Experts intervene as UAE introduces federal corporate tax: report – Business & Finance
Moving away from the levy exemption regime, the United Arab Emirates (UAE) will for the first time introduce a federal corporate tax on business profits effective June 1, 2023.
The historic development was announced by the UAE Ministry of Finance on Monday, which maintained a low base to keep it attractive for business.
The UAE plans to introduce a 9% federal corporate income tax on taxable income above AED 375,000 for the first time next year.
“With a standard statutory tax rate of 9% and a tax rate of 0% for taxable profits up to AED 375,000 to support small businesses and startups, the UAE corporate tax regime will be among the most competitive in the world,” the UAE’s UAE Ministry said. Finance had announced it Monday in a press release.
The move comes as the oil producer continues to diversify its revenue sources away from oil revenues.
In a report by BloombergMohamed Abu Basha, head of macroeconomic research at investment bank EFG Hermes, said the measure will not affect the UAE’s ability to attract investment.
“First, companies in the free zones will continue to benefit from their tax advantages, and are therefore immune from the decision,” he said. “Second, most other Gulf countries already impose corporate tax on multinationals operating in the economy, including 20% in Saudi, 15% in Oman and 10% in Qatar.”
However, the upcoming tax is expected to hit some sectors of the economy more than others, said Mohammed Ali Yasin, chief strategy officer of Al Dhabi Capital Ltd, according to the report.
How Dubai’s tax laws attract both business and talent
“Telecoms and service sector companies already pay fees, some as high as 20% as in the case of hotels. For some companies, a 9% tax will take them from profitability to loss, reducing investor appetite and driving down share prices. Many will be looking to see if royalties or fees could be changed as well.
However, implementing the tax rate was an expected move, said David Daly, partner at Gulf Tax Accounting Groups, particularly for the corporate sector.
“The problem I see is the implementation for SMEs. What is stopping business owners from raising wages to avoid paying tax. Usually many of these businesses are controlled by few shareholders,” Daly said.
Meanwhile, others are measuring the impact of future taxation.
“I am happy to see that SMEs and small businesses will most likely be exempted from the corporate tax burden,” said Izzat Dajani, managing director of Dubai-based IMCapital Partners Ltd.
“Companies and financial institutions will have to start charging a corporation tax that will affect their net profits. Therefore, a leaner workforce as well as more efficient operations could be put in place to offset the tax impact on profitability,” Dajani said.
While others have expressed concern that the upcoming tax regime could push investors away.
“Upcoming regulatory changes could cause concern for companies operating here,” said Aafreen Shah, managing director of Dubai-based Corporate Advisory. “Even so, with huge investments in infrastructure and changes in immigration policy, this is a natural progression for the country’s growth, in line with best practice globally.”