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Saudi Arabia And UAE Introduce 5% VAT

The Middle East has long been associated with tax-free living, but from January 1st United Arab Emirates and Saudi Arabia 5% VAT on most goods and services.

The introduction of VAT follows the recommendation from the IMF that oil-exporting countries in the Gulf introduce taxes as one way to raise non-oil revenue.  Forbes reports that although it threatens to slow economic growth at a time when it is already sluggish, the UAE is expected to raise around $3.3 billion from the tax.

The IMF mideast director Jihad Azour said VAT is part of a long-term tax reform to help Gulf states reduce their dependence on oil revenues. “We believe VAT is an important component of the fiscal adjustment and revenue diversification plans of GCC countries and these measure are necessary for long-term fiscal sustainability,” he said.

VAT will be applied to a range of including food, clothes, electronics and gasoline, as well as phone, water and electricity bills, and hotel reservations.

Many financial services will be exempt from VAT as they are in most countries with a VAT scheme.  Life insurance premiums. interest on loans, lending fees charged with an implicit margin such as loans and credit cards, mortgages, financial leasing, transactions involving money and securities, as well as current, deposit and savings accounts will not attract a VAT charge.   Expats sending money abroad will be affected, however, as money transfer charges will be subject to VAT.  This will be applied to the money transfer fee and not on the transfer amount.

Other Gulf countries are expected to introduce VAT but are not yet ready to make the move and no dates have been announced.