Taxing questions at the heart of the Dubai economic model

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Tarek Fadlallah, CEO of Nomura Asset Management for the Middle East, kicked off a vigorous LinkedIn debate over the weekend with a timely post regarding perhaps the most sensitive aspect of economic life in Dubai – tax.

He pointed out correctly that media outlets that label the emirate “tax-free” are mistaken, as anybody living in Dubai can testify.

There is no income tax, of course, but that doesn’t mean the government doesn’t claim a fair share of a resident’s cash in other ways.

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VAT, import duties, housing charges imposed by municipal or utility providers, property transfer fees, road tolls and a host of other charges for public services mean that residents all have to pay their way.

And – in a move that has gladdened the hearts of accountants and tax lawyers everywhere in the UAE – corporation tax at nine percent for all but the smallest businesses was introduced on June 1, with liability beginning at the next financial year.

Fadlallah’s very apposite point was that the low-tax regime in the UAE, Dubai in particular, was the result of very deliberate economic strategy designed to meet the country’s unique demographic mix.

With a very high proportion of foreign workers – both blue and white collar – it would be unfair to levy income tax across the board. More than any other type of financial imposition, income tax suggests citizenship and a permanent stake in the country, which was not possible in the UAE.

Instead, the UAE expects private individuals to pay for those things that higher-tax regimes often provide freely, or heavily subsidised – education, healthcare, community housing, retirement pensions and other welfare benefits.

This is an entirely different type of social and economic contract from the arrangements in existent in the tax-and-spend regimes in the West and other parts of the world.

“We will provide you with the ecosystem and the security to make money, but we will not force you to spend it in a particular way,” is the basic message from the UAE authorities.

The Western high-taxers seem incapable of understanding this. For them, addicted as they are to high levels of public expenditure, low-tax equals “tax haven” equals “tax evasion”.

The old meme of “shady men in sunny places” is a powerful one in Europe and the US, and carries weight with big international organisations like the IMF too, who like nothing better than to take your hard-earned cash and spend it on your behalf.

The incredible economic development of the UAE is testimony to the efficiency of its own economic model, especially in Dubai, where the obvious benefits of enormous natural hydrocarbons resources were exhausted pretty quickly.

The emirate has learned to live on its commercial wits, and has made a great success of it.

When I first came to Dubai, approaching two decades ago, I was thrilled that the top line in my salary cheque was the same as the bottom line, and by the fact I could choose how to spend it.

I recall writing an enthusiastic column in a newspaper that said the attraction of the UAE was summed up in five short words: “Valet parking, no income tax.” I still hold to that starry-eyed view, up to a point.

The question on many an expat mind is whether this is all changing. The introduction of VAT in 2017 was a Rubicon of sorts, as for the first time a compulsory imposition was applied across the board.

I suppose there was still the voluntarist argument that you could simply chose not to spend as much, but that’s difficult in a consumer economy like Dubai.

Corporation tax is another step away from the low-tax model. It’s set at a manageable rate, but some pessimists are suggesting it’s a slippery slope towards the global norm of around 25 percent.

There is also the unresolved question of the status of the “free zones”, which promised zero tax rates for decades to come.

If this is all leading somehow to the inexorable introduction of some form of income tax – perhaps related to the issuance of “golden visas” as has been rumoured – does that mean the end of the unique Dubai social contract? Even an exodus of foreign workers?

As the official position is that income tax is not under consideration at all, it is perhaps meaningless to pose that question.

But Dubai and the UAE have reached a stage in their economic development where they have to think very carefully about the next steps. It would be counter-productive in the extreme to ditch the basic economic model that has been the country’s cornerstone for more than 50 years.