On January 31 the Ministry of Finance of the United Arab Emirates (UAE) announced the introduction of a federal corporate tax of 9 percent. According to the press release, businesses operating in the country will be subjected to this new tax starting on June 1st, 2023.
Dubai, Abu Dhabi, and the whole of the UAE have been going through a spectacular economic transformation which has often been labeled as a “miracle.” In reality, though, the changes experienced by the Emirates stem from a conscious effort by their leaders and population to diversify what used to be an oil-dependent economy. Thus, in the 21st century, Dubai and its sister Emirates have become regional and international hubs for tourism, trade, transport, financial services, and much more.
In 1971 when the original six Emirates federated and founded the UAE, the GDP was 1.4bn US dollars but by 2019 it had skyrocketed to 421bn. So much so that the Emirati economy only trails Saudi Arabia as the biggest in the Arab world. What is more, nowadays the non-oil/gas sector represents two-thirds of the country’s economy. The exact inversion of the economic sector distribution of 1971.
Technology and innovation have exponentially grown as well. “In March 2019,” noted Dr. Yasar Jarrar, “the Middle East’s premier silicon success story proved itself to the world. Less than a year after global giant Amazon bought Dubai’s home-grown e-commerce business Souq.com for $ 700 million, two more Dubai-based tech companies were the subject of major deals, with Network International negotiating a $ 300 million investment from Mastercard, which paved the way for its IPO on the London Stock Exchange, and Careem, Dubai’s local ride-hailing app, being acquired by Uber for $ 3.1 billion.”
The business-friendly climate generated by the authorities of the UAE and responsible for the country’s remarkable achievements is undeniably multicausal. Several building blocks like the fight against corruption, competition between jurisdictions, free zones, openness to foreign investment, respect of private property, and debureaucratization are some of the building blocks of its virtuous pro-business environment. Nevertheless, it cannot be denied nor undermined that the UAE’s tax-free regime has been a cornerstone of its remarkable progress. Indeed, along with all the other features just mentioned, the tax-free status has long attracted entrepreneurs and startups as well as multinational companies and billionaires – who in turn contributed to make Dubai in particular and the UAE, in general, a diversified post-petroleum economy.
All this begs the question: Why change a system that seems to be working so well? Indeed, why run the risk of altering one of the key pieces of the puzzle?
There are two intertwined yet opposing narratives to explain the UAE’s introduction of a corporate tax.
According to the national narrative, the creation of a corporate tax by the UAE is part of the country’s effort to diversify its streams of revenue away from oil. This goes in line with its 2018 move to a 5 percent value-added tax (VAT) on most goods and services. Moreover, the foreign banking sector was already taxed at a rate of 20 percent while companies with concessions to extract oil and gas pay 55 percent (at the emirate level).
Moreover, the 9 percent corporate tax rate is relatively low, both regionally and internationally. For example, a comparison with other members of the Gulf Cooperation Council (GCC) shows that the corporate tax in Saudi Arabia is 20 percent, in Oman and Kuwait is 15 percent, and in Qatar 10 percent. From 2023 only Bahrain will keep a 0 percent rate.
The Ministry of Finance’s press release, however, very explicitly points into an international narrative, as well. H.E. Younis Haji Al Khoori, the Undersecretary at the Ministry of Finance, is quoted directly in reference to several OECD’s buzzwords. “With the introduction of corporate tax, the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices. The regime will pave the way for the UAE to address the challenges arising from the digitalization of the global economy and the other remaining BEPS [Base Erosion and Profit Shifting] concerns, and execute its support for the introduction of a global minimum tax rate by applying a different corporate tax rate to large multinationals that meet specific criteria set with reference to the above initiative,” said the Undersecretary.
Incidentally, the UAE has also been investigated by the Paris-based Financial Action Task Force (FATF) for its alleged shortcomings in combating money laundering, terrorist financing, and financial proliferation.
It is important to note that low tax jurisdictions, also known as tax havens, are often portrayed by their critics as prone to money laundering. Yet the biggest money-laundering scandals have not involved any of the so-called tax havens and tended to be committed by American and European financial institutions.
In the case of BEPS, an OECD’s mythological creation, the level of exaggeration and hysteria is even worse. Since its inception in 2013, it has always been a solution in search of a problem. Indeed, according to academic research in 2014, “the statistical evidence consistently indicates that the impact on tax revenues is only modest in magnitude.” Moreover, a 2021 study by the Tax Foundation showed that “all OECD countries with territorial tax systems have designed provisions that seek to prevent base erosion and profit shifting by multinational corporations.” As a consequence, whatever loopholes companies may have had to lower their tax bill by exploiting different country rules are now long gone.
While Pillar 1 of BEPS focused to assist countries to uphold their tax sovereignty, Pillar 2 has even bigger ambitions. Namely, a global minimum corporate tax rate of 15 percent for large multinationals.
It may very well be that the introduction of the corporate tax in the UAE is a strategic sovereign decision. If that is the case, then the country’s rulers will have until June 2023 to assess and evaluate how the announcement impacted the business environment. Moreover, they will be able to reverse course if they believe the corporate tax has not delivered the results they expected.
Unfortunately, there is a more worrisome possibility. Perhaps what we are really witnessing is a silent global battle for tax competition. It could be that pressure by a pincer movement between both the unsubstantiated claims by BEPS and FATF nudged the UAE to make this move. An action more related to Darwinian adaptation than to economic calculation.
Indeed, it would be a very dangerous precedent that faceless supranational bureaucracies can make a small progressive country jeopardize its success and future.