Free zones to crimp fiscal benefits of UAE’s corporate tax: Moody’s

The fiscal benefits of UAE’s new corporate tax will be constrained by the large role of free zones, which are exempt from the tax, on its non-oil economy, Moody’s Investors Service said on Tuesday.

The rating agency said UAE’s introduction of the corporate income tax is the most significant fiscal reform since 2018 when it introduced value-added tax (VAT).

“The new tax will broaden the revenue base for the federal government and, most likely, also for the individual emirates, in line with the current approach to distributing VAT receipts—representing a new source of revenue in additional to license fees, service fees and volatile land sales. Nevertheless, the fiscal benefit will be constrained by the large role of free zones in the UAE’s non-oil economy, where the new tax will not apply,” according to Moody’s Investors Service.

The UAE will introduce its first tax on business profits, a levy of nine per cent in June 2023. The UAE and other Gulf oil-producing countries are seeking ways to make their economies less reliant on oil by diversifying their revenue resources.

Analysts and tax experts are estimated that new corporate tax will be able to generate $25 billion additional revenues annually. They said the corporate tax regime expresses the government’s efforts to ensure UAE complies with the global tax developments and still be competitive.

Credit negative for domestic UAE companies

Moody’s said that, while broadly credit negative for domestic UAE companies, the tax’s overall impact on large corporates would be muted because of the free zones as well other potential offsetting levers such as increasing prices, optimising cost structures and cutting dividends.

“The introduction of the nine per cent federal corporate tax is broadly credit negative for domestic UAE corporates because it will reduce their operating cash flows. However, the overall impact on the credit profile of large corporates will be muted because they have several offsetting levers, such as increasing product or service prices, optimising their cost structure and reducing shareholder dividends,” the rating agency said.

The UAE is a magnet for the globe’s ultra-rich, and its share markets fell on Tuesday on the tax announcement. In the UAE’s free zones, foreign companies can operate under light regulation and foreign investors take 100 per cent ownership in companies.

Most other Gulf nations levy corporate taxes on foreign companies but only Oman taxes domestic ones too.

“UAE’s introduction of the corporate income tax is the most significant fiscal reform since 2018. Only Oman in the GCC currently has a corporate profit tax that applies to businesses owned by citizens and foreigners alike — most other GCC nations imposing corporate taxes on foreign companies. Only Bahrain not taxing any foreign companies,” the rting agency said.

— muzaffarrizvi@khaleejtimes.com