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High VAT revenues fortify UAE government finances — Moody's

High VAT revenues fortify UAE government finances — Moody's

Dubai: The UAE’s value added tax (VAT) collections in the first year exceeded the original estimates and is driven by strong tax compliance, according to credit rating agency Moody’s.

“The government’s 2018 and 2019 VAT revenue forecasts had included conservative assumptions regarding the level of compliance in the initial years of implementation. Nonetheless, the robust level of compliance in the first year of the tax framework is a positive reinforcement of the UAE’s high institutional strength,” Thaddeus Best, an analyst at Moody’s wrote in a report.

Moody’s which rates the UAE at Aa2 stable believes that the stronger than expected tax revenues is credit positive for the country.

VAT collection data released by the government showed collections were far higher than expected, reaching Dh27 billion ($7.4 billion) in 2018 compared to the government’s original projection of Dh12 billion ($3.3 billion), and higher even than the government’s 2019 projection of Dh20 billion ($5.5 billion).

According to Moody’s report, the federal government will retain Dh8.1 billion (30 per cent of collected revenues) while the remaining Dh8.9 billion will be divided among the emirates.

VAT revenues is least significant for Abu Dhabi, where large hydrocarbon revenues and investment income from the sovereign wealth fund, the Abu Dhabi Investment Authority, reduce the significance of VAT collections, which represent under 2 per cent of total revenues

Moody’s said, in nominal terms, the biggest beneficiary from the introduction of VAT was Dubai, which we estimate received around 60 per cent of the share of revenues attributed to the emirates, and 42 per cent of total VAT revenues in 2018.

Although the standing populations of Dubai and Abu Dhabi are fairly similar, Dubai benefits from much higher tourism spending and a higher daytime population as workers commute in from other emirates. “The additional VAT receipts should help offset some of the losses to government revenues from the reduction in service fees that the government of Dubai recently implemented as part of its efforts to stimulate the economy in the face of decelerating non-oil real GDP growth,” said Best.

The addition of a new revenue source, according to Moody’s, is important for the federal government. Its share of VAT revenues is equivalent to slightly under half of the direct budget grants it receives from Abu Dhabi and Dubai ($19 billion), making it an important driver of own-source revenue and in turn less reliant on grant transfers from the emirates.

According to Moody’s VAT revenues are likely to be the second largest source of non-grant revenues for the federal budget in 2019, after combined royalties and dividends from the federal government’s holdings in the telecommunications sector.

“Given this high level of compliance in the first year and our expectation for non-oil growth to remain subdued, we do not expect a significant increase in VAT collections in 2019. It will nevertheless be higher than currently budgeted. Meanwhile, implementation of the VAT had a small and short-lived impact on inflation,” said Best.

Moody’s observed that subdued consumer demand mitigated the inflationary impact, leading many retailers to partially absorb the effect on their margins.