Tax Morality and Its Impact on Tax Compliance in the UAE

Introduction

The paradigm of financial cooperation between the civil population and the government is most usually performed through an established taxation system. Thus, by paying an additional price for products and services purchased in the country, people assist the government in financing health care, the army, and various public sectors. However, since this relationship is built on trust and mutual respect for cooperation, it is necessary to understand the rate of the population’s tax morality. Since the introduction of value-added tax in the United Arab Emirates back in 2018, researchers continue to question how increased morality can lead to higher VAT compliance and better outcomes for both the state and the population. The present paper presents an explicit analysis of the existing pattern of tax compliance, along with its prospects in the UAE economy.

Research Goals

Thus, the primary goal of the present thesis is to explore the existing pattern of VAT in the UAE in order to assess the level of people’s tax morality and tangible ways to improve it. To achieve this goal, the thesis will make sure to tackle such objectives as analyzing the impact of VAT and tax morality on society as well as assessing the current attitude towards VAT. After creating a solid foundation for the research, the final goal of the thesis is to answer the question of how to improve the rates of tax morality among the UAE population.

Literature Review

The first step of the literature review on the topic was to dwell on the concept of tax morality. Thus, according to the OECD (2019), tax morale stands for the phenomenon that internally encourages people to pay taxes to their government as an intrinsic desire for loyalty and compliance. The global community recognizes tax morality as one of the driving forces behind a gradual increase in state revenues. Instead of placing emphasis solely on public procedures of tax policies, tax morale dwells upon the human component of allocating a certain part of income to the state. When VAT was introduced to the UAE community, the researchers wanted to analyze both the tax’s impact on the population as well as their willingness to pay taxes in all conscience.

Thus, according to the study by Saderuddin and Barghathi (2018), the introduction of VAT from the auditors’ perspective leads to a series of benefits, namely, higher state revenues in the long run, more transparent business deals between the companies and the state, and sustainable GDP growth. Even if business owners and UAE residents, in general, are dissatisfied with such an initiative at first, the long-term outcomes will be positive for the whole country. The issue, however, concerns the fact that another UAE-based sociological study shows that people have relatively low rates of tax morality, as they tend to overestimate the government’s responsibility for the state’s sustainability and well-being. As a result, the theoretical background demonstrates that it is of paramount importance to address this issue in order to produce the expected benefits of VAT implementation.

Methodology

The present thesis paper is a qualitative study that combines both primary and secondary data collection tools. The first part of collecting evidence is reaching out directly to the Federal Tax Authority (FTA) officials who realize the scope of VAT influence and the overall importance of tax compliance across the state. After analyzing subjective data from the FTA representatives, the next step is to compare the obtained information from the primary governmental reports on tax revenue and GDP since 2018. Finally, based on the secondary data presented by scholars and economic analysts, the recommendations for improving tax morality in the UAE will be outlined.

The UAE Tax

Presented on January 1st, 2018, Decree-Law no. 8 declared the nationwide 5% VAT implementation in the UAE for an estimated list of products and services. Since it is widely recognized that VAT implementation can increase national revenue, the success of taxation is represented through the percentage of national GPA. Hence, one may see on the graph that while in 2017, tax revenue constituted nearly 0.5% of GDP, the number almost doubled one year after the implementation of VAT.

For many years, UAE’s economy has been dependent explicitly on the export of oil, being a thriving and financially sustainable community. However, back in 2010, the global market of oil experienced a major reduction in its monetary value, mainly due to issues related to the environment. Thus, in order to prevent the downfall of the internal state economy, the decision was made to introduce a value-added tax at a suggested rate of 5%. Compared to other developed economies, such a rate was acceptable, so people had no choice but to embrace the new reality. The control over taxation was taken over by the UAE Federal Tax Authority.

Results

To estimate how the introduction of VAT influenced the UAE residents, a survey was conducted among fellow residents and the FTA representatives. The results of the survey were inspiring, as the majority of people had minor issues with taxes. Thus, the numbers on the slides demonstrate that, for the most part, people realize the causal link between paying taxes and supporting the local community and infrastructure. Moreover, they accept the responsibility of paying taxes to support the government instead of waiting for the government to support them from an imaginary never-ending public budget. Hence, it may be concluded that the UAE population demonstrates high tax mortality rates.

However, despite a high tolerance rate for VAT contributions to the state fund, it is understandable that people do not feel motivated to share a part of their income with the community. In fact, people mostly think that paying their taxes is not a pleasurable experience whatsoever. Hence, another part of the survey was dedicated to the ways to raise tax compliance through incentives. The respondents were given options such as fines, arrest, audit, and prosecution, where the option of fines was considered the most appropriate one.

Observation

The conduction of present study demonstrates a strong correlation between tax morality and tax compliance across the UAE. As far as tax morality is concerned, the researchers need to understand that the primary intrinsic motivation to contribute financially to the state does not depend on the amount of tax rate and state regulations. Primarily, tax morality is associated with a series of highly personal attributes that include age, upbringing, cultural values, and the overall well-being level within the state. Once these aspects correspond to the requirements needed to respect the laws and provisions of the state, local residents extrapolate their upbringing to essential burdens such as paying taxes.

Recommendations

Thus, based on the observation and results obtained from the surveys, the recommendations for increasing tax compliance in the UAE should address two major aspects: socio-economic context and enforcement. The first major recommendation is rather abstract, as it encourages local governments and communities to put tax compliance into perspective, fostering respect and obedience through culture. The second recommendation, on the other hand, is more reactive, as it presupposes the creation of a tangible punishment for non-compliance. While it can be beneficial, it is necessary to make sure that the ones punished are educated enough to be rightfully accused of tax evasion.

Conclusion

Having taken the notion of tax compliance into consideration, it can be concluded that tax morality plays an extremely important role in one’s probability of paying taxes faithfully. Although the governments should create an action plan to address people unwilling to comply, their primary task is to discover the roots of low tax morality. Whether it is poor upbringing or lack of education, the UAE government should place emphasis on this issue to avoid future implications on tax compliance.

References

OECD. (2019). Tax morale: What drives people and businesses to pay tax? OECD. Web.

Saderuddin, A., & Barghathi, Y. (2018). The laws of the introduction of VAT on the audit profession and economy in the UAE: Auditors’ perspective. Accounting and Management Information Systems, 17(3), 406-439. Web.

Yaghi, A., & Alibeli, M. (2018). Theoretical and empirical analyses of citizens’ willingness to pay: ethical and policy implications for the environment in United Arab Emirates. Journal of Emerging Trends in Economics and Management Sciences, 9(5), 291-303.

World Bank. (2019). Tax revenue (% of GDP) – United Arab Emirates.