Will corporate tax hit UAE businesses, consumers?

From next year, the UAE will charge a 9 percent tax on corporate profits. For international companies that would relocate to the Emirates for its tax-free policies, this will be a challenge.

The new tax comes at a time when speculations are rife that other Gulf countries might also impose taxes on economic sectors to diversify the sources of revenue away from the oil sector.

Experts believe that the tax, by and large, will attract international investments and prevent harmful economic activities besides generating revenue.

Who is eligible for corporate tax

Two years ago, following the implementation of the value-added tax, work began on taxes on public shareholding firms in Dubai. 

Expectations were raised at the time for the introduction of legislation governing corporate taxes, particularly in light of their relevance to the sustainability of economic income, and to stimulate and encourage an environment that will boost the economy’s competitiveness, better than it is today in terms of fees imposed.

The corporate tax system that will be implemented in the UAE from 1 June 2023, is predicted to be one of the most competitive in the world, as it will be levied at an introductory rate of 9 percent and 0 percent on taxable profits of up to 375,000 AED ($102K) to benefit start-ups and small firms.

In contrast, corporate tax will not be levied on personal income earned from employment or other personal income earned through real estate or other investment activities. 

In a nutshell, the 9 percent tax will not be imposed on any income that does not arise from business or any other form of authorized commercial activity.

Furthermore, the UAE will not withhold tax on domestic and international payments (i.e., cross-border transfers) and foreign investors who do not conduct business in the country. 

In addition, the petroleum sector will be exempt from the UAE’s new business tax, as it is subject to its local legislation regulating taxes and fees.

Corporate tax will be determined on the business’s profits according to internationally accepted accounting standards. The taxable income will be the business’s net accounting profit, adjusted for certain items as specified by the country’s corporation tax law. Accounting net profit is the amount declared in a business’s financial statements prepared in line with generally accepted accounting principles.

Corporate taxes worldwide

Corporate tax rates in nations such as Germany and Japan exceed 30 percent. In Canada and China, companies pay 27 percent and 25 percent, respectively. At the same time, taxes in some Scandinavian countries reach 45 percent.

Since the 9 percent tax is competitive—Egypt, Jordan, Kuwait, Lebanon, Oman, Saudi Arabia, and Qatar charge between 10 and 35 percent—the UAE will keep attracting international investors and maintain its role in the region as a business hub for global players, says Hanan Abboud, Partner Merger and Acquisitions and International Tax at Pricewaterhouse Coopers.

In an interview with TRENDS, Abboud said the introduction of a corporate tax would enable the UAE to adopt and implement the OECD BEPS 2.0 measures to address the tax challenges arising from the digitalization of the global economy, and the introduction of a global minimum tax rate for large multinationals.

Consumers may take a hit

Anurag Chaturvedi, the Managing Partner at Chartered House Tax Consultancy, believes that consumers face the prospect of increased inflation and a higher cost of living due to the corporate income tax.

The UAE is likely to generate approximately AED 25 bn ($6.8 bn) in revenue.

On the other hand, Chaturvedi said, the UAE corporate tax will bring transparency to avoid harmful practices. The tax is also in line with the OECD mandate for implementation of global minimum tax, he added. 

“The lowest tax rate at 9 percent will put the UAE ahead globally to attract unicorns to make UAE their base. The next lowest tax rate is Ireland which levies corporate tax at 12 percent. Within GCC, UAE proposed the lowest rate of tax with added advantages,” Chaturvedi told TRENDS.

Investments may increase

Despite apprehensions, many believe UAE could see more foreign investments and multinational companies moving their headquarters to the Emirates.

Chaturvedi said the UAE economy will benefit from the implementation of corporate income tax as it entails pursuing the OECD’s two-pillar approach to a global minimum tax, which mandates levying income tax on the business profits generated in a non-tax regime to a country where the company is headquartered at the rate of tax prevailing in that country.

Also, not having a single personal tax will continue to maintain UAE’s status as a destination for global investors who plan to make it a base for building wealth.