union specifically and revenue collection and harmonisation of taxes. They didn’t pursue it because of disagreement with the hardliners in Saudi Arabia and disagreements concerning the rate on how much you charge.”
Bovis is professor of International and European Business Law at Hull University Business School, a lead advisor to the UK cabinet office, UN, EU and special advisor to the Saudi and Bahraini governments.
Agree? Join the debate in the comments section below. Next up is the chairperson of a business group who argues it would be a bad idea as many wealthy investors move to Dubai specifically for the tax-free benefits...
NO says Jonathon Davidson, chairman of the British Business Council in Dubai
“I believe Dubai wants to remain a haven for high-volume business and high net worth individuals and has taken the approach of applying fees on usage rather than direct taxation. I think it is the fair route that those who come and settle, and who want to use Sheikh Zayed Road should pay a salik fee and those that to use restaurants and hotel pay a municipality fee. I think the fees are fairly well applied.
“What may be a slight concern if those fees begin to creep up, as what Dubai wants to avoid is the stigma of a direct taxation approach. The worry of introducing a formal taxation would be that companies may see this as the commencement of something bigger. It may start with 5 percent, but then 10 percent and go higher.
“But I don’t think it will lead to an exodus of people and companies. There is a small 10 percent of people who would leave but 90 percent who are here as expats know that where they come from back home there are much higher taxes so it is my guess that they would choose to stay.
“That said, if the tax rate started to creep up to 20 percent, like in Switzerland, it would be an issue. I am aware of a lot of high net worth individuals who have relocated to Dubai from Switzerland simply because of the tax advantage. The short advantage is that people who might come will think longer and harder and examine the opportunity if there was a direct taxation element.
“A big issue is would it be applied at a UAE federal level? If it happened on just a Dubai level companies would simply move to Ajman or Sharjah. That would create confusion. The only logical way would be to have it approached at a federal level.”
Agree? Join the debate in the comments section below. Next up is a wealth management expert who says it's only fair expats pay tax when you look at the benefits they enjoy in Dubai...
YES says Nicholas Cully, director - head of business development at Dubai-based wealth management firm Sovereign Corporate Services
“Even with taxation, Dubai would still be one of the most tax-efficient places to do business in the world. There is no reason why legitimate companies should move. I think it’s only fair expats pay tax when you look at the opportunities they have been afforded in Dubai.
“Given the huge investment that the government has made to establish, develop and consolidate Dubai’s as a world-class international financial centre, it is appropriate that those who have benefited from this investment should “give something back”. Should locals be taxed? The most effective tax systems are simple, fair and transparent. Tax systems that discriminate against any particular section of a community are generally divisive and anti-competitive.”
Agree? Join the debate in the comments section below. Next up is the head of a recruitment website who says many might demand some sort of permanent residency status if Dubai starts asking them to pay tax...
MAYBE says Sanjay Modi from recruitment firm Monster.com
“If Dubai goes ahead with this then there would be a mid- to short-term impact. But, in the long term, I don’t think it would cause people to leave.
“However, it would have to be introduced slowly and not with a high rate straight away. One issue that would arise is if people are paying tax they may want citizenship. This is something the government needs to debate internally. If not citizenship, then something like permanent residency, similar to what is in Singapore. Taxation is not just about tax but also the social, cultural and economic implications.”
Modi is managing director for India, Middle East and South East Asia
Agree? Join the debate in the comments section below. Next up is the regional head of an international law firm who says people might care more if they are expected to pay for it...
YES says Abdul Aziz Al Yaqout, regional managing partner at law firm DLA Piper Middle East
“The question of a proposed income tax for individuals and corporates is one that raises its head regularly. It could be viewed as sensible that a certain level of tax is introduced to help sustain and fuel the country's continued capital investments. A tax system would require the introduction of effective corporate governance, a positive move for the long term sustainability of any economy.
“The introduction of tax on companies in Dubai, from a legal and economic perspective, could be a positive move provided it was set at the right level. A key factor raised by decision makers in discussions on income tax, is the positive impact it would have in creating an owner mentality. People will care more, if they have to pay for it. On the other hand, and this is also certainly something being dwelt on by decision makers, is that tax have always gone hand in hand with a stronger demand for political participation.”
Agree? Join the debate in the comments section below. Next up is a professor who advised governments looking to introduce taxation systems for the first time who argues the cost of setting up a tax collection scheme might not be worth the revenue you get in...
NO says Christopher Hennessey, Professor of finance at London Business School
“If I was sitting with the tax authority I would want to get a good sense of the infrastructure projects they are planning, the funding needed and the funds they will generate through user fees. The issue is that the cost of introducing a taxation system to cover infrastructure could be disproportionate to the revenue raised. If you start with a blank slate there will be huge costs to introducing any tax and it takes two forms: the administrative costs and the compliance costs for individuals.
“In my experience, most jurisdictions have first gone with a value added tax (VAT) on cigarettes and alcohol and restaurants as the first source of taxation. An economic theory is that there is less awareness of these so it preserves that marquee of zero tax. It is easier in terms of administration for the government and the individual.
“Another headache would be taxing citizens who have assets and investments overseas and how they would be handled. My advice would be to avoid moving out of that zero-tax scenario.”
Professor Hennessey helped design tax systems for the newly independent states in Eastern Europe and advised Pacific states who were looking to introduce taxation systems for the first time.
Agree? Join the debate in the comments section below. Next up is a tax expert who says who is keen to help the government set up a taxation scheme and says its only a matter of time before it happens...
YES says Chas Roy-Chowdury, head of taxation at the Association of Chartered Certified Accountants
“Dubai needs to think about introducing a tax system to guarantee a steady stream of income, especially with its oil running out. The introduction of a value added tax (VAT) might be one way of going obtaining this. It needs a transparent system which could be at a low level, something at about 3 percent. I don’t think that would necessarily be a problem. A value added tax (VAT) would not hit the business per se as additional charges would be put on the end consumer. It shouldn’t be something that would drive companies away.
“The Channel Island of Jersey introduced a tax on businesses a few years ago and that didn’t cause any great problems to its economy. ACCA would be delighted to advise the Dubai government, as we have done with other jurisdictions. A low rate, lower than five percent, is what they need to be aiming for and they need to have a proper roadmap for implementing it and something which will gather traction in the near future.”
Agree? Join the debate in the comments section below. Next up a researcher in the area of business and finance who says it could be a win-win situation for everyone...
MAYBE says Shrikanth S, research manager in the business and financial services practice at consultancy firm Frost & Sullivan
“Rumours have been afloat that Dubai might consider introducing Value Added Tax (VAT) or income tax which might end the popular tax-free status of the emirate. Lots of questions arise in citizen’s minds regarding this.
“There are some Dubai stakeholders who will be worried for their current savings, vis-à-vis what will be the net savings after tax. Statistics support that every third Emirati and every fifth expat do not save any part of their disposable income. Furthermore, The Telegraph reports that nine out of 10 expats don’t save sufficient money for the future.
“Given this scenario, if income tax is introduced, it should be only above a certain income slab. The idea of introducing income tax above a certain slab should be accompanied with an option for reducing the income tax by introducing Pension fund schemes. This pension scheme, if adequately invested by residents, could have provisions which could also ensure zero or very low income tax. Hence if introduced, this might be a win-win situation and will have three fold benefits – encourage savings for residents, cheap long-term funding for infrastructure projects, and potential reduction in future budget deficits.
Agree? Join the debate in the comments section below. Last, but not least, we have an author and economist who agrees with the Damac bosses and argues taxation "is not going to be the disaster detractors predict"...
YES says Dr. Bob Swarup, author and economist
Hussain Sajwani’s comments to The Sunday Times flagging the possibility of limited taxation in Dubai has set off a furious debate as to whether this is a good thing for the city. The answer is simple. It is, because the long-term management of a society requires a long-term perspective.
First, the financial turmoil of recent years has emphasised the need for policymakers to be ready to act as lenders of last resort in times of need. Dubai, like every sovereign throughout history and in the future, will go through the cycle of boom and bust many times on its economic journey. If these economic undulations are to be managed effectively and contagion minimised, a structurally sound economy and healthy balance sheet are needed.
It is worth noting that any introduction of taxes is not going to be the disaster detractors predict. The success of Singapore is a case in point, and demonstrates that people value simplicity in conjunction with low taxation above a no taxation regime.
Swarup is a respected international expert on macroeconomics, financial markets and alternatives. He is the principal of Camdor Global, an advisory firm, and co-founded the finance website, QFinance, which is funded by the Qatar Financial Centre.
Join the debate by having your own say in the comments section below
We already have taxes, they're just called by different names: SALIK, housing fee, chiller fee, school registration fee
I am leaning towards the MAYBE side and would like to agree that this will only be successful with better acceptance if 1)it is implemented below 5 percent 2)if Singapore is to be the model here, then make sure that it is followed exactly as it was implemented there (ie. citizenship or long residency status) and 3)actual voice or representation in the governance. As stated by one gentleman in the panel, people will start taking ownership once they are paying for it, however I would add that this will become true only when the people will be able to have the feeling of belongingness and chance of becoming a citizen or long term resident status and voice in the government. Otherwise, it is better to continue with the indirect taxation through fees which is already being implemented.
Give out Citizenship to the Residents who are contributing ...There many people living here since more then 10 years !
I wont mined paying taxes if we are offered ( free education , health , human rights )
Taxation without representation will not work. Levies like salik, hotel tax etc.... these are costs that people are willing to absorb. If we discuss Income tax, then most will start to ask, what am I getting against this and am I properly represented. If we look at the VAT, the cost of doing business for retailers in some of the high end malls requires their pricing to be higher than some major cities, and introduction of a VAT might make retail hurt if this is not balanced accordingly. I don't believe that business will leave right away, as with any business, you pay taxes but also you can have deductions / exemptions that could work for your favour in order to pay less. All in all this is not an idea that should be completely disregarded; however, a clear, fair and representative tax scheme could prove beneficial to the country and its citizens.
I dont want citizenship, that is not why I came here.
But if you bring in taxes, what is it for?
Paying off debts from the past, contributing to the future development of the city and so on.
If you are transparent and tell me that my salary is going to be taxed and I have no control over the spending or reason, I will not be happy.
Then we all have a choice. Stay or go.
If you make it fair, not discriminatory, then everyone wins.
Comparing HKG and SIN is extraneous as that is easier for residency.
Adding any form of taxes will add fire to the train of gun powder.
Rightly said some expats will leave the country, however those who stay back would demand for citizenship and representation. Further government will have to provide same subsidies to tax paying expats as well as locals without any discrimination. Sooner or later, demand for election and democracy will be raised, further adding to corruption.
Hence sensible approach would be to have status quo and be happy with the Indirect taxes which are currently in form of Visa fees, ID fees, medical fees, salik charges, traffic fines, parking charges, knowledge fees, housing fees, registration fees, etc. and adding.
"Come on, youâ€™ve got to pay.â€ Great argument, I'm convinced!
I do not mind income tax, provided the following;
1) There is a significant reduction in all the other fees (indirect taxes)
2) There is some kind of representation, i.e. I do not want "if you don't like it there are 03 airports".
3) No I do not want citizenship, but I need some form of stable residency (i.e. I do not have to go back within 01 month if I leave the job)
4) Last but not least, it should be applied in an equitable manner, i.e. higher income earners may be taxed higher, lower income earners may be exempt and tax is applied on everybody (not only expats).
@Irfan - I was going to reply but no point in cutting and pasting your reply. Spot on!
@Nicholas Cully " I think itâ€™s only fair expats pay tax". Well if you truly think that, then why don't you just write a check to the government? Forcing people to give you money is theft, even if you are government and forms need to be filled.