Corporate tax to help cut UAE’s fiscal breakeven oil price

Strong growth in Dubai continues to be driven by tourism and hospitality


Issac John

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Photo for illustrative purposes only. - KT file
Photo for illustrative purposes only. - KT file

Published: Mon 1 May 2023, 2:07 PM

Last updated: Mon 1 May 2023, 3:42 PM

The new corporate income tax that will be effective from June 1, 2023 will help boost the UAE’s non-hydrocarbon revenues in 2024 and 2025, enabling the second largest Arab economy to sustain the fiscal breakeven oil price at below $65 per barrel despite the oil output cut, the Institute of International Finance (IIF) said as it revised down the GCC region’s overall real GDP growth forecast.

Garbis Iradian, Mena chief economist at the IIF, said non-hydrocarbon real growth in the UAE will remain strong at 4.8 per cent as the tighter global financial conditions will have a limited impact on economic activity in the Emirates.

The IIF estimated that while the average oil prices would decline from $100 a barrel in 2022 to $85 in 2023 and $80 in 2024, oil production cuts will drag down overall GCC’s real GDP growth to 2.2 per cent in 2023 from 2.7 per cent forecast earlier.

According to Moody's, the fiscal balance of the UAE will remain in surplus under an average oil price of $75 per barrel in 2023. Estimates by analysts show that the fiscal breakeven oil price for the UAE — after factoring in the higher oil output and prices maintained in the first half of the year — dropped to $60.4 per barrel in 2022 from $68 per barrel in 2020.

Under the corporate tax regime, several businesses in the UAE, excluding small firms that don’t meet the income threshold of Dh375,000 per annum, are expected to pay a corporate tax of 9.0 per cent starting next year. Companies will be subject to the new tax from the beginning of their first financial year that starts on or after June 1, 2023.

The corporate tax will not be levied on salaries or personal income from employment, as well as earnings made from bank deposits, savings schemes and real estate investments made by individuals. No tax will be collected from businesses that don’t meet the income threshold of Dh375, 000 to support small businesses and start-ups.

Starting May 1, the UAE is expected to cut crude oil production by about 150,000 barrels per day (bpd) in the context of the recent Opec+ agreement. This would lead to a decline in the average oil output from 3.32 milion bpd in 2022 to 3.21 million bpd in 2023, the IIF said. “As a result, overall growth will moderate from 8.8 per cent in 2022 to 2.9 per cent this year,” said Iradian.

However, the strong growth in Dubai continues to be driven by tourism and hospitality. The inflation rate will moderate to 2.4 per cent in 2023 supported by lower global commodity prices and manufacturing unit value.

The IIF economist said the UAE may pursue a modest expansionary fiscal policy stance in the coming years, if needed, given its large financial buffers and spare capacity. The consolidated budget for the UAE registered a large surplus of 10.7 per cent of GDP, up from 4.2 per cent in 2021. Revenues increased by 29 per cent, driven by higher oil prices and a large increase in revenues from VAT. Meanwhile, spending declined by 1.0 per cent following the large increase in 2021. The general government debt-to GDP ratio continued its decline to 20 per cent of GDP in 2022, Iradian said.

“We expect the fiscal surplus in 2023 to narrow to 6.7 per cent of GDP on account of lower oil revenues. We see further improvement in the banking sector. Banks remain adequately capitalised with a 16.1 per cent Tier 1 ratio, the eligible liquid asset ratio for national banks has increased, and the loan-to-deposit ratio edged down to 86 per cent in December 2022. Net foreign assets of commercial banks more than doubled to $104 billion at end-2022. We expect deposits and credit to the economy to grow by around 8.0 per cent in 2023. However, NPLs remain relatively high at 7.3 per cent,” said Iradian.

The IIF noted that the UAE authorities have set clear goals for encouraging diversified and knowledge-based growth to achieve a competitive knowledge-driven economy and are implementing a broad range of policies to achieve their goals. Such reforms will increase productivity growth and boost the supply of highly qualified labor, which is needed to raise potential growth.

The progress made in digital transformation has opened opportunities for small and medium enterprises (SMEs) and offered the potential of enhanced productivity. The UAE remains the main regional destination of FDI inflows, attracting about $22 billion in 2022 (4.4 per cent of GDP, one of the highest among emerging economies). Such elevated FDI is explained by the friendly business environment, excellent infrastructure, and relatively diversified economy by regional standards, said Iradian.

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