Dubai needs creativity to pay debt without taxes

Dubai must raise funds to feed its mushrooming debt but the Gulf emirate dreads imposing taxes to avoid breaking a business model that helped turn it from a lazy fishing town to a regional trade and tourism hub.

Selling some prized assets appears to be an easier option.

Dubai, one of seven members of the United Arab Emirates federation, and state-linked firms owe an estimated $80 billion of debt borrowed to fuel a boom, when Dubai branded itself as a tax-free destination for foreign workers and businesses.

Now, scrambling to rebuild its image after a $26 billion debt bombshell last month that was poorly managed, the emirate is unlikely to risk another public relations black eye by imposing taxes at this juncture.

“Dubai is looking to keep attracting businesses,” said Hamad Bu Amim, director-general of the Dubai Chamber of Commerce and Industry. “It is not the right time to introduce taxes. According to what’s on our radar, this is not happening in 2010.”

The emirate’s budget committee chief, Dhahi Khalfan Tamim has said initial estimates indicate Dubai’s budget will be balanced, with any potential deficit lower than a projected 2009 deficit of 4.2 billion dirhams ($1.14 billion).

The emirate is seen curbing infrastructure spending and last week it tightened control of government revenues, ordering all departments to transfer all revenues to the treasury.

Dubai sent shock waves through global markets on November 25 when it said it needed to restructure $26 billion in debt linked to flagship firm Dubai World and its main property units.

An 11th hour bailout by Abu Dhabi helped stave off default on a $4.1 billion bond on December 14 but it still needs a standstill deal with creditors to let Dubai World restructure.

And while asset sales are on the cards, Dubai has to find new revenue sources at least to pay off its own debt.

“In the short term, such an announcement (of taxes) could have a big psychological effect within the community of foreign players in the country,” said Philippe Dauba-Pantanacce, senior economist at Standard Chartered bank in Dubai.

One option for Dubai to generate revenues could be to raise government fees and charges or introduce more paid services similar to its road toll system, or business licensing fees, analysts say.

“These so-called “charges” and “fees” are in essence tax,” said Ehsan Khoman, a Dubai-based economist.

“While increasing these sort of indirect taxes during an economic downturn will be a bitter pill to swallow, it will be certainly be more accepted than an outright income tax.”

Some, however, doubt such short-term fixes can work to pay off Dubai’s billions of dollars in debt.