Interest in United Arab Emirates taxation has been aroused again by the under-secretary at the Ministry of Finance, Younis Haji Al Khouri, stating that a draft of corporate taxation reforms is likely to be finalised in Q3 2015.
The UAE public seems to discuss tax in the UAE periodically – understandably, since it could influence whether many of us, or our employers, continue to consider the great nation of the UAE to be our home.
Timing and Framing
Two notable points regarding Al Khouri’s announcement are its timing and its framing. Firstly, the IMF is a vociferous supporter of the UAE introducing excise taxes and a more standardised corporate tax policy, given the IMF forecasts that the UAE will this year post its first fiscal deficit since 2009. Secondly, he stopped short of suggesting a timeframe for implementation.
It is important to recognise that the UAE already has corporate taxation legislation in place; the current musings concern the development of the legislation, not the embryonic introduction of it.
Corporate tax in the UAE is not currently a federal matter, it is dealt with at emirate level. So there are policy differences between emirates, and in theory each is entitled to enforce such taxation as it sees fit. In practice however, only oil companies and foreign banks are forced to pay corporate tax, at levels of up to 55% and 20% respectively.
Despite each emirate being able to apply corporate tax independent of its neighbours, each emirate appears to recognise the collective strength of a unified strategy.
A similar understanding appears to be in effect at Gulf Cooperation Council level. Other than Bahrain and the UAE, all the GCC countries impose a general tax on companies. Perhaps the UAE is looking to capitalise by realigning that general tax with the GCC collective. However, I do not think it would be to the UAE’s benefit to enforce a wider corporate tax policy in isolation from other GCC countries, as it would compromise the UAE’s competitive edge.
The UAE has bilateral treaties with a number of countries to restrict double taxation on companies doing business in the UAE. This means that the taxation on remittances a company makes to its global head office is offset against the equivalent taxes it is liable for in the UAE. This makes the UAE an attractive place to do business, even more so when one considers that the UAE does not, in practice, demand those taxes for which the company is liable.
This is relevant to the majority of businesses in the UAE, but for the purposes of this article I will focus on manufacturing companies and suppliers. Insofar as the implementation of double taxation practices remain the same between the UAE and the country a material is sourced from, the price of the material is not greatly impacted by the enforcement of a corporate tax policy within the UAE. This is because the first principles of said material cost remain unaffected in their country of origin.
The operational costs of companies in the UAE merit greater consideration. The increased administrative costs associated with enforced corporate tax would probably not drive those companies out of the UAE, but they would be forced to optimise their operational costs. This would lead to smaller workforces, smaller staff remuneration packages, more stringent payment terms with suppliers, etc.
This could lessen the pull factor of the UAE as an international expat destination, and businesses with global operations may shun more onerous payment terms, particularly considering payments terms in the GCC are already very unfavourable to providers.
Ultimately, companies already established in the region would not likely depart, as the costs associated with such relocation are gargantuan, without factoring in associated costs of loss of productivity, start-up and business development costs elsewhere. Therefore, these costs would be absorbed.
This absorption, however, may lose the UAE some of the region’s most sophisticated minds, who may no longer consider the UAE to be as attractive a hub to live and work.
More Sophisticated Accounting Practices
I must note, however, that many encourage more sophisticated accounting practices in the UAE. As undoubtedly recognised by Al Khouri, there are a number of benefits, including improved accountability and greater corporate governance. More intricate accounting and taxation practices would also lead to greater tax-deductible incentives, which would probably benefit charities and improve the lives of the most vulnerable in our society.
Nonetheless, let’s give industry leaders and decision-makers the credit they deserve by recognising that the greatest impediment to the enforcement of amended corporate tax legislation is commercial acumen.
The ten largest general construction contractors in the UAE are private companies that are not obliged to disclose all their finances. Many of the largest international contractors, which operate in the UAE as joint-venture partnerships with local companies, dilute their earnings within an international division of the company so that the performance figures of the company acting within the UAE or region are malleable depending on their business objectives and strategy.
At the other end of the spectrum, smaller, family-run construction companies founded on building skills cannot afford the resources, technology or time to navigate a complex taxation framework.
The USA found that three quarters of 2014 tax return respondents complained they lacked the resources to file accurately. Bearing in mind that this is a country whose founding father Benjamin Franklin wrote in 1789 that two of life’s certainties were death and taxes, rushing the topic does not look likely to benefit the UAE.
Aggressive taxation would be such a tectonic shift of the UAE’s business landscape that it would wreak havoc in the construction industry, an industry which the UAE government has successfully cultivated as part of the UAE’s development beyond oil and gas.
I consider Benjamin Franklin’s hypothesis regarding the unavoidability of death to be empirical, but I am not sure that corporate tax in the UAE is as imminent as the public’s next wave of interest in the possibility. It appears wise that the UAE’s leaders are not in a rush to change the status quo.
Craig Gibson works with Omnium International. He is dual-qualified in law and quantity surveying and is a chartered surveyor with experience of ICC and DIFC arbitrations and a passion for simplifying construction, commerce and conflict.