The UAE economy remains robust, surpassing expectations as the World Bank projects a remarkable growth rate of 4.1 percent this year, even amid challenging business conditions in key global markets. In this interview with His Excellency Younis Haji Al Khoori, Undersecretary of the Ministry of Finance, UAE, Economy Middle East looks at the Ministry’s latest initiatives aimed at maintaining the UAE’s competitive edge, sustaining its momentum toward sustainable growth, and actively contributing to the fulfilment of the nation’s development goals and aspirations.
The World Bank estimates a 4.1 percent growth for the UAE economy this year. Do you share a similar outlook, or do you think a better performance can be achieved?
The UAE enjoys a positive economic outlook, as evidenced by a strong and growing economy with low unemployment levels, increasing wages, and increasing business activity. Our economy reflected a strong performance in the oil and non-oil sectors in 2022, as it expanded by 7.6 percent.
For 2023, the Central Bank of the UAE projects a growth rate of 3.9 percent for the country’s economy. This includes an estimated growth of 4.2 percent in non-oil GDP and 3 percent in oil GDP, considering the anticipated decrease in oil production in line with the OPEC+ agreements. However, there is always uncertainty when it comes to economic projections, due to the complexity of the systems involved and the challenges in accurately predicting them. Various factors, such as international financial conditions and the state of the global supply chain, can potentially impact these projections.
UAE firms continue to show forward-looking expectations, as reflected by the increase of the Composite Business Confidence Index (BCI) (Northern Emirates) from 109.8 points in Q3 of 2022 to 119.4 points in Q4 of 2022.
Domestic consumption, one of the determinants of the growth and success of the economy, demonstrated remarkable performance in the fourth quarter of 2022. This impressive outcome was fueled by a substantial surge in employment rates, with the three-month moving average of individuals employed in the UAE and private sector wages experiencing a double-digit year-on-year increase, surpassing their pre-pandemic levels.
The UAE has always been a top destination for foreign direct investment and expatriate talent. Will the 9 percent corporate tax to be applied beginning June 2023 have an impact?
Given the UAE’s status as a prominent international business and financial hub, the implementation of a comprehensive corporate income tax system would enhance the ease of conducting international business for UAE companies.
By introducing a corporate tax regime in the UAE that adheres to the latest international tax practices, businesses would be safeguarded against punitive taxation in foreign countries and ensure they receive relief from foreign taxation under double taxation agreements. This would contribute to attracting more businesses to the UAE, thanks to its secure and internationally compliant business environment.
The UAE government is fully dedicated to establishing a tax regime that includes the introduction of a Corporate Tax system. This commitment reaffirms the UAE’s resolve to uphold international standards for tax transparency and prevent harmful tax practices.
What is the significance of Agreements on Mutual Promotion and Protection of Investments and Avoidance of Double Taxation Agreements?
Let’s begin by discussing the importance of Avoidance of Double Taxation. Some countries impose taxes of the same nature on the same individual and goods, resulting in double taxation. This practice has had detrimental effects on the exchange of goods, services, and international mutual investments.
The UAE recognizes the importance of eliminating double taxation. Consequently, the Ministry of Finance has diligently followed international standards set forth by the G20 and the Organization for Economic Co-operation and Development. These standards address harmful practices, as well as the exchange of information and the misuse of agreements to gain advantages for third parties or to establish non-economic entities within the state.
In line with this commitment, Cabinet Resolution No. 3/196 of 1989 was enacted, empowering the Ministry of Finance to engage in negotiations and sign comprehensive bilateral agreements aimed at avoiding double taxation. As of now, the UAE has successfully concluded 142 such agreements.
Double taxation avoidance agreements serve multiple purposes in the UAE. They promote development goals, diversify national income sources, and eliminate instances of double taxation, including additional and indirect taxes, as well as fiscal evasion. These agreements address challenges related to cross-border trade and investment, offering comprehensive protection against direct and indirect forms of double taxation. Their objective is to facilitate free trade and investment flow, attract larger investments, and support development goals while considering evolving the global economy, financial sectors, and new financial instruments like transfer pricing mechanisms. Additionally, these agreements encourage the exchange of goods, services, and capital movements.
Secondly, the Protection and Promotion of Investment Agreements are aligned with the UAE’s efforts to strengthen its global standing by showcasing the favorable investment environment available within the UAE at local, regional, and international levels. Consistent with our wise leadership’s vision to foster sustainable development and establish an investment ecosystem that appeals to both the public and private sectors, these agreements also seek to fortify relationships and cultivate strategic alliances with Arab and foreign nations.
The Cabinet Resolution No. 382/1 of 1989 was issued to authorize the Ministry of Finance to negotiate and sign bilateral agreements with Arab and foreign countries to safeguard and promote investments. To date, a total of 110 agreements have been reached, all aimed at shielding investments from non-commercial risks such as nationalization, expropriation, sequestration, and freezing. They facilitate the establishment and licensing of investments, guarantee the unrestricted transfer of profits and other returns in a freely convertible currency, ensure equal treatment as per the laws enforced in the host country, and extend the most favored national treatment concerning the management, maintenance, and expansion of investments.
The agreements ensure fair and prompt compensation to the investor in the event of expropriation of their investment for the public interest, in accordance with the law and without any discrimination This compensation should correspond to the fair market value of the investment prior to the expropriation. Furthermore, these agreements establish the procedures for resolving disputes between the investor and the State, allowing for amicable solutions, recourse to local courts, or resorting to international arbitration.
What steps has the Ministry of Finance taken to secure green financing instruments and are there measures to motivate investors to adopt this type of financing?
The UAE was the first Gulf country to commit to net-zero emissions. In 2021, the UAE launched its Net Zero 2050 Strategic Initiative, which aims to promote investments in clean and renewable energy sources to achieve net-zero by 2050. Our commitment to net neutrality entails the provision of climate finance, building on an effective sustainable finance ecosystem in the UAE.
On that note, the UAE has experienced remarkable growth in the issuance of green and sustainable finance in the past couple of years. The UAE’s ESG bonds market for green sukuk, bonds and loans is also thriving, with a valuation that nearly reached $17 billion in 2021.
The Ministry of Finance plays a central role in shaping the sustainable finance landscape in the UAE. Internationally, the ministry is leading the UAE’s contribution to global sustainable finance policy discussions through G20 and other global multilateral forums. On a local level, the ministry is participating in the UAE Sustainable Finance Working Group, which aims to develop the local sustainable finance ecosystem. The group is also developing a UAE Sustainable Finance governance model, as well as disclosure requirements and taxonomy.
Additionally, we are working closely with the UAE COP28 Team to explore climate finance opportunities and challenges in order to inform them of local and international efforts and objectives in this regard.
Innovation is a valued practice in the UAE, and highly encouraged by its leaders. Can you share the latest innovation initiatives of the Ministry of Finance?
Innovation is deeply ingrained in the UAE’s DNA, and as the Ministry of Finance, we are committed to continuously fostering a culture of innovation within our organizational work environment. Over the past decades, our ministry has successfully embraced a fully digitalized approach to providing services, adhering to the highest international standards. This reaffirms our position as a global leader in government financial work and contributes to elevating the customer experience while driving economic development in the UAE.
To further enhance accessibility to our services, we have introduced the Digital Service Guide – a user-friendly and interactive digital platform. Its purpose is to simplify the process of accessing information, submitting applications and obtaining services for individuals and businesses.
Moreover, the Mohammed bin Rashid Innovation Fund is a groundbreaking initiative by the Ministry of Finance, launched under the patronage of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai. MBRIF aims to empower the innovation ecosystem and support innovators in making a positive impact on the UAE’s transition to a knowledge-based economy. Through this initiative, we aspire to achieve prosperity and sustainability for our nation. MBRIF has meticulously developed two comprehensive programs tailored to meet the unique needs of every innovator, with the invaluable support of our like-minded network of partners.
What are the ministry’s plans to support entrepreneurs, as well as startups and small businesses?
Supporting the growth of SMEs is a priority for the Ministry of Finance. The thriving SME sector in the UAE plays a vital role in driving sustainable development, unlocking the economy’s potential, and fostering growth, diversity, flexibility and innovation.
In line with our mission to make the UAE a global business hub and a promising destination for SMEs, the Ministry of Finance introduced advanced digital solutions to create a business-friendly and encouraging environment for business owners and entrepreneurs.
Furthermore, we offer various forms of sponsorship that cover all stages of establishing and developing thriving businesses and promising projects. The ministry extends support and sponsorship for innovative businesses and entrepreneurs, offering modern environment, transparent procedures, smart services, digital platforms, open data and futuristic models.
SME owners and entrepreneurs can also register their companies in the Federal Supplier Register to apply for all government bids and tenders proposed by federal government entities. Moreover, in line with our mission to foster an innovation-driven environment and shape the future of the UAE economy, we facilitate affordable financing and streamlined loan processes through government-backed guarantees for unique and innovative ideas from companies and SMEs.
We also provide incentive packages for companies that include a 50 percent discount on first-time registration in the Federal Supplier Register, free registration renewals, exemption of SMEs from registration fees for the first two years from the establishment date, a 10 percent price preference to SMEs and a free tender booklet.
In addition to a 0 percent Corporate Tax rate for taxable income up to and including AED375,000, small businesses with revenue below a certain threshold can claim “small business relief,” allowing them to be treated as having no taxable income during the relevant Tax Period. They may also be subject to simplified compliance obligations. To claim small business relief, a formal election must be made to the FTA.
Recently, the Ministry of Finance issued Ministerial Decision No. 73 of 2023 on “Small Business Relief,” aimed at supporting startups and other small or micro businesses by reducing their Corporate Tax burden and compliance costs. This decision specifies the revenue threshold and conditions for eligible taxable persons to elect for small business relief. It also provides clarity on the treatment of carried-forward Tax Losses and disallows Net Interest Expenditure under the “Small Business Relief’ scheme.
According to the Ministerial Decision on “Small Business Relief,” resident taxable persons can claim this relief if their revenue in the relevant tax period and previous tax periods is below AED3 million for each tax period. However, once a taxable person exceeds the AED3 million revenue threshold in any tax period, the “Small Business Relief” will no longer be available.
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