How VAT Regulations Are Going to Affect Rate of FDI in UAE?

The federation of seven emirates has been considered a safe playground for the investors since the beginning of this century, especially when the countries like Libya, Syria and Egypt were going through some serious turbulence. The low tax rates and other favorable conditions have helped a great number of businesses grow seamlessly in the United Arab Emirates, and have enticed several large multi-national companies (MNC) to establish their regional headquarters in this country. But the latest tax regulations which are going to be implemented from the next year (Jan 1, 2018 onwards), has raised a lot of speculations among the MNCs and large business houses (along with medium and small businesses) in the UAE on how those regulations are going to affect their business operations. One of the biggest concerns for the MNCs has been how the implementation of the VAT is going to influence the rates of Foreign Direct Investment (FDI) in the country.

According to the latest Global Investment Report (2017) published by UNCTAD, UAE stands at the 9^th position for being the largest FDI recipient in Asia. The UAE received its major investments from the countries: UK, Japan, and Hong Kong. As a matter of fact, in 2016, the UAE has collected a massive amount of 8.9 billion USD from the foreign investors as the political and economic stability of the country has created one of the most favorable business environments for the investors. The majority of the foreign investment is concentrated on the sectors of hydrocarbons, water and electricity production. While the economic and political stability of the country has worked out as bliss for the investors; the ease of access to the oil resources, cost-effective energy supply and a high purchasing power are some of the factors that have attracted the investors in the first place.

UAE has been ranked the 26^th out of 190 economies (countries) in the 2017 Doing Business ranking published by the World Bank, but the biggest concern for the foreign investors now is that how the latest VAT regulation is going to affect the Foreign Direct Investment rates in the country.

According to a report published in Gulf Business, EY’s Middle East and North Africa tax leader Sherif El-Kilany has stated that the governments in a number of developing countries are becoming more and more dependent on the indirect taxes to increase the revenues and to fund a number infrastructure projects. The shift from the indirect taxes to the direct taxes is a worldwide phenomenon, and the UAE is not the first country to adopt that change. As per the report, El-Kilany has also added that the introduction of VAT in the country should not be conceived as an event that would discourage Foreign Direct Investment (FDI). The region would continue to be a haven for the investors and business with low corporate tax rates and a business-friendly environment.

The Gulf Business report also stated that KPMG UAE partner and head of tax Mr Nilesh Ashar believes that UAE’s appeal stretches beyond its tax-free status. According to him, infrastructure development, free trade zones, competitive labour costs, access to high potential growth markets in Africa and Asia, fewer trade barriers and the political stability of the country work in favour of the country. Ashar has acknowledged the fact that in the current environment, most of the companies are searching for more than just tax-free lands to set up their businesses.

After experiencing the political unrest in the Arab Spring, all the investors are looking for the regions that are stable in terms of both economy as well as politics. As mentioned before, the economic and political stability of the UAE has put the country on the list of top countries.

Majority of the views indicate that even after the successful implementation of the VAT and other tax reformations, UAE will continue to be one of the major economies to draw the foreign investors in the MENA region (The Middle East and Northern Africa). Speculations and assumptions about FDI in the UAE are at all-time high, but only time can tell whether the introduction of VAT in the UAE will affect the FDI rates in the country or not.

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