Last tax-free days in Saudi Arabia, UAE before price hike

Stores, gyms and other retailers are trying to make the most of the remaining tax-free days in Saudi Arabia and the UAE, encouraging buyers to stock up before VAT is applied on January 1, 2018.

Long luring foreign workers with the promise of a tax-free lifestyle, the Gulf havens will apply a 5 percent value-added tax to a range of items like food, clothes, electronics and gasoline, as well as phone, water and electricity bills, and hotel reservations in a bid to boost revenues since oil prices collapsed three years ago.

Elda Ngombe, a 23-year-old college graduate who's looking for a job in Dubai, said there's one specific purchase she's planning before next year's price hike: "Makeup, because I can't live without makeup," she told AP.

"I am scared because everything is actually expensive already in Dubai. The fact that it's actually adding 5 percent is crazy," she said.

There will be some exemptions for big-ticket costs like rent, real estate sales, certain medications, airline tickets and school tuition.

Higher education, however, will be taxed in the UAE. Extra costs parents pay to schools for uniforms, books, school bus fees and lunch will also be taxed, as will real estate brokerage costs for renters and buyers.

Other Gulf states are expected to implement their own VAT scheme in the coming years.

Even with a 5 percent jump in prices, the tax rate is still significantly less than the average 20 percent rate in some European countries.

"If you compare with Europe, I don't think it's as expensive. Only in rent and food," said Vera Clement, a mother and assistant manager of restaurants from France who has lived in Dubai for three years.

"We are going to be more careful when we buy something," she added.

Diversifying revenues

The National newspaper, based in Abu Dhabi, says the cost of living in the UAE is expected to rise about 2.5 percent next year because of the VAT. Salaries, meanwhile, remain the same.

As the government adjusts to lower oil prices, the UAE is expected to raise around 12 billion dirhams ($3.3 billion) from the tax.

Meanwhile, Saudi Arabia recently unveiled the biggest budget in its history, with plans to spend 978 billion riyals ($261 billion) this coming fiscal year as the government forecasts a boost in revenue from the introduction of VAT and plans to reduce subsidies. Still, Saudi Arabia is facing a budget deficit until at least 2023.

The International Monetary Fund has recommended oil-exporting countries in the Gulf introduce taxes as one way to raise non-oil revenue. The IMF also recommends Gulf countries introduce or expand taxes on business profits.

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.

"It is something that will allow the government to diversify revenues," he told The Associated Press on the sidelines of an event in Dubai, adding that any immediate slowdown in spending by consumers next year will be compensated for with government investments.

In line with IMF recommendations, Saudi Arabia and the UAE this summer imposed a 100 percent tax on tobacco products and energy drinks, and a 50 percent tax on soft drinks.

VAT, however, is by far the most wide-ranging tax to be rolled out in the two countries.

Though the Gulf has long been associated with being a tax-free haven, foreign companies - except in Bahrain - pay corporate income taxes. In Oman, locally-owned companies also pay taxes.

Foreigners make up about a third of the Saudi population and far outnumber locals in the UAE. For now, anxious residents have been reassured there are no immediate plans to impose a payroll tax, which could prompt an exodus of highly-skilled expatriate workers.