Corporate tax in the zero-rated UAE is hotly debated. But is it likely to be introduced?

When international companies scan the horizon for investment-friendly locations, there are few destinations where a regime free from corporation tax can be expected. The Bahamas, the British Virgin Islands, Brunei, Monaco, and Vanuatu perhaps. 

The famed zero-rated corporate tax regime is a noted means for luring in foreign investors. And in this sense, the United Arab Emirates (UAE) has mastered the art of playing to the international field, and has seen a response that can be measured by the steady drumbeat of boots on the ground.

Today, as the COVID-19 outbreak continues to darken the outlook, and Gulf Cooperation Council (GCC) governments' concerns multiply at their growing list of obligations and responsibilities, the question of the introduction of corporate taxes continues to be hotly debated. 

It is not as if the concept does not exist in the region. 

"There are currently in practice no taxes levied on the income of the vast majority of businesses in the UAE, except for oil and gas exploration and production companies, certain petrochemical companies and branches of foreign banks," Deloitte said in its Middle East tax handbook in 2018.

Mahmoud Abuwasel, managing partner and head of corporate and tax disputes at disputes boutique Wasel & Wasel, Abu Dhabi, said the UAE was a regional exception.

"You have corporate tax already in most GCC jurisdictions. You have corporate tax in Saudi Arabia, for example, at 20%. But a regional treaty on corporate tax, such as the GCC value-added tax (VAT) treaty, has yet to happen." 

Unavoidable

When Emirati lawyer, Habib Al Mulla – a  partner at Baker & McKenzie Habib Al Mulla, Dubai – recently waded into the discussion, in an interview with Dubai-based news site Arabian Business, businesses took note.

He suggested that the step to institute corporate tax was inevitable and unavoidable if UAE governments are to diversify their sources of income and not rely exclusively on one commodity. 

As early as 2013, Esam Al Tamimi, chairman of UAE-based firm Al Tamimi and Co., argued that it was reasonable for the government to introduce fees to maintain the capital investments it had made. 

The introduction of a low level of tax for local and international UAE-based companies was not a bad idea, he said, as it would generate income for local and federal governments, although that would not be the only driver. Taxation would require proper corporate governance, and implementation of accurate accounting and auditing mechanisms.

"Many family-run businesses do not yet have such practices and they are not standard across the UAE. It will also increase the demand for local accountants and financial controllers and encourage people to study and develop their skills in these fields," he said.

Noncommittal

When asked if corporate taxation would be implemented in the UAE, Abuwasel was noncommittal. "No-one really knows. It could be, in a month; it could be, in a decade. There is not enough information to [say]. It is difficult to discuss this unless there is a clear statement by government," he said.

Chris Williams, managing partner at law and government relations firm Bracewell strikes a similar tone: "This does come up for discussion on a pretty regular basis, as does [the question] of income tax.

"The general consensus is that it will be far easier and far more straightforward to introduce corporation tax than it would be to introduce income tax, for a multitude of reasons. However, there are some obviously significant hurdles regarding the corporation tax idea."

"There are many complexities to introducing corporation tax in the UAE" 

Brian Conn, partner, tax services, BDO, Dubai, echoes this sentiment. Because corporation tax is driven by financial results, financial statements are the anchor that makes the process work. A good deal of work would need to take place to ensure that everyone was accounting to similar standards, he said.

Williams said significant indirect taxation already existed in the UAE, such as on licensing, residency, property, utilities, customs and excise, and VAT. "Obviously, it's very difficult to quantify that, but we have some very significant government fees, which are levied on companies doing business out here."

'Anything is possible'

Cognizant of the need to raise new revenue, the UAE government introduced 5% VAT in 2018. Saudi Arabia took the same step, but then abruptly raised the rate to 15% earlier this year, as the enormity of the COVID-19 pandemic's effects on government spending became clear. 

"Saudi Arabia tripled its rate of VAT to 15%, and tripled some of the customs duty rates, overnight," said Conn.

"We've seen taxes in the region, not particularly the UAE, introduced… Some of the excise taxes were introduced very quickly, [as were] things connected to taxes like transfer pricing in Saudi Arabia… It is possible to introduce them… and it's been seen to be quite successful.

"Anything is possible," he adds.

The UAE's over three dozen free zones, designed to promote international business by allowing 100% ownership and full repatriation of profits, complicate corporation tax's introduction.

A major economic stimulant, they remove the requirement faced by 'onshore' companies to be owned at least 51% by an Emirati national. It would be difficult to introduce such a tax when free-zone businesses had often been set up due to the guaranteed tax holidays explicitly on offer.

"One of the complexities in the UAE is that there are so many different types of businesses with so many types of registration," said Conn. "Because of the number of free zones, people have many different options for setting businesses up. Some of them have issued rules and promises that taxes won't be applied for 50 years. There are many complexities to introducing corporation tax in the UAE." 

The Dubai International Financial Centre (DIFC) provided a 50-year holiday at zero taxes on corporate income and profits as of 2004. The Abu Dhabi Global Market (ADGM) also implemented a 50-year corporate tax holiday upon its establishment. 

Williams warns of the danger of tearing up the UAE's tax-holiday agreements.

"If you introduce corporation tax, you will encourage high-tech businesses in your jurisdiction to say, 'there are other countries around the world, which could maybe be considered as alternatives. I'll go and put that factory, manufacturing plant or other entity elsewhere, because actually, the cost of doing business would be less after the introduction, putative or otherwise, of a UAE corporation tax rate.'"

International investment treaties

Decision-making at the national, or federal level, and the need to drive competition, by forcing different emirates to sink or swim on the strength of their attractiveness for investment, also causes tension.

Abuwasel says: "Applying taxation is in the purview of the federal government, per the constitution. If corporate tax takes place at a federal level, it would be interesting to see how that would interact with the economic zones.

"Would the economic zones be subject to such federal legislation? Who would have jurisdiction? Would the establishing laws of the economic zones be subject to amendment?" 

The international frameworks which govern relationships between states can have a major bearing on taxation questions.

As an example, Abuwasel cited the GCC-Singapore Free Trade Agreement which provides various investor protections for GCC nationals investing in Singapore, and vice-versa, but states that, generally, the provisions of the agreement shall not apply to taxation measures. 

"Investors look to investment protection agreements in other countries, [which] protect foreign investor rights by restricting unlawful expropriation of a foreign investor's assets, but, generally, there are carve-out provisions with respect to tax," he said.

"As a general matter, a country has a lot more liberty in changing taxation laws, and such changes are rarely deemed expropriation. As a global standard with respect to international public law, countries have liberty to amend and change taxation law as necessary."

He added: "Before investing in a jurisdiction, a [diligent] foreign investor looks at investment protection instruments both internationally and domestically, but nonetheless understands that changes to tax legislation are standard and should be expected. When it comes to taxation, sovereigns usually have a larger landscape of liberty."

Firm line

Conn said he had heard 'absolutely nothing' official or even semi-official, to suggest that corporate taxation could be introduced in the UAE. 

He said the recent introduction of economic substance rules in the UAE should not be taken as any sort of indication that it intended to introduce corporation tax.

"Economic substance was introduced by the Ministry of Finance in support of OECD initiatives to reduce abusive international tax practices," he said. "It's a measure that stands on its own merits and should not be seen as a precursor to new taxes.

"The official comment has been that there is no plan to introduce either corporate tax or any sort of employment tax. That's a pretty firm line that the Ministry of Finance has made clear. Things can change very quickly. They have changed very quickly in the region because of COVID-19.

"I suppose nothing is ever completely off the menu, but I haven't seen anything yet," he added.

Bracewell's Williams concludes: "The overall message, from my perspective, is that nothing has been announced. I don't disagree with [Al Mulla's] view. Because we already have a lot of indirect taxation on corporates, it probably would be better wrapped up as a corporate tax. That's really the long and short of it."

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