What does Dubai’s new corporate tax mean for its competitive edge?

KARACHI: The UAE has long remained a magnet for foreign firms because they don’t have to pay any corporate tax. But that will no longer be the case as it is soon going to implement a 9% levy on most companies, with the exception being small businesses and those operating in free zones.

The question on many people’s minds now is: will the new tax regime impact the country’s competitive edge in the region and globally?

Also read: Setting up a business headquarters in Dubai: what you need to know

What’s happening?

To say that the UAE has historically had 0% corporate tax is not true. According to the Tax Foundation, each emirate has had the discretion to levy up to a 55 percent corporate tax rate on any business. In practice, the country imposes a 20% tax on branches of a foreign bank, while the oil and gas sector is taxed up to 55%.

In January, the Ministry of Finance announced the UAE will introduce a new corporate tax on business profits, effective for financial years starting on or after 1 June 2023. This means it’s actually going to be around the middle of 2024 when firms actually have to hand over some cash.

The target is bigger businesses: they will have to pay a standard statutory tax rate of 9 percent. There is a 0 percent tax rate for taxable profits up to AED 375,000, to support small businesses and startups.

The tax will not apply to personal income from employment, real estate and other investments, or to income earned from a business licensed outside the UAE — nor will it apply to companies in free zones unless they conduct their business onshore.

The Ministry of Finance has said companies will be given “ample time” to prepare. It will issue further information on its corporate tax regime in a few months’ time, which will help businesses get ready.

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The tax regime “has been designed to incorporate best practices globally and minimise the compliance burden on businesses,” and will be “amongst the most competitive in the world,” it said.

Why is the UAE doing this?

One major reason is the UAE wants to diversify its revenue sources and rely less on money coming in from oil. The new tax could add as much as $13 billion to the government’s exchequer.

A Bloomberg report from four months ago said oil’s share in the country’s economy in 2020 had spiked to the highest since 2016: it accounted for about 29% of its GDP in 2020, compared with 25% during the previous year, in part because of the economic toll of the pandemic hitting other sectors.

Thani Al Zeyoudi, the country’s Minister of State for Foreign Trade, had said last year at the World Investment Forum that the UAE is striving “to push forward its economic diversification agenda” by encouraging investments in scientific research, health care, food security and renewable energy, among many other areas.

More recently, Younis Haji Al Khoori, Undersecretary of the Ministry of Finance, said: “The introduction of a corporate tax regime will help the UAE achieve its strategic ambitions,” said.

He also said it will help it to implement its long-term goal of having a 15% minimum tax rate, as per a historic pact the country has signed, along with 130-plus countries.

Will the new tax impact the UAE’s competitiveness?

Referring to the minimum corporate tax agreement, Thani Al Zeyoudi told Bloomberg the announcement of the new levy “has been received in very positive manner because first of all we have to comply with international directions.”

“It’s one of the lowest corporate taxes the world,” he said, adding it will replace “most of the fees” the UAE is currently charging companies. He also said he doesn’t believe the tax will push businesses to raise prices, or impact inflation.

The general consensus among experts seems to echo these thoughts.

“The new corporate tax law could take new investors who are used to hearing about the tax-free environment in the UAE aback at first,” Daniel Takieddine, CEO MENA at broker BDSwiss told Business Recorder.

“However, the new tax rate remains very competitive regionally and globally and might not be an obstacle to the UAE’s efforts to develop the already thriving business environment it was able to create.”

For perspective, Saudi Arabia has the highest corporate tax rate in the region (20%), followed by Oman (15%) Kuwait (15%) and Qatar.

Takieddine said the advantages of establishing a presence in the UAE has not just been zero taxes - companies are able to tap into an experienced and multicultural workforce and to be at the heart of a growing region, and these factors will remain. Added to this is ease of business and access to investors.

Farah Mourad, Senior Market Analyst of brokerage group XTB MENA, told Business Recorder the “the additional tax will only bring the UAE in line with the GCC, where we didn’t witness discouragements from foreign companies and expatriates.”

She said the new tax will be the second lowest in the gulf countries in terms of rate, after Bahrain, which doesn’t impose such a levy.

Meanwhile Dubai Islamic Bank Group CEO Adnan Chilwan told Bloomberg “a corporate tax regime is welcome as it’s a sign of a maturing and developing market”.

He added that when a 5% value added tax was introduced in 2018 “there was speculation it would slow down the economy, but it did not – in fact we’ve done more business within the UAE post the implementation.”

Copyright Business Recorder, 2022