On November 27, 2016, a significant milestone was set in the chronicles of GCC financial governance:
This date marked the initiation of the Common Excise Tax Agreement of the States of the Gulf Cooperation Council (known as the “GCC Excise Tax Agreement”). Serving as the architectural blueprint, this agreement has profoundly shaped the Excise Tax paradigm not only in the UAE but across the broader GCC spectrum. In its wake, it has fostered a multitude of legislative tools ranging from federal laws and cabinet decisions to ministerial edicts and mandates from the UAE’s revered Federal Tax Authority (“FTA”).
Within the UAE’s boundaries, the Federal Excise Tax is levied upon six distinct categories of goods, singled out due to their potential detriments to human well-being and the environment. However, a global overview reveals that the reach of Excise Tax frequently surpasses these concerns, often encompassing the luxurious echelons of commodities.
In this article, we dive into the Federal Excise Tax legislative approach in the UAE, referencing applicable legislations and the future of Excise Tax implementation in the UAE in respect of luxury goods.
International Position – Excise Tax on Luxury Goods
Excise Tax on luxury goods, sometimes referred to as ‘luxury tax’, is applicable in various states around the world.
States may choose to impose Excise Tax on luxury goods for various purposes, such as:
- “Taxing the rich” concepts.
- Nudging consumer behavior away from specific luxury goods.
- Generating additional revenue.
On a GCC level, none of the states that implement an Excise Tax regime currently impose an Excise Tax on luxury goods. However, rumors are spreading in the news about Kuwait’s intention to implement an Excise Tax on luxury goods such as “watches, jewelry and precious stones, as well as luxury cars and yachts”. This is yet to be confirmed by the Government of Kuwait to date.
Nevertheless, it is important to note that the GCC Excise Tax Agreement provides in Article 3(1) that “Tax shall be imposed on goods that are harmful to human health and to the environment, as well as on luxury goods, according to a list and the tax rates levied thereon as determined by the Ministerial Committee”, hence setting the basis on which GCC states may implement Excise Tax on luxury goods.
As of the date on which this article is published, we are not aware of any list of Excise Goods and applicable Excise Tax rates published by the referenced Ministerial Committee. On the other hand, we find that the application of Excise Tax varies from one GCC state to another.
Federal Excise Tax on Luxury Goods in the UAE
While the obligation to pay Excise Tax is imposed in the UAE via a Federal Decree-Law (a high-level legislative instrument), the UAE’s Excise Tax Decree-Law does not specify the Excise Goods subject to Excise Tax nor the Excise Tax rates applicable thereof. Goods subject to Excise Tax and the rates applicable to such goods have instead been specified in a Cabinet Decision (a lower-level legislative instrument).
According to Cabinet Decision No. 52 of 2019 on Excise Goods, Excise Tax Rates, and Methods of Calculating the Excise Price, Excise Tax is currently applicable in the UAE on six categories of goods at rates of 50% and 100% as per the table below:
| Excise Good | Excise Tax Rate |
| Tobacco and tobacco products | 100% |
| Liquids used in electronic smoking devices and tools | 100% |
| Electronic smoking devices and tools | 100% |
| Carbonated Drinks | 50% |
| Energy Drinks | 100% |
| Sweetened Drinks | 50% |
As evidenced from the table above, the UAE does not currently levy Excise Tax on luxury goods.
However, placing Excise Goods and their respective tax rates within a Cabinet Decision (a subordinate legislative instrument) instead of a Federal Law or a Federal Decree-Law (a superior legislative instrument) strongly suggests the legislator’s intention to maintain greater adaptability in adjusting the established provisions.
Indeed, it is pertinent to mention that from the inception of the Excise Tax in the UAE on October 1, 2017, only three types of goods were subject to this tax: tobacco and its products, carbonated beverages, and energy drinks. The subsequent three categories were recognized as Excise Goods starting from 2019.
Given this context, considering the rapidly evolving taxation framework in the UAE, should the nation decide to impose an Excise Tax on luxury items, whether in the immediate or more distant future, it might do so at rates markedly less than the prevailing Excise Tax rates of 50% and 100%. This scenario seems probable for all GCC nations, largely due to the foundation for the imposition of Excise Tax on luxury items being established in the GCC Excise Tax Agreement. This supposition gains traction, particularly if the speculations about the instatement of Excise Tax on luxury goods in Kuwait materialize.
Excise Tax Liability and Administrative Penalties
Amendments to tax regimes and regulations, in whatever form they take, almost always impose new obligations on taxpayers. If, in accordance with the above, the UAE widens the scope of Excise Tax to encompass luxury goods, taxpayers must act quickly and swiftly to ensure that the revamped Excise Tax rules and regulations are complied with. For example, if Excise Tax is imposed on luxury watches, watch traders must carefully assess whether their luxury watches could potentially be classified as ‘excess’ for Excise Tax purposes, which could deem them as stockpiled excise goods on which Excise Tax is due. Failure to settle the due Excise Tax would result in the imposition of hefty penalties by the FTA, in addition to a late payment penalty of up to 200% of the amount of tax due.
Conclusion
Excise Tax obligations and liabilities are significantly high in contrast with obligations and liabilities under the Value-Added Tax regime and the Corporate Tax regime. As the introduction of federal taxes in the UAE is relatively new and recent, it is very likely that the UAE’s tax regime will undergo significant and major changes in the near future. This could take various forms, such as the introduction of new taxes, amendments to current tax rates, introduction or eradication of tax advantages and benefits, and others. Therefore, businesses are encouraged to continuously monitor new developments and seek consultation from tax professionals and tax lawyers in the UAE to assist them with fulfilling their tax obligations and benefiting from available tax benefits.
This Article is prepared by Mohamed El Baghdady, Head of Tax and Financial Crimes, and Marwan Alnooryani, Senior Tax Associate, at Habib Al Mulla & Partners Law Firm.
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The content of this article is intended solely for informational purposes and does not constitute legal advice or an opinion on any issue. Readers should not act upon the information presented without seeking professional consultation. The scenarios and assumptions discussed in this piece are hypothetical and speculative in nature, and do not reflect current or impending tax policies or decisions in the UAE or elsewhere. This article does not represent any confirmation of new tax impositions or alterations to existing structures.
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