As the implementation of the UAE’s newly announced corporate tax (CT) fast approaches, set to take effect on June 1st, 2023 with a headline rate of 9%, the business community is left grappling with a multitude of questions and concerns. Despite the government’s assertion that the tax regime embodies “best practices in international taxation” and offers several exemptions, the reality of additional operational costs and the need for businesses to thoroughly assess their compliance still looms large.
To shed light on the topic and delve deeper into what the tax really means, we spoke with Dr. Nabeel Ahmed, Partner DVS Management Consultancy. In a captivating interview, Dr. Ahmed offers insights into the implications of the CT for businesses and provides clarity on what the future may hold.
What are the Tax’s positive implications on the UAE national economy?
One of the outcomes of CT is UAE’s commitment to adhere to international best practices. With the coming of CT, the UAE would be able to shrug off the tax haven status and demonstrate confidence among regulators across the world as a well-regulated Jurisdiction. UAE has gradually brought in significant tax mechanisms, starting with the implementation of Value Added Tax (VAT) in January 2018, and now with the coming of CT, UAE has taken concrete measures, with a view to streamline its tax system, and align itself with international markets and diversify its revenue streams.
The introduction of economic substance rules (ESR), as well as Country-by-Country Reporting (CbCR) regulations in April 2019, were steps to acclimatize businesses to a possible tax regime which is now a reality.
Do you foresee an eventual lowering of the AED 375,000 amount where the 9% applies? Should MSMEs be prepared for that potential eventuality?
The reason why a threshold of AED 375,000 was decided by the UAE Government was to keep the environment conducive for SMEs and start-ups. It is very unlikely for the threshold to be lowered.
Does this pave the way for applying an income tax on individual earnings salary and other employment income?
In fact, as recently as Feb 2022, The Minister of State for Foreign Trade, Thani Al Zeyoudi, made a statement that the UAE will not introduce employee income tax now. So, any speculation in this regard should be put to rest. There is no need to panic or fear. UAE has been a consultative regime with respect to stakeholders. Sufficient time will be given, even if something is imposed in the future.
Should the UAE look at taxing bank deposits, savings schemes, dividends, capital gains, securities, and other investment returns, in order to diversify tax revenues?
To answer the ‘should’ question would be an exercise in speculation. Whether a government ought to maximize tax revenue is contingent upon other economic demands like spurring economic growth. If Singapore is taken as an example, which is also a business hub, then income from other sources is taxed while capital gains are not. If UAE were to follow suit, then perhaps income from other sources could get taxed. Ergo, going by UAE’s history of taxation, regulators have always balanced competing for demands of tax buoyancy and economic growth pretty well and the same is expected to continue.
How about multinationals? Shouldn’t they have a different tax rate than 9%?
Currently, there isn’t a different slab for Multinational Enterprises (“MNEs”) as per the Corporate Tax law. However, UAE is a member of the Inclusive Framework (“IF”) on Base Erosion and Profit Shifting (“BEPS”) and, as reports suggest, it is committed to addressing the challenges faced by tax jurisdictions internationally. UAE was also among the signatories of the Two Pillar package driven by the Organization for Economic Co-operation and Development (OECD), where signatories to the deal agreed, either to implement or increase the effective corporate tax to 15% from 2023 ensuring MNEs be subject to a minimum tax slab. This would specifically apply to MNEs that have consolidated global revenues in excess of EUR 750 million (AED 3.15 billion) in at least two of the four Fiscal Years immediately preceding the financial year.
The introduction of a CT regime helps to provide the UAE with a framework to adopt the Pillar Two rules. Until adoption of such rules, businesses across the board in the UAE will be subject to the regular UAE CT regime. A watch needs to be kept on the Ministry of Finance (“MOF”) website for further information on the implementation of the Pillar Two rules in the tax regime.
The UAE CT looks too simplistic compared to its European or US counterparts. When will we have an “Uncle Sam” tax version in the UAE, if ever?
The architecture of tax statutes varies depending upon the politico-economic goals of a country. It is unwise to have a one size fits all model. Also, European and US counterparts have a demography and tax base that is diversified in terms of business and the nature of businesses, which explains the nature of their tax regimes. Simplicity in terms of structure and procedure is a desirable virtue, that the UAE has incorporated. However, the UAE continues to leverage innovative strategies to boost economic growth and diversification and with time, changes in its tax regime could be expected to cater to the challenges digitization of economies pose.
For more on the UAE corporate tax, click here