New tax regime a win-win game for public and private sectors

Reuters
Reuters

Move aimed at diversifying national income and reducing dependence on petrodollars.



by

Michael Gomes

Published: Tue 1 Feb 2022, 11:49 PM

The UAE’s decision to levy a nine per cent tax on corporates from June 2023 marks a tectonic shift in the country’s policy towards its taxation regime, a move aimed at diversifying its national income and reducing dependence on the petrodollars.

It’s one of the most significant fiscal reforms taken in the last few years to broaden the revenue base for the federal government and, most likely, for individual emirates, in line with the current approach to distributing value-added tax (VAT) receipts.

This represents a new source of revenue in addition to licence fees, service fees and land sales. As per the OECD guidance on minimum tax, global economies will collect over $150 billion in additional tax revenue. The UAE will have over $25 billion from tax revenue from the corporate tax.

Being one of the latest countries to introduce corporate income tax and that too at a much lower rate than most of the countries around the world, this step reflects the UAE government’s two-pronged approach of boosting revenues as well as supporting small and medium businesses because there will be no tax on profits up to Dh375,000 which covers mainly the SME segment.

Interestingly, 17 countries reduced their corporate income tax rate last year to bring in line with the global average of around 23 per cent. Maintaining its investor-friendly approach, the government will introduce corporate income tax at one of the lowest rates worldwide.

This will also ensure that the Emirates is feasible to do business for most of the existing companies and also woo more foreign firms. By introducing a zero tax rate for startups, SMEs and free zone companies and nine per cent for large enterprises, the UAE successfully maintains the right balance, showing the government’s commitment towards investor protection and, at the same time, focus on a sustainable growth of the economy.

This new tax regime will also ensure businesses operate with correct governance and tax structures that comply with the best international standards and practices. As Younis Haji Al Khoori, Undersecretary at the Ministry of Finance, stated that with the introduction of corporate tax, “the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices.”

The new tax regime exhibits the government’s efforts to ensure that the UAE complies with global tax developments and still remains competitive against its regional and global peers. The corporate income tax is another milestone step towards making the UAE a more matured economy with the least burden on the private sector entities’ balance sheets. Hence, a win-win game for the government and the private sector.


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