The United Arab Emirates was wrongly included in a European Union blacklist of tax havens and will likely be removed, according to local practitioners.

The European Union flagged 17 countries considered “non-cooperative jurisdictions in taxation matters” in a list released Dec. 5. The list prompted a strongly worded official response. Blacklisted countries could face sanctions in the future.

“It was very surprising to see the UAE on the list,” said Shiraz Khan, a senior tax adviser at Al Tamimi and Co. law firm in Dubai. “The UAE has recently taken a number of measures to improve tax transparency and information exchange.”

UAE ‘Disappointed’

The EU said that the countries on the list “failed to take meaningful action to address deficiencies” in compliance related to tax transparency, fair taxation and the implementation of anti-BEPS measures, and didn’t make a “commitment at a high political level” before Dec. 5 to address them.

The UAE was among several countries that made last-minute submissions to meet EU criteria for either bank information exchange or corporate tax reforms. Thus, officials were “surprised and disappointed” to see it wind up on the list, according to a Dec. 7 government statement.

“We have committed to a reform process which will be finalized by October 2018, and we are absolutely confident this will ensure the UAE is swiftly removed from the list,” Younis Haji Al-Khouri, the Ministry of Finance undersecretary, said in the statement.

Steps to Improve

The UAE has “done enough to demonstrate that it is fully committed to compliance with international standards and regulations,” including adopting the OECD’s Convention on Mutual Assistance in Tax Matters, committing to sign the Multilateral Competent Authority Agreement on automatic exchange of financial account information, and signing double tax treaties with 25 of 28 EU member nations, Khan said by email on Dec. 20.

The EU has placed several dozen countries on a “gray list,” a warning shot to governments it considers uncooperative. While the UAE is in the process of implementing the OECD’s minimum base erosion and profit shifting (BEPS) standard, other countries at that stage weren’t blacklisted, Khan said.

“Notorious tax havens have been omitted from both lists. I fully expect the UAE to be removed from this list in due course,” he said.

The UAE’s signature on the Convention on Mutual Assistance in Tax Matters hasn’t yet entered into force, which remains “an important hurdle,” said Thomas Vanhee, a founding partner at Aurifer tax advisers in Dubai.

The blacklisting has “no effect” on a European level “but on the individual member state level, some countries may no longer grant the benefits of the double income tax treaties to businesses in the UAE or make it more difficult to obtain these benefits,” Vanhee said by email on Dec. 20.

Without a central company register, the country “barely has any information to exchange,” said Vanhee, a situation which will change with registration for value-added tax, which begins on Jan. 1.

‘Political Sentiment’

The exclusion of EU member nations from the blacklist suggests that it’s not based solely on matters of transparency, said Sam Instone, CEO of AES International, a wealth management firm in Dubai.

“That’s political sentiment, that people within the European Union don’t want assets flowing to other parts of the world,” Instone said Dec. 20. “I see a very well-governed financial system, very transparent,” he said. “I believe it will move very fast to bring itself into line.”

The EU is trying to “unilaterally impose their own rules,” said Sabah al-Binali, an Abu-Dhabi-based investor and former chief investment officer of SHUAA Capital.

“If the EU has trouble regulating its own citizens with respect to EU taxes then that is the responsibility of the EU, not the UAE. If the EU has problems with the UAE, then they should simply require the UAE and its citizens to refrain from investing and trading with the EU. I dare them,” alBinali said by email on Dec. 19.

The value of the UAE’s diamond trade in 2016 was $26 billion, up from $300 million in 2002, making it the third-largest wholesale market in the world after Antwerp and Mumbai, said Peter Meeus, chairman of the Dubai Diamond Exchange. “This story should continue in the next decade and all the odds are in favor of further growth. However, the announcement of a possible introduction of VAT on loose diamonds would strongly jeopardize this,” Meeus told the Dubai Diamond Conference Oct. 16 in remarks first reported by Khaleej Times.

The UAE and Saudi Arabia are set to lead the six nations of the Gulf Cooperation Council in introducing VAT from January 2018, with the other members following within 12 months, according to an agreement reached last year. The Gulf states are seeking to replace lost revenues from oil, whose price has fallen by about half since 2014.

Industry Concerned

“The introduction of VAT here in the UAE next year—though lowest in the world—leaves our member companies and even industry generally concerned,” Ahmed bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC), told the conference, adding that volumes in the Dubai gold market were “down 30-40 percent compared to 2016.”

“I’m already aware of two gold refineries in the UAE looking to move to Hong Kong. This sends a very negative message if it becomes a reality. Diamonds and gold are critical for Dubai, jointly accounting for $75 billion annually,” Bin Sulayem said, comparing the UAE to Germany and the Netherlands, which he said had hosted Europe’s largest gold and diamond markets respectively until the introduction of tax caused them to migrate to Luxembourg and Belgium.

Under Art. 45 of the Federal Decree Law No. (8) of Aug. 23, 2017, the “supply and import of investment precious metals” is zero-rated, but it isn’t clear if that applies to jewelry. The Ministry of Finance is “still in the process of preparing the executive regulation of VAT,” said Younis Haji Al Khoori, Ministry of Finance undersecretary, in an Oct. 17 online statement.

The jewelry industry has faced similar issues in India, where a 3 percent general sales tax was introduced in July. “Small businesses are being heavily impacted by compliance issues and we are hoping the government will move to reduce these demands,” said Praveen Shankar Pandya, chairman of India’s Gem and Jewellery Export Promotion Council, according to a DMCC online post on Oct. 11.

The comments by Meeus and Bin Sulayem are “the most vocal challenge to date” against the introduction of VAT in the UAE, said Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai.

“As demonstrated by historic precedent, the diamond and gold trade is a highly mobile market which is very sensitive to taxation,” Vanhee said by email on Oct. 19. “In the diamond center of the world in Antwerp, sales of diamonds to traders and services associated with the sale of these diamonds are subject to a zero rate.”

“Because of the high sensitivity to taxation, the gold and diamond sector will be more at unease than other sectors,” he said. “However, the UAE economy as a whole is currently nervously waiting for the VAT Executive Regulations to be published by the Federal Tax Authority and there is a certain amount of unrest with companies on how VAT will apply to their specific businesses.”

Too Late?

The jewelry trade is “unfaithfully mobile,” said David Daly, an accountant and lead partner at Argent Gulf Consulting in Dubai. “Unlike the City of London where a material amount of finance jobs couldn’t practically be moved in reaction to a change, the same doesn’t hold in the gold and diamond market,” Daly said by email on Oct. 18.

Even though there is some justification for their concern and the executive regulations aren’t yet finalized, the jewelry executives had left their protest very late, he said.

 “VAT was formally announced at the beginning of Q3-2016. The question we should ask is why these conversations are happening now, over twelve months later,” he said. “The reality is that most entities are either ignorant of VAT, believe the government will withdraw its launch at the last moment, or refuse to act until the final detailed legislation is released in the executive regulations. Surveys suggest that only 30-40 percent have in any way begun preparing for VAT.”