Is UAE corporate tax the thin end of the wedge?
Many people, myself included, do not like tax. In fact, for many foreign workers in the Gulf region, that dislike is one of the big reasons we are here in the first place.
The thrill of seeing, for the first time, the bottom line of your payslip the same as the top line, after years of wincing at the 30 percent-plus hit for many in the West, cannot be overestimated.
This does not make us some kind of libertarian, anti-government movement opposed in principle to state funding or the provision of public services. It is a belief that individuals will often make better decisions than governments about spending on the future of themselves and their families.
The Gulf offered an economic model that seemed an excellent compromise: No or low-tax regimes for individuals and businesses, while communal or public services — schools, hospitals, roads, etc. — were paid for individually, according to use, or jointly via government-imposed fees and levies.
Of course, some personal income ended up going to governments, but there was always the option: If you did not want or could not afford the public service, do not use it.
That same reasoning — can’t pay, won’t pay — was also used when the UAE and other countries introduced VAT in 2019. If the extra 5 percent made a difference in your discretionary spending, don’t spend at all.
With the announcement of plans by the UAE to introduce a flat 9 percent corporate tax from next year, that successful economic model is being challenged. For the first time, all businesses — foreign or Emirati — will have to pay that proportion of their profits to the federal government.
It is important to highlight the limited nature of the move. First, and probably most significantly, it is not income tax on individual salaries and the UAE authorities have been at pains to point out there are no plans to introduce such a scheme.
In theory, it would be entirely possible under the new arrangement to set up a company in the UAE for a few thousand dollars and take millions out in personal salary, unaffected by the new corporate tax levy.
Second, it is a relatively modest imposition. When global financial authorities agreed on a universal tax rate last year, it was set at about 15 percent. If that does become the global norm, the UAE would remain very competitive.
Third, as UAE authorities were quick to point out, it would be gradually accompanied by a reduction in the fees and levies for government services, in theory balancing out the overall hit to corporations.
Finally, the new tax arrangements would not apply in the free zones, which employ many foreign workers and which have been the driving force behind the UAE’s rapid economic growth over the past two decades.
So, for all these reasons, businesses in the UAE will probably notice little difference to their bottom lines when the new corporate tax regime is in place. But as a straw in the wind, it has a deeper significance.
Other countries in the Gulf, which already have varying but limited levels of corporate and other taxes, will be watching to see how the experiment goes.
The UAE has been under some pressure to “normalize” its fiscal regime, to ensure greater transparency and “prevent harmful tax practices,” as the financial authorities in the UAE acknowledged when they made the tax announcement.
Most of those who have criticized the Emirates’ tax regime are from the high tax-and-spend countries who are very happy to see their systems extended to a part of the world that has thrived under a different kind of economic model.
Some see the 9 percent proposal as the thin end of a wedge that will eventually see deployed the full array of weapons the taxman has at his disposal, including income tax. If that were to happen, it would undoubtedly impact the attractiveness of the region as a place to live and work.
Other countries in the Gulf, which already have varying but limited levels of corporate and other taxes, will be watching to see how the UAE experiment goes.
Will the benefits for the UAE — in terms of government revenues — outweigh the hit to the country’s attraction as a place to live and work?
And is it worth scrapping the economic model that has served the UAE so well for 50 years in exchange for the approval of the international financial authorities?
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai