The United Arab Emirates is taking nascent steps to raise income from wealthy residents accustomed to tax-free living as it tries to recover from last year's burst of the real estate and asset bubble, said an expert.

But mindful of its reputation as a low-tax centre and eager not to drive out expatriates, it is focusing on raising indirect taxes and resisting directly taxing its residents, at least for now.

'More, smaller, indirect taxes could be a way forward, even if they could not possibly translate into significant revenue sources for the government,' said Philippe Dauba-Pantanacce, senior economist at Standard Chartered.

'Even if anecdotal, the basic fee for a parking meter has no less than doubled a few months back, and we have witnessed a quasi 50 per cent reduction in petrol subsidies at the pump.'

Dubai, the flashiest of the seven emirates, faces a grim budget situation and indebted state-owned companies are being forced to sell assets in order to repay creditors, most notably Dubai World with a debt pile of $39.9 billion.

Fuel subsidies have been cut as well, and various fees for processing government forms and applications also bring in revenue for the government, effectively working as hidden taxes.

But deciding to impose taxes outright would mark a dramatic shift in philosophy, as Dubai has used its mostly tax-free status to attract business to the region and help cement its position as a Middle Eastern financial hub.

The last available Dubai budget data from 2009 shows that non-tax revenue -- including oil and gas, enterprise profits and fees -- accounted for around 71 per cent of total revenue, and revenue from customs tax for around 29 per cent.

Dubai has a 2010 budget gap projected at Dh6 billion, or 2 per cent of gross domestic product, up from an expected 4.2 billion gap in 2009. But detailed 2010 figures are not available.

At the same time, the country is well aware that the introduction of more obvious tax measures -- corporate and personal income taxes, value-added tax (VAT) or a property tax -- would drive expatriates and their businesses out.

'As a local and even as the government, I want to keep everything as it is. I want Dubai to be the cheapest city in the region,' Dhahi Khalfan Tamim, the head of Dubai's budget committee, said last month.

Fresh cash

Still there are signs that the government is eager to find new ways to boost income.

The UAE, the world's third-largest oil exporter, cut oil subsidies twice in 2010, and one oil official said petrol prices could rise again this month as the government moves to phase out subsidies that have strained the budget. Abu Dhabi's state oil firm denied that such a move had been decided.

'The imposition of road tolls and other fees goes hand-in-hand with the provision of infrastructure and services and these measures could have a predominantly revenue-raising angle,' Giyas Gokkent, head of research at National Bank of Abu Dhabi (NBAD), said.

'Abu Dhabi is also installing parking metres across the city centre. This measure by itself may not be a very significant income generator, while the rise in gasoline prices could be more significant,' he said.

In Dubai, road tolls were introduced in 2007, and authorities doubled parking fees to Dh2  ($0.55) for a first hour this March.

In late 2009, the UAE government said all residents, estimated at 4.6 million, must obtain identity cards -- at a cost of Dh100 for each adult, which would translate into $125 million in revenue.

Residents say the government has increased enforcement of rental housing taxes and police have stepped up speed traps on the roads. Dubai has deployed 50 patrol cars to catch traffic offenders and cars with expired registrations.

Shaheen Shahani, owner of the Shampooch mobile pet grooming business, said she would pull out if taxes were introduced.

'Tax-free living and working was why I set up my business here, and that is the main reason why people moved to Dubai,' said Shahani, who drives around in a pink van to offer showering and styling services to dogs and cats.

For now, the main source of fresh capital is expected to come through asset sales and debt issuance. Dubai's biggest debtor Dubai World is eyeing the sale of prized assets of up to $19.4 billion to repay creditors.

Moving too fast to introduce outright corporate, personal income or value-added taxes could also destabilise the political balance among the seven emirates, as a proposal by one would have to be adopted by all, according to current laws.

'If a business had set up in a free trade zone and had qualified for a tax holiday and then those tax holidays were withdrawn, potentially this could have an impact on the sovereign (political) risk profile of the UAE,' said Dean Rolfe, a tax specialist at PricewaterhouseCoopers in Dubai. – Reuters