Prudent tax strategy key to making Dubai the world’s largest diamond hub – News

Diamonds, gold and jewelry have been key industries in finding a home in the UAE thanks to its location, infrastructure, transparency, ease of doing business and tax regulations.

By Ahmed Ben Sulayem

Posted: Sun Dec 19 2021, 22:37

Last update: Sun Dec 19 2021, 22:58

In a letter to French scientist Jean-Baptiste Leroy in 1789, Benjamin Franklin said: “In this world nothing can be said to be certain except death and taxes”, a statement widely mistakenly cited as a metaphor for nature. inevitable mortality of our own and the ever-present specter of the tax collector.

And for the most part, I agree with both. Tax, in its idyllic state, serves as a useful and necessary mechanism where members of society contribute to common services and / or amenities that ensure that basic needs are met, thus creating an equitable and civilized basis on which communities and businesses can thrive. However, as our world continues to become more and more interconnected, the result of tax design is no longer as simplistic as a source of income, but a delicate balance that has the power to influence a wide range of factors. both for business and for nations.

As a nation, the UAE has no federal income tax and a targeted income tax that is limited to foreign banks and oil companies, making it very attractive to expats who make up around 80% of the population and who ultimately reinject at least part of their income into the national economy through investment and consumer spending.

However, as the Tax Policy Center Urban Institute & Brooking Institution clearly points out, “the long-term effects of tax policies depend not only on their incentive effects but also on their deficit effects”.

As such, the United Arab Emirates, along with several other GCC countries, introduced Value Added Tax (VAT) on January 1, 2018, in order to provide the country with a new source of income which, according to government sources, “Would continue to be used to provide high quality public services while helping the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.” Of course, from a macroeconomic point of view, it was a masterstroke. At a rate of only 5 percent, which is only applicable to companies with taxable deliveries and imports exceeding Dh 375,000, the impact has been minimal and certainly preferable to the world average which hovers between 10 and 20 percent. cent, while at the same time, the UAE government has raked in 27 billion dirhams in its first year alone. As a net result, businesses and residents continued to reap the benefits of living in the UAE, while the government was able to grow around 1.7% of its GDP, allowing almost everyone to earn, with the exception of the gold and diamond industries.

Emerged from obscurity to account for 27% of Dubai’s non-oil economy over a 20-year span, diamonds, gold, and jewelry have been key industries for finding a home in the UAE thanks to its geographic location, its infrastructure, transparency, ease of doing business and, of course, tax regulations.

Following the introduction of the VAT, imports of rough diamonds immediately fell by 33 percent, with exports also being affected by a 26 percent cut as trade was redirected to other major hubs such as Belgium , Hong Kong and India, which seriously impacted the UAE not only through the immediate economic effect of trade, but also through the considerable downstream benefits of increased employment, investment and spending. .

Fortunately, thanks to the insight of our national leaders, the Cabinet quickly approved a reverse charge mechanism for VAT (CVA) on gold, diamonds and / or products whose main component is gold or diamonds. , i.e. jewelry, on business transactions between registered dealers and as a result has succeeded in protecting the UAE’s position as a strategic trading center with only a small amount of reputational damage caused by the first five months of VAT uncertainty.

If this policy had not been introduced, the industry accelerators that have arisen throughout the pandemic, such as the Abraham Accords, may not have had as much of an impact on success. Continuous from the United Arab Emirates. Ultimately, the most productive and long-term macroeconomic decisions are best made when there is a clear understanding of the outcome and how it will bring a net gain to our society at large, which our leaders know how to do well.

To borrow a quote from His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai, “The purpose of government is to serve the people, the purpose of government jobs is to serve the society, the purpose of rules and regulations are at the service of mankind. Remember this; does not glorify laws and measures and does not think the system is more important than mankind. And that is what brings me to the point of this piece.

Amid the challenges that have arisen over the past 18 months, the UAE has not only weathered the storm, but has also proven to be a better equipped and technically competent center of stability thanks to the wise decision-making of the leadership. nationals of the country. By finding and promoting the right tools and technologies to keep people physically safe, while allowing businesses not only to continue, but to grow rapidly, the UAE finds itself with a unique advantage. When it comes to colored stones, especially rubies, emeralds and sapphires and lab-grown diamonds, this is more of a sideways movement than an entirely new industry. However, in an era of fragmentation, Dubai is particularly well equipped to offer a strategic and supportive arm to centers such as Hong Kong and Bangkok, which would also benefit from a fiscally advantageous location further west.

According to a recent analysis by DMCC, the UAE does not currently have a significant share of the colored gemstone market.

However, if traders could be persuaded to locate in Dubai, it could represent additional economic activity of up to $ 4 billion. Likewise, thanks to advancements in technology, the laboratory-grown diamond (LGD) market could add up to an additional $ 6 billion in a global venture valued at around $ 20 billion, thanks to its additional utility in the commercial and industrial sectors. So if the upside potential is so great, why hasn’t the market migrated here already? VAT and customs duties. Although they are widely applied forms of taxation, their presence is enough of a deterrent to ward off lab-grown gems and diamonds. However, the good news is that it doesn’t have to be that way, and when it comes to VAT it is possible to change policy without the government losing a single thread.

Suppose a sale takes place for a valuable commodity for which the buyer pays $ 100 million plus VAT of $ 5 million, where both companies are registered with the Federal Tax Authority (FTA). The seller will issue a tax invoice to the buyer for the $ 105 million (including VAT) and pay the $ 5 million VAT to the FTA. The buyer also pays the $ 105 million to the seller, including the $ 5 million VAT, which will include an input tax claim in its VAT return for the $ 5 million, meaning the tax in input will reduce any input tax payable or be available as a refund claimable from the FTA. This is essentially a neutral transaction for all parties.

This is, of course, the intended process for B2B transactions; however, the funding requirement is a direct cost to the buyer and a barrier to the profitability of existing trades and new market entrants. As a solution, by providing either zero rating for the supply of valuable raw materials or a reverse charge mechanism similar to that applied to gold and diamonds, the process would not only be streamlined, but would create a simple environment in which to live. which exchanges would be made Easy.

As far as tariffs are concerned, valuable goods are currently subject to a general rate of 5 percent, however, unlike the amount charged in VAT on businesses, the tax earned is not worth the market lost. Under current regulations, when colored gemstones are imported into Dubai, a 5% non-refundable duty is applicable, meaning that companies have no viable option other than to use a logistics provider. security to ship the goods using a TIB (temporary importation obligation.

However, these costs are also significant due to the weight and value of the goods. In the next phase, regardless of whether the stones sell or not, the goods must leave Dubai and return to their country of origin, after which they can be distributed to the buyers. By removing tariffs on valuable goods or simplifying the procedures for suspending tariffs, the UAE would not only encourage the world market to take advantage of all the country has to offer, but also improve the ease. to do business for an industry currently burdened with high financial guarantees and unnecessary costs.

It is important to remember that Dubai’s current position as a world leader in the gold and diamond markets is intrinsically linked to the decision of the UAE Cabinet to learn from past mistakes of other global economies. and cancel the 5 percent value-added tax for investors. at the wholesale level. It is for this reason that Dubai is poised to become the world’s largest diamond hub, having significantly narrowed the gap with Antwerp in rough and polished trade volumes.

Without this critical decision, Dubai would not even be in the conversation. Applying the same strategy to gemstones and lab-grown diamonds, Dubai would again be able to become a major hub for two sets of high-value commodities, which are already prepared for its existing infrastructure, location and ease of operation. to do business. .

Ahmed Bin Sulayem is Executive Chairman and CEO, DMCC

About Natalee Broderick

Natalee Broderick

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