The UAE is moving to impose a VAT (value added tax) on all expatriate remittances. The decision, made recently by the UAE government, has been debated for years. Unfortunately, this doesn’t really help to prepare the expatriates who will be impacted by the tax. The VAT will go into effect January 2018 and is intended to help the UAE government diversify their revenue streams. However, whether the VAT will provide much revenue for the UAE government is still questionable. The full effect of the VAT on remittances is still somewhat unclear, as the Ministry of Finance is still in the process of clarifying the exact regulations and solidifying them as part of 2018’s fiscal regulations.
What We Know About the VAT So Far
The VAT on remittances is very specifically placed on remittance services and is not a tax on the remittances themselves. This means the VAT will apply to the fee charged rather than the number of funds being remitted. This may be good news for expatriates concerned about the impact of the VAT on their remittances, as the fee will be nominal in comparison to remittance taxes. The UAE does currently account for approximately $20 billion of the Middle East’s $100 billion annual remittances. So far, a few things are clear. The VAT will likely impact exchange houses in the UAE who charge varying remittance fees for different international regions. According to the Khaleej Times, “the fees range on average between Dh10 and Dh20 for Asia, between Dh15 and Dh35 for the Middle East and Asia, and between Dh35 and Dh55 for the US, UK and Europe.”
Why is the VAT Tax on Expatriate Remittances Being Imposed?
The UAE is currently receiving most of its national revenue from the oil industry. To diversify their revenue streams, they have been discussing the idea of the VAT on expatriate remittances for a while, in addition to several other revenue-generating taxes or charges. As almost 70% of the UAE’s income-earning population is comprised of expatriates, it is assumed that taxes and charges specifically targeting that segment of the population will be the most profitable.
Similar Decisions Have Been Made
The VAT on expatriate remittances is not the first tax or charge that has been designed to target expatriates in the UAE. The initial lure of the duty-free life that the UAE offered expatriates has been wearing off in recent years, even as the UAE attempts to maintain their “edgy” image. There has been talking in recent years of implementing a corporate or income tax, and several tariffs have been implemented. Furthermore, the VAT doesn’t only have the potential to impact remittances. The VAT also applies to several imports at a rate of 5%, with only 100 food items, health, education, bicycles and social services being exempt. Many sources have noted that the impact on remittances is still under discussion.
Impact on Exports
The Ministry of Finance in the UAE has recently put a registration into effect that requires all businesses with revenues surpassing Dh375,000 annually as “above the threshold” for the value-added tax. The UAE has established a Federal Tax Authority to enforce these federal taxes on businesses whose income is over the designated threshold. These taxes will directly impact large companies whose primary source of revenue is exporting the product. This is all new territory for the UAE, although the VAT and additional tariffs have long been predicted.
Who is This Going to Impact?
The primary makeup of the UAE expatriate population is comprised of low-income migrant workers from countries such as Pakistan, Egypt, Bangladesh, India, the Philippines, and Sri Lanka (to name a few). These workers are generally blue-collar, and the VAT on expatriate remittances would impact them the most. The wages that these workers earn are generally sent back to their families in third-world countries. Although the VAT may have been intended to target higher-earning immigrants from Western nations, this will not be the case as remittance is less common in that income bracket, or if they do use remittance exchange houses who impose a fee, the fee is nominal in comparison to the number of funds they are remitting.
It’s important to make this differentiation as we move forward in understanding what, exactly, this imposed VAT will mean for expatriates living in the UAE. Only time will tell how the VAT will ultimately play out, and whether it will generate a legitimate income stream for the UAE government, as is expected by the Ministry of Finance. For now, it’s important for expatriates, especially those working and earning blue-collar wages, to stay up to date on what value-added taxes will impact their remittance fees and stay watchful for any additional taxes or charges that could be levied soon as these new ideas are solidified.