Introduction of corporate tax will not burden UAE’s banking sector

Dubai: The introduction of a 9 per cent corporate tax on business profits above Dh375,000 from June 1, 2023 is unlikely to be a burden for the UAE’s banking and financial services sector.

Like all other private sector businesses, profits of local banks are not taxed in the UAE. However, the profits of foreign banks operating in the country are subject to a flat rate of 20 per cent. For the UAE’s banking sector, the introduction of corporate tax will not be a burden from their overall perspective or credit ratings.

“We do not expect the introduction of corporate tax will have a significant impact on banks’ creditworthiness," said Trevor Cullinan, an analyst at Standard & Poor’s. "Banks in the UAE enjoy strong profitability, with an annualized return on assets of 1.2 per cent on September 30, 2021.

"They also have strong efficiency, with a cost-to-income ratio of 36.4 per cent on the same date. In our view, banks will use whatever tax-reduction mechanisms the government introduces to optimize their tax bills,”

UAE banks achieved significant cost efficiencies through mergers and acquisitions, branch rationalization and major advances in digitalization. Asset quality issues faced by the banking sector following the decline in oil prices and challenges faced by the private sector due to Covid crisis are largely behind them.

Transparency gains

Bankers say the introduction of corporate tax - while it will have some implications - will enhance transparency of businesses and will greatly improve the asset quality of banks. “With the filing of tax returns becoming mandatory for a significant share of private sector, financial data will be much more credible and transparent, making credit decisions efficient while improving asset quality of banks,” said the chief financial officer (CFO) of a local bank.

S&P analysts said the new tax regime will not have a material bearing on UAE-based insurers. Listed insurers in the UAE typically have adequate capitalisation, and the sector has shown strong profitability, with a return on equity of about 10-12 per cent.

All GCC countries except Bahrain already levy a corporate tax on foreign non-hydrocarbon companies. While Qatar has 10 per cent tax, Saudi Arabia has 20 per cent and Kuwait 15 per cent. However, until the UAE’s recent announcement, no GCC country apart from Oman had applied corporate tax to domestic non-hydrocarbon companies. Oman levies a rate of 15 per cent on both foreign and domestic companies.

“The corporate tax (CT) rate of 9 per cent announced [in the UAE] is highly competitive both within the GCC and globally,” said Shabana Begum - Partner, Head of Transfer Pricing, KPMG Lower Gulf.