The move marks a significant shift as the UAE seeks to align itself with international standards and move towards a global minimum tax.
By Ben Bartenstein and Zainab Fattah and Farah Elbahrawy /Bloomberg
The United Arab Emirates will impose a federal levy on corporate earnings for the first time next year, as it dismantles a tax-free regime that’s made it a magnet for global business but drawn scrutiny over transparency.
The measure comes as the UAE seeks to align itself with new international standards, particularly the move toward a global minimum tax on multinational corporations endorsed by the Group of 20 major economies last year. The ambitious plan aims to eventually set 15% as the base levy to stem international competition to offer more attractive rates.
The UAE announced in July its support for global tax standards and said Monday that its new 9% rate, which will come into effect in June 2023, would provide a basis to apply that support, though in the UAE many of these large corporations operate inside free zones and will remain exempt provided they don’t do business with the mainland.
“Introducing a CT regime reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices,” it said in a statement on its website.
Global Standards
The measure comes as the global financial watchdog weighs whether to add the UAE, home to the Middle East business hub of Dubai, to a “gray list” of countries that are not doing enough to combat money laundering and terrorist financing, according to people with knowledge of the matter. The Paris-based Financial Action Task Force was due to discuss the issue as soon as next month, and UAE officials have been working to head off the designation, which could adversely affect investment.
The UAE has already taken several steps to dilute its reputation as a tax haven for both businesses and individuals. It introduced a 5% value-added tax in 2018 and later imposed a 5% customs duty on imports. It already taxes banks and insurance companies operating outside of the country’s vast network of free zones as much as 20% on their profits. The oil and gas sector of OPEC’s third-biggest producer is also taxed under a separate program.
“It was just a matter of time before the UAE imposed corporate tax in line with some other Gulf Cooperation Council countries,” said Izzat Dajani, a former senior banker at Goldman Sachs and Citigroup who’s now chief executive of Dubai-based IMCapital Partners Ltd. “The levels announced of 9% base are quite reasonable in international standards.”
Eyes on Saudi
The move comes despite rising competition from neighboring Saudi Arabia, which has been offering new incentives and piling pressure on international firms to shift their Middle East headquarters to the kingdom.
Even as the gradual introduction of taxes has made the UAE a more expensive place to live than it once was, the government took several significant steps during the pandemic to encourage the foreigners who make up most of its population to stay for the long haul. In 2020, the government abolished the need for companies to have Emirati shareholders — a major shake-up of foreign-ownership laws — and last year it unveiled plans to offer citizenship to a select group of foreigners.
This month, the UAE switched to a Saturday-Sunday weekend to synchronize better with the global economy. It wasn’t immediately clear whether the latest measures would prompt companies to relocate though analysts and businesspeople said that while the new taxes would affect net profits they remained competitive regionally and internationally.
“I don’t think it will much affect UAE’s ability to attract investments. First, companies in free zones will continue to enjoy their tax benefits, hence are shielded from the decision,” said Mohamed Abu Basha, head of macroeconomic research at investment bank EFG Hermes in Cairo. “Second, most other Gulf countries already impose a corporate income tax on multinationals operating in the economy, including 20% in Saudi, 15% in Oman and 10% Qatar.”
Thousands of Companies
However, the relatively low tax threshold of 375,000 dirhams ($102,100), will require thousands of companies to pay tax for the first time, according to Tarek Fadlallah, head of Nomura Asset Management’s Middle East unit.https://d8be2387563e23fa928e1ff7d84f3b30.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
“The introduction of corporate tax will apply from June 2023 so there is an adjustment period for listed companies to prepare,” he said. “But this will necessarily impact net profit forecasts going forward.”
(Updates throughout with quotes, background.)
–With assistance from Lin Noueihed, Adveith Nair and Mirette Magdy.
SOURCE: BLOOMBERG /Al Jazeera
