The UAE is introducing corporate income tax on Thursday, a step that will not only help the Arab world’s second-largest economy broaden its revenue base, but will also help the country achieve its long and short-term economic growth objectives.
The move will increase the country's taxation scope beyond VAT and different custom duties and complements government efforts to diversify its economy from oil, analysts say.
“It is a very positive development and shows continued focus on diversifying various areas of the economy, including revenue base of the government,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Measures such as the introduction of VAT in 2018 and corporate tax law last year were aimed at “strengthening the near and medium-term fiscal framework”, she added.
Ushering in the corporate tax regime is another step in that direction by the UAE, which has laid out its next 50-year growth agenda.
The country plans to double its economy to Dh3 trillion ($816.8 billion) by 2031, as it continues to recover from the coronavirus pandemic-driven slowdown and maintains a robust growth momentum.
“The UAE is moving ahead with various economic reforms at the same time and that is building the economic resilience,” Ms Malik said.
“The trade agreements, the focus on urban development, renewable energy and the strengthening of the fiscal framework are all progressing concurrently.”
In January 2022, the UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent, which comes into effect for businesses whose financial year starts on or after June 1 this year.
In December, the country issued the federal corporate tax law, bringing the income of companies exceeding Dh375,000 in the corporate tax bracket.
Taxable profits below that threshold will be subject to a zero per cent rate. No corporate tax will apply on salaries or other personal income from employment – be it in the government, semi-governmental or private sector, the Ministry of Finance said at the time.
The UAE's corporate tax regime is based on a self-assessment principle, which means businesses are required to ensure that the documents submitted to the Federal Tax Authority are correct and comply with the law.
The new tax regime allows a generous compliance period, for example, businesses with a financial year starting on June 1, 2023, and ending on May 31, 2024, will have until February 28, 2025, to file their tax returns and make payments.
The introduction of the tax is part of the UAE’s efforts to add new revenue streams and allow the government to bolster its fiscal buffers, Khatija Haque, chief economist, and Jeanne Claire Walters, senior economist at Emirates NBD said in a research report in February.
Emirates NBD expects hydrocarbons to remain an “invaluable source” of revenue for the government for many years to come. However, a declining in oil price in 2020 on the back of the pandemic underlined the need for a more broad-based approach.
“Following on from VAT, it is an important step towards broadening the tax base. This will help insulate against swings on oil prices and give some additional solidity to revenues," Scott Livermore, chief economist at Oxford Economics Middle East, said.
The new tax will help the UAE increase the share of non-oil revenue to the government's overall budget revenue and will “increase the tax revenue-to-gross domestic product ratio – currently estimated at around 15 per cent of GDP", said Aathira Prasad director of macroeconomics at Nasser Saidi & Associates.
“This will also provide added support to the UAE's efforts towards greater fiscal consolidation.”
The new tax “by itself would be around potentially 2 per cent of GDP”, however, that figure has to be “taken in conjunction with various other factors”, Ms Malik of ADCB said.
“It also boosts transparency of the economy and helps to integrate the UAE with the OECD [Organisation for Economic Co-operation and Development] and G20 tax agreements,” she added.
The introduction of corporate tax at a headline rate of 9 per cent is one of the lowest globally. The average global corporate tax rate is currently in the region of 23 per cent, after having declined steadily from average rates of about 40 per cent in the 1980s, Emirates NBD said.
Only a limited number of jurisdictions across the world still maintain a zero per cent corporate tax rate.
The rate is also one of the lowest among GCC member states, although the coverage in the UAE is significantly broader than other members, the report said.
The UAE plans to keep the rate of corporate tax unchanged for the foreseeable future, undersecretary of the Ministry of Finance Younis Al Khouri told The National in January.
Despite the introduction of the new tax regime, the UAE will still have a "very favourable tax environment on an international competitive basis as the overall business environment remains strong", Ms Malik said.
“For the corporates here they will have to adjust, but in the long term it will strengthen macroeconomic stability.”
Last month, the ministry clarified that small businesses in the UAE with revenue of Dh3 million or less could benefit from a corporate tax relief programme.
Last week, the ministry issued three new decisions that explain further exemptions and preparation of financial statements before the introduction of corporate tax.
The first ministerial decision clarified the basis of preparing financial statements and the second dealt with the exemptions of private regulated pension funds and social security funds.
The ministry also addressed the issue of determining conditions for claiming the participation exemption in the third decision.
“Taken in isolation, any tax can be damaging to growth”, however, the UAE is implementing the corporate tax “against a raft of business friendly reforms and a really healthy economy”, Mr Livermore said.
“These factors will continue to mean that the UAE is an attractive place for businesses.”
