A Teen from the United Arab Emirates Considers a New Era of Taxation
Saqer Al Nuaimi, 16, is a high school student from Abu Dhabi, the capital city of the United Arab Emirates or UAE, a country on the Persian Gulf. He attends the International School of Choueifat – Al Ain, where he is head of the student life organization. Saqer was recently accepted to the University of Pennsylvania’s College of Arts & Sciences, where he plans to pursue a major in politics, philosophy and economics. He’ll be taking a gap year to complete mandatory military service before attending Penn. Last summer, Saqer participated in the KWHS Global Young Leaders Academy at Wharton to explore his interest in business and economics. This fall, he reached out to KWHS with an idea to write a personal essay about taxation, something his country has never had – until now.
In the 2000s, governments in the UAE and Saudi Arabia introduced the first-ever value-added tax (VAT), a tax on goods and services that consumers must pay at the time of purchase. Other gulf nations, including Bahrain, Kuwait, Oman and Qatar, have delayed introducing the tax until 2019. The International Monetary Fund, an organization that oversees the global financial system, has repeatedly urged the gulf region to diversify their revenues away from oil. Analysts project that the UAE and Saudi Arabia could raise as much as $21 billion in 2018 from the new VAT tax. The UAE finance ministry has said that money will be used “for infrastructure development … (to) upgrade public services … and boost UAE economy competitiveness.” The VAT is a significant change for the gulf region, which has always provided complete financial support and incentives for its citizens. It also has important implications for one of the world’s wealthiest regions, which is a destination for big spenders. Dubai, the UAE’s largest city, boasts the world’s biggest mall, The Dubai Mall, and is reportedly still building new ones.
In this essay, Saqer provides a snapshot of the spending habits of the UAE and surrounding Gulf nations and the changing attitudes in the region’s new era of financial awareness. Take it away, Sager…
The opening of the Louvre Abu Dhabi museum in November 2017 was a jewel in the United Arab Emirates’ crown. When it comes to high-profile destinations and events, the UAE already has bragging rights. Consider Burj Khalifa, the tallest tower in the world; the Palm Islands; the World Islands; Dubai Expo 2020; Dubai Mall; Sheikh Zayed Grand Mosque; and Yas Formula 1 Circuit, among many other wonders of human inventiveness. All these are a tribute to the UAE’s culture and opulence. But while my country may have a reputation for lavish lifestyles, residents are just now starting to get used to a jolting financial reality – taxation.
A Culture of Materialism
To understand our changing relationship with money, you need some context. The UAE, founded 46 years ago, is a member of the Gulf Cooperation Council (GCC), an organization of the oil-rich, culturally related Arab Gulf states. The UAE, and the rest of the GCC nations, have been among the very few countries in the world that have levied no taxes – no income tax, no value-added taxes, no corporate tax. Citizens and residents alike have, for decades, reveled in the freedom to use the entirety of their income on goods and services that are also not taxed. As an American journalist once wrote, it may as well be called a paradise.
And yet, as the famous Chinese yin-yang philosophy suggests, nothing comes without a downside. Years of generously high incomes and excessive monetary freedom have led to tremendous levels of consumerism – the purchase of goods and services in ever-increasing amounts – and the reflection of that culture into the lifestyle of the populace. It’s not fair to say that it’s a trend of the whole population. A large segment of the public has condemned unrestrained spending, but it has been rising at an alarming rate, especially within my younger generation. Seeing teenagers rushing after new smart phones, accessories, fashion collections, PlayStation/PC games each successive season has become quite the norm, and even some unrestrained adults pursue extravagance. Materialism has infected a wide faction of the youth, along with its “rush and buy everything new” lifestyle.
That is, until a few years ago when reality struck. The 2015 oil crash sent oil prices spiraling downwards. Even though the earlier 2008 global financial crisis had hit international markets badly, the governments of the GCC managed to escape relatively unscathed because of their oil wealth. But the oil crash affected the main, and most vital, source of revenue for these nations. It quite literally “hammered Arab economies” as the 2015 headlines proclaimed.
Such dynamic changes, and the onset of a budget deficit, prompted a change in fiscal policy – the government’s tools of taxation and government spending – that directly affected the demand and supply of goods and labor. The economies of the GCC have since entered recession, and mentalities have begun to change permanently. Part of that transformation in the UAE involves placing some of the fiscal responsibility to maintain a healthy economy for the first time on the residents of our rich nation.
As of January 1, 2018, the United Arab Emirates and Saudi Arabia have begun collecting a 5% value-added tax (VAT), a goods-and-services tax paid by the consumer at the time of purchase. A separate demerit goods tax on goods considered unhealthy to consumers (100% – 50% depending on good) was already implemented on October 1, 2017. Education tuition fees and other indispensables are exempted from the VAT. In the UAE, essential foods are now taxed.
I have been observing how my society has changed as a result of these economic setbacks and revolutionary new tax reform. Here’s what I’ve discovered.
The effects of the recession have been felt in all households across the Emirates and the GCC, even the wealthiest. Although prices have been constantly increasing since 2008, they have not been accompanied by a rise in incomes this time. Many theaters have become a “no man’s land”, and countless civil engineers have been laid off – earning that profession a gloomy prospect and reputation. Individuals are clutching on to their purses, and many a business is struggling to make ends meet. In my family, I can witness how my father – a dermatologist – has been striving to maintain business revenue levels. Certainly, it is necessities that seem foremost on people’s minds, not luxuries.
I recently went out shopping for groceries with my mother. I was appalled by the prices of essential goods. Prices of even the basics – such as milk, buttermilk, pastries, beef and fish, have almost doubled in the past few years. Even though we as a family tend to be unadventurous in spending and not irresponsible like many others, this made me think; what will happen to those – typically 15 – 25 year olds – who were enjoying reckless, uncontrolled spending sprees?
The answer is simple. They too are adjusting to this new, yet inevitable reality. The culture of consumerism has slowly been eroding, with greater emphasis on financial awareness. They are starting to understand that old proverb – money does not grow on trees.
A new mindset is also on the horizon. While most of us have been accustomed to government pampering and munificence, through things like free health care, education, land, and housing loans, people are now starting to understand that a more appropriate, “give and take” relationship in the long run is more sustainable for our society.
The government is leading several initiatives to eradicate consumerism and build healthier economic activity. For example, 2017 was designated the “Year of Charity,” following the vision of the UAE’s founder, Sheikh Zayed bin Sultan, and his well-known saying: “Wealth is not money. Wealth lies in the people. This is where true power lies, the power we value. This is what has convinced us to direct all our resources to build the individual.” Although lavishness may still persist in a portion of society, the UAE is ranked as one of the most generous nations per capita and among donors of international development assistance.
In spite of its inconvenience, the people seem willing to pay for the VAT. Ultimately, it is one way to give back to the country that has nurtured them so generously. The general stance is the following: if it is going to benefit the community and the nation, by lessening the government budget deficit, then how can we object? After all, 5% is negligible by itself, let alone when compared to VATs ranging from 10% – 30% in the European Union, Australia, China, New Zealand, the Nordics, and other countries.
‘Restrictions on What We Consume’
When I asked a few of my teenage classmates their opinions on the tax, the consensus was that they think it’s a good idea. I suspect some young people in my region are still adjusting to this new culture of financial awareness – and fewer trips to the mall – but those around me do seem willing to appreciate the value of money in a new way. Here are a few of their thoughts about the tax:
“It will only be an addition of a few dirhams (UAE currency) per good; something that is, from one perspective, minor for a consumer. But what is assured is that the government will benefit immensely from it,” said Saood Al Suwaidi.
“This tax is not the end of the world, but rather a beginning of a period of exponential growth of the country, through infrastructure improvement and GDP growth. It will be a point where we will have to alter our habits and place guidelines and restrictions on what we consume,” said Ahmed Abdelaziz.
“I see it as a stride forward for the nation on an economic scale, as it will stabilize the economy, and promote a bigger sense of financial responsibility in the citizenry,” noted Mohammed Al Romaithi.
“I will actually start taking into account whether I really need the item [I want to buy] or not, especially given the economic situation. You certainly wouldn’t want to be throwing money left and right,” admitted Ali Mekawy.
It is certain that the new tax structures are going to have long-term effects on the Gulf nations, their citizens and residents. If all goes well, spending habits will become wiser in judgment, and a new perspective of prioritization will replace rampant consumerism. Many citizens can see its benefits, even though it means they will have to pay more. I am hopeful that this signals a more financially aware, careful and educated generation.
Related Links
- NYT: Louvre Abu Dhabi
- AFP: Saudi, UAE Introduce VAT in First for Gulf
- Reuters: Pre-VAT Buying Boosts UAE Private-Sector Growth
- Investopedia: Value-added Tax
- Emirates Woman: Women’s Shopping Habits in Dubai Revealed
- Smart Budgeting Pays in Post-VAT Scenario
Conversation Starters
Why are the UAE and Saudi Arabia introducing a VAT for the first time?
The UAE is a relatively young country. How would you describe its relationship to money, both on the government side and the consumer side?
One of Saqer’s friends says that he sees the new VAT as “a stride forward for the nation on an economic scale.” Why do you think he believes this?
1)Why are the UAE and Saudi Arabia introducing a VAT for the first time?
A: The UAE and Saudi Arabia are introducing the VAT tax to safe up more money in order to improve infrusture development and public services. Also to make new buildings to attract tourist and improving the world largest mall (Dubai mall).
2)The UAE is a relatively young country. How would you describe its relationship to money, both on the government side and the consumer side?
A: In the recent years as income rise for families, they tend to lean to consumerism- which is the purchase of goods and services in ever growing amounts. The people agree towards the VAT tax saying that it will benefit the government a lot.
3)One of Saqer’s friends says that he sees the new VAT as “a stride forward for the nation on an economic scale.” Why do you think he believes this?
A: He believes this because with all the money that will be generated throughout the VAT tax, their country would strive and improve in public areas for their citizens.
The UAE and Saudi Arabia are using the VAT tax as a way to curb consumerism in response to the oil crash in 2015. This is because any loss in their main source of income will Money collected by the VAT will be allocated to infrastructure and public services.
Money has played a huge role in the development of the UAE, both from the perspective of the government and that of the consumer. The government has done a good job in bringing affluence to its nation, by exploiting its natural resources and bringing all professionals from around the world to work there, resulting in a supple economy and surplus of goods and resources for the average consumer. This allowed for them to get on without taxes for a while, and led to a viral spread of consumerism, causing excessive spending on the populace’s part.
One of Saqer’s friends sees the VAT as a stride forward for the nation because following the oil crash, the government cannot support the economy as it used to. This is because their main source of revenue took a turn for the worse, and although not demolished, the Middle Eastern money engine is not bringing in as much as it used to. Thus, the government’s only option is to start taxing its citizens. Although the tax is minor, not only will it support government spending, it will also promote a more “you get what you give” mindset among consumers.
Why are the UAE and Saudi Arabia introducing a VAT for the first time?
The UAE and Saudi Arabia introducing a VAT for the first time because to gather more money to help development, public services, and buildings.
The UAE is a relatively young country. How would you describe its relationship to money, both on the government side and the consumer side?
Lately, they relied on the consumers because income was elevating and the VAT tax will benefit the government more.
One of Saqer’s friends says that he sees the new VAT as “a stride forward for the nation on an economic scale.” Why do you think he believes this?
He believes with all the money from the taxes they can stride forward in all areas for the citizens.
Why are the UAE and Saudi Arabia introducing a VAT for the first time?
The UAE and Saudi Arabia introducing a VAT for the first time so they cam obtain a greater amount of money to help development, public services, and buildings.
The UAE is a relatively young country.
How would you describe its relationship to money, both on the government side and the consumer side?
Recently they relied on the consumers because income was increasing and the VAT tax will greater benefit the government.
One of Saqer’s friends says that he sees the new VAT as “a stride forward for the nation on an economic scale.” Why do you think he believes this?
He believes with all the money from the taxes they can stride forward in all areas for the citizens.
1. Why are the UAE and Saudi Arabia introducing a VAT for the first time?
– The UAE and Saudi Arabia are introducing a VAT for the first time because VAT means a taxing on the goods and services that consumers must pay at the time of purchase. It illustrates the harsh reality of immediate taxation, and impacts the less-fortunate, and the wealthy.
2. The UAE is a relatively young country. How would you describe its relationship to money, both on the government side and the consumer side?
– Government was counting on the consumers because of the earnings being increased. In addition, the VAT tax (which requires immediate taxation) will result as positive feedback and a benefit for the general government.
3. One of Saqer’s friends says that he sees the new VAT as “a stride forward for the nation on an economic scale.” Why do you think he believes this?
– I think he believes this because economics is beginning to play a much more important role with the new strategy of taxation coming into place. It makes paying taxes on time a very important responsibility of the citizens.
Why are the UAE and Saudi Arabia introducing a VAT for the first time?
The UAE and Saudi Arabia introducing a VAT for the first time because to get more money so that the government can invest it in the building and rebuilding of roads parks public services buildings and other things the government has control of.
The UAE is a relatively young country. How would you describe its relationship to money, both on the government side and the consumer side?
Since the creation of the country we have seen a substantial rise in the amount of money that families and individuals are making due to the natural resources of the country but the government was having problem making money so a taxation system was put in place to raise money for the government since allowing public purchase of the oil to be in place.
One of Saqer’s friends says that he sees the new VAT as “a stride forward for the nation on an economic scale.” Why do you think he believes this?
I believe he says that because Now that a taxation system is in place the government will be better able to fund projects in the country that will benefit everyone which in turn will create jobs and economic opportunities for many of their citizens and their companies
Well, I think VAT is expected to have a positive impact on the UAE’s economy, especially as an alternative source of revenue for the government. However, the implementation and execution will be important for the success of such reforms to have a meaningful and sustainable impact on the broader economy. The long-term impact will take a few years to crystallise after the introduction in 2018, especially as this system will take time to be streamlined across all industries.
Why are the UAE and Saudi Arabia introducing a VAT for the first time?
The UAE and Saudi Arabia are introducing a VAT for the first time because the VAT is supposed to help the UAE’s economy as another source of revenue.
The UAE is a relatively young country. How would you describe its relationship to money, both on the government side and the consumer side?
Money has kept on rising up so we made a taxation system to make sure government has enough money.
One of Saqer’s friends says that he sees the new VAT as “a stride forward for the nation on an economic scale.” Why do you think he believes this?
He believes this because the taxation system will open up more opportunities around the world for all of us to succeed as we desire and hope to.
The UAE has always fascinated me, essentially being an oasis in the middle of an ocean of sand. However, it has always been a mystery to me how exactly such an anomaly could even exist. One could imagine that while scouring for articles, I was fascinated by this one. While Saqer Al Nuaimi (the author) covers a variety of topics, I want to focus upon his assertion that rampant consumerism is a negative force and his point regarding the role of the government
Arguably the most interesting ideas that Saqer proposes revolves around the idea that an unregulated economy can cannibalize itself. A common misconception that many people hold is that higher levels of consumer wealth lead to a greater amount of consumption, which then causes economic prosperity. While it is indisputable that more consumer wealth leads to more consumption, it is this notion that a higher level of consumption is indicative of a strong and healthy economy, that Saqer systematically dismantles. The UAE’s reliance upon a single commodity as an inflow of revenue coupled with the citizen’s lavish spending habits (fostered by a lenient tax structure) would create the perfect storm. Saqer mentions the Chinese Yin-Yang philosophy to demonstrate the duality of decisions. If the yin of mass consumerism was getting to live a lavish and extravagant lifestyle, the yang was most certainly the practically nonexistent saving of capital. Once oil prices tanked in 2015, the UAE’s one source of income was in jeopardy. While this would hurt the economy, what made matters worse was that many citizens had not saved properly and had to experience the effects of economic downturn unprotected. What makes Saqer’s perspective incredibly unique is that he identifies rampant consumerism as one of the main problems rather than just solely blaming the lack of diversity in the UAE’s economy. While it is true that the spend not save attitude did not cause the economic crisis to begin, it is certainly one of the factors that made it become as bad as it did. The fall of oil prices might have been the spark, but the extreme consumerism was the gasoline that ignited the inferno. Many students who read this might just dismiss it by thinking that this cannot impact them as this happened in the UAE. What is truly haunting about this is the fact that this level of raging consumption is found in countries all around the world. When we look at some of the worst economic catastrophes around the world, overconsumption almost always is a common factor. In the case of the Great Depression, while the stock market crash of 1929 would be the reason it began, it was the fact that Americans had spent every dime on consumer goods and not saved that really made it an international crisis.
Saqer also shares many thoughtful insights upon the solution to this problem that the government of the UAE pursued. After the economy had begun to slide, the government decided to implement a Value Added Tax (VAT). The beauty of this measure is that it happened to kill two birds with one stone. First, it was able to successfully curb consumerism and encouraged families across the UAE to save more. Secondly, it raised additional revenue to not only reduce the deficit but also to fund new projects to diversify the economy. While in this case government intervention was able to create the most socially optimal situation, this is not how it always ends up. Throughout history, governments have shown time and time again that they are capable of mismanaging resources and stifling growth. A good example of this would that of Greece. The Greek government tried to increase the size of the state by increasing taxation and, subsequently, government spending. This ended in disaster when the deficits in Greece would soar to 15 percent of the annual GDP in 2009. This is all to say that it is a game of finding an equilibrium of how much the government should intervene in the economy. Saqer points out that the VAT that the UAE implemented was only 5%, as compared to much higher rates found around the world. The UAE managed to reach this balance as they still intervened to rectify the issue but made sure not to place a boot upon private industry and households.
I think the primary reason that Saqer’s article really resonated with me was because it brings up some important economic questions which reach far past the deserts of the middle east. Questions about the level of responsibility that consumers have for the state of the economy and what role our governments should play when trying to regulate markets are applicable to practically every country in the world. The true genius of Saqer’s article is that by analyzing issues in his own country, he is able to inspire readers to engage in a dialogue about relevant and important economic questions.
“In spite of its inconvenience, the people seem willing to pay for the VAT. Ultimately, it is one way to give back to the country that has nurtured them so generously. The general stance is the following: if it is going to benefit the community and the nation, by lessening the government budget deficit, then how can we object? After all, 5% is negligible by itself” is one of the most impactful sentences in the essay for me. The text is really well written and quite genuine, however, it does not exactly dive into the country’s financial situation, nor the application of taxes on products in all of its nuances and implications.
It is estimated that about a quarter of Saudi Arabian population live below the poverty line, and therefore struggle to purchase goods at a normal rate. Even though the VAT might just be “negligible” for the majority of the population, a considerable part of it might be extremely harmed by this increase in prices.
Even though several governmental programs are developed to support this poor part of the population, many of them are still found in poor conditions. The UN estimates that about 70,000 people are stateless in the country and, because they are not officially considered Saudi Arabian citizens, they are not eligible for these programs. Additionally, due to strict laws, women frequently find many obstacles in terms of seeking employment, which further contributes to the perpetuation of poverty in specific sectors of society.
Given the strongly present poverty in many households in the country, applying taxes to products is an inappropriate measure since it divides the economic contribution needed in the nation equally among citizens without consideration for their respective incomes. As a result, it ends up reverberating in the country in several different ways. While a 5% price increase might feel negligible to the wealthy part of the population, simply leading them to rethink their consumerism practices, it might be the perpetuation of starvation and homelessness to the already impoverished families.
Another measure that stands as a more feasible solution is the application of taxes based on income and not in a general inconsiderate form such as the application on products established by the value-added tax. My country’s economic situation throughout the last century stands as evidence for this fact. The Brazilian taxation system has been unequal in terms of the relation between someone’s income and taxes paid, ever since the worldwide financial crisis of 1929. Brazil had until then mainly an agro-exporter economic model and, due to the recently established low exports, the taxes previously applied on the exported products started to be applied internally and relying, consequently, on the population. However, the core of this obstacle lies in the fact that taxes in Brazil are applied mostly to products and services, and not to income and possessions. As a result, poor and wealthy people alike pay the same taxes on products, leading to the perpetuation of economic inequality, as well as lower returns to the government.
In conclusion, taxation stands as a strong factor in the economy and in the well-being of a population, no matter their income level or country of residence. The text eloquently expresses a specific perspective on the measures taken by the government, however, a deeper discussion is needed to fully comprehend and explore the situation to better understand the bigger picture.