The United Arab Emirates will collect a federal tax on company earnings for the first time upcoming year, as it dismantles a tax-free regime that has garnered criticism for its lack of transparency. The move comes as the UAE strives to align itself with new international standards, particularly the Group of 20 major nations' decision last year to adopt a global minimum tax on multinational firms. The ambitious idea intends to create a base levy of 15% in the future to prevent international competition from offering lower rates. Although most of these major businesses operate inside free zones in the UAE and will remain excluded as long as they don't do business with the mainland, the UAE confirmed its support for global tax norms in July and said Monday that its new 9% rate, which will take effect in June 2023, would provide a basis to apply for that support. A statement on its website, stated, "Introducing a CT regime underscores the UAE's commitment to fulfilling international standards for tax transparency and combating harmful tax practises."
What made UAE take the action? UAE is considered, Middle East’s business hub with Dubai attracting investments from around the world. For several decades, huge investments have been done due to the UAE’s policy of tax-free trade for businesses and corporations. Also, UAE created free zones in which no tax would be imposed even after any imposition of tax countrywide on businesses. These measures have been criticized around the world for unfair trade practices and recently global financial watchdog was going to hold a meeting for grey-listing the economy. The reasons to be discussed were a tax-free trade economy, battling terrorist financing and combating money laundering. This move can be considered as an effect to stop FATF from blacklisting the economy. Even before the decision, UAE has taken other steps to dilute the tax heaven stigma on the country. In 2018, it enacted a 5% value-added tax and subsequently levied a 5% customs duty on imports. It already levies a 20% profit tax on banks and insurance companies operating outside of the country's wide network of free zones. A separate policy taxes the oil and gas sector of OPEC's third-largest production. Following certain other Gulf Cooperation Council countries, the UAE introduced a corporation tax.
The new competitor: Saudi Arabia has opened its economy in the last few years. Measures such as creating new cities, excepting taxes to support the establishment of businesses, calling big business houses to trade in the country and the region, opening the economy to tourists and other similar steps have been taken to make Saudi Arabia, less dependent on oil and create Saudi Arabia as another golden option for businesses to trade in the Middle Eastern Economy. UAE has become significantly over-expensive in the last decade and it isn’t encouraging travellers to take up the destination. Saudi Arabia is giving the other alternative to travellers with the same resources but with relatively less budget. Similarly, it is expected to attract investments from worldwide and give UAE, tough competition.
The UAE is implementing several measures to keep the economy under check. The government scrapped the requirement for enterprises to have Emirati shareholders in 2020, signalling a dramatic shift in foreign-ownership restrictions and announced intentions to grant citizenship to a select group of foreigners last year. To better align with the global economy, the UAE switched to a Saturday-Sunday weekend earlier this month. While analysts and entrepreneurs claimed the additional taxes would hurt net earnings, they remained competitive regionally and internationally, it was unclear whether the current measures would encourage companies to relocate.
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