Offshore centers have historically competed with each other to attract business based on location, ease of doing business and cost of doing business. The last concerns the rate of taxes levied on profits. The news that the UAE will introduce a new corporate tax of 9% on business profits above 375,000 dirhams ($102,096) from June 1, 2023 came as no surprise. However, the UAE’s expected corporate tax will still be lower than that of the other five GCC countries, which range from 10% for Qatar, 15% for Oman and Kuwait, and 20% for Saudi Arabia. . All of these are still below other tax jurisdictions. The highest average corporate tax rate in EU countries is 21.3%, 23.04% in OECD countries and 69% in the G7, according to the Tax Foundation, based in the United States.
The UAE authorities appear confident that the planned corporate tax levy, with its long lead time, will not undermine the UAE’s attractiveness as a low-rate tax haven, and that this decision is in line with the general trend in the countries of the Gulf Cooperation Council. to diversify their sources of income away from dependence on hydrocarbon revenues, and follows the introduction of value added tax in the Gulf countries.
These two major GCC economies have left intact the personal income tax exemption for foreigners, which is welcomed by the large expatriate workforce in both countries, despite those who argue for a some form of remittance tax above certain levels but exempting most lower levels. remittances.
The UAE has entered into extensive double tax treaties with other countries to ensure that the proposed new corporate tax is not levied unfairly and that the UAE remains a global hub open for business as the he lack of double taxation agreements in some GCC countries had blunted their attraction. But tax levels alone will not attract world-class companies to locate in the Gulf, as this requires transparent legal, accounting and regulatory frameworks in place, especially if the objective is to promote this country. of the Gulf as a world-class financial center. The key to success for these competing GCC financial centers is to differentiate themselves instead of cloning themselves.
For many years, Bahrain held the crown as the self-proclaimed financial capital of the Middle East, but in recent decades the crown has slipped, as Bahrain has been overtaken by better-funded rivals with more modern infrastructure, Dubai being the first serious challenger. with its Dubai International Financial Center, followed by Qatar Financial Center, which sees itself more as a niche player than a full-service financial center. In Saudi Arabia, the King Abdullah Financial City promises to dominate the Gulf financial sector given the pipeline of government projects and the listings of Saudi companies and joint ventures, which in size and liquidity will eclipse others in Bahrain, the United Kingdom. Qatar and Oman, and compete with Dubai.
Some believe that financial centers such as London have grown because of the innate skills of its financial workforce, but essentially London has flourished in recent years because it has attracted the best financial players in the world, while foreign banks and financial institutions were drawn to London as a convenient and profitable place to do business.
This model of competitive location demonstrated that activity in international financial markets is mobile and that if other locations are more profitable and convenient, major players will locate elsewhere. This is where the aspiring financial centers of the Gulf can play more cards than low corporate tax rates, taking advantage of their trading time zone straddling the trading time zones of Asia, the Middle East, United States and Europe. But relying solely on time zone advantage is not enough for Gulf financial centers as they will also need to introduce other services to provide depth. The UAE introduced the Murban energy contract benchmark on the ICE Futures Abu Dhabi exchange in March 2021, for ADNOC crude oil futures to trade at around 2 million barrels per day.
In conclusion, whatever the pre-eminence of a financial center and the power of its host economy, it will lose markets to the benefit of other players if it does not remain competitive and innovative. A lower corporate tax rate is certainly helpful, but the provision of other niche services such as international sukuks and green energy bonds will ensure that some GCC financial centers remain attractive to international businesses.
At the same time, the UAE’s move will remove some of the tarnish associated with zero-rate offshore tax havens that attract money laundering and negligible oversight, and bring it in line with international regulations.
• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.
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