Mideast: Future-Proofing The UAE With Taxation
For the first time in the history of the United Arab Emirates the government announced its first corporate taxation structure in 2022. Starting in the summer of 2023, the government compelled companies to pay nine percent of corporate income greater than 375,000 dirhams (AED) [>100,000 USD] in taxes. Corporate income below 375,000 AED remains tax-free. Additionally, companies making over 750 million Euros are taxed at 15 percent to comply with international standards laid out by the OECD. Previously, in 2018, the Emirati state announced a national Value Added Tax (VAT), the first national taxation scheme in the country’s short history. This development broke from the UAE’s reputation as a tax-free business environment and indicates their plans for the future.
The UAE comprises seven Emirates, is located on the Persian Gulf, and shares borders with Saudi Arabia and Oman. In the nineteenth century, Britain controlled the Emirates, Qatar, and Bahrain as protectorates called the Trucial States. The primary economic engine was pearling. After the First and Second World Wars, pearling became significantly less profitable, and the United Kingdom lost mercantilist interest in controlling the area. However, the Emirates remained a British Protectorate until the early 1970s when the Brits departed. The cost to protect the Emirates had surpassed the profit. By that point, oil had been discovered, and while British companies were present and profiting from the discovery, the Emirates assumed ownership of the natural resources and profited as well.
Oil in the Persian Gulf became not a defining aspect of the Emirati economy, but the only aspect of the Emirati economy. The Emirates made massive incomes from oil exports to the West and Japan. It was the late twentieth century, two world wars had been fought with oil, and the world could not get enough.
Looking at the contemporary cities of Dubai and Abu Dhabi, it is hard to imagine that just fifty years ago, a tiny and relatively impoverished population was living along the Emirati coast. In 1970, fewer than 300,000 people resided in the Emirates; today, that number is over 9.5 million.
Population In The United Arab Emirates
The boom from a small British protectorate into a hulking, cosmopolitan, technocratic nation is entirely due to oil. The Emirates effectively “rented” their natural resources to oil companies, receiving percentages of the revenue and raking in royalties.
The leaders and sheikhs of the UAE were clever with the boom and set out to protect their economies against a decrease in oil availability or demand. The various Emirates invested their government’s oil money differently; in Abu Dhabi, they invested in oil infrastructure and tourism; in Dubai, they built a dynamic shipping capital called Port Rashid. The Emiratis created an international luxury airline with a hub in Dubai to encourage foreign travelers. They built a military and allied themselves, at least nominally, with US interests, recognizing Israel and fighting the Houthis in Yemen. They invested in international alliances and multilateral groups to create a worldwide web of interdependence and trust.
But, perhaps most importantly, they refused to implement taxation. They knew the government would not lack income for several decades, and the most significant investment they undertook was a refusal to levy taxes. Foreign businesses and investors beat down the door to establish themselves in the young, wealthy tax haven.
Their tactics were incredibly effective. Abu Dhabi and Dubai are international destinations. Travelers worldwide add The Palm and the Burj Khalifa to their bucket lists. The police are known to drive supercars around the city streets, and influencers post photos of lavish vacations in towering 5-star hotels. The COP-28 international climate conference was hosted in Abu Dhabi, and Gulf Cooperation Council (GCC) members look to the Emirates for real estate opportunities and business ventures.
Now, it is the twenty-first century. The world has been trying to turn its back on oil for several years. Young people globally view combatting climate change as a political priority. The oil industry and the greenhouse gasses emitted by burning hydrocarbons are the leading cause of climate change. Electric car companies are becoming more influential, and non-electric car companies are pledging to go electric. The future world looks unforgivably toward the petrol economy.
Thus, the Emiratis have to shift, and shift they have. The UAE is using its successfully engineered status as an international business center to make new government profits through taxation. Its tax-free policies guaranteed robust growth, and its modern infrastructure was attractive to foreign expats. Now, they have breathing room to begin taxation.
In 2018, the Emirates levied a national VAT of five percent for the first time. Goods and services sold in the UAE carry an extra five percent cost to be relayed to the government. VATs are standard worldwide and function similarly to the American sales tax; the expenses of VATs are inevitably passed on to the consumer.
Despite the seemingly radical shift, it is a reasonably modest tax policy. Five percent is on the low end of VAT schemes globally, and tourists can request refunds of VAT paid during visits to the Emirates. Nevertheless, it provides an alternative revenue stream for the Emirati government and an introductory taxation structure that could be added to or developed as needed.
Five years later, the corporate tax resulted from two factors impacting Emirati economic policy. Firstly, they are trying to diversify government revenue streams in the face of a declining oil economy. Secondly, the UAE is aligning itself with a global effort led by the OECD to address “base erosion and profit shifting” internationally. It is a particularly convenient time to align their government with such standards as these new taxes could generate 13 billion USD.
Without a personal income tax and with a low-impact tax regimen, the UAE maintains its business-friendly status. Perhaps more insidiously, they allow the abuse of migrant labor by businesses. A majority of their population is migrant laborers, mainly from South Asia, who are deprived of the rights of citizenship and have built a bullish economy on the strength of their backs. The Emirati attitude toward workers’ rights makes it easier to do business there, away from the prying eyes of fair-trade regulators. These foreign workers lack access to many social benefits and never see the actual profits of their labor. Perhaps if the UAE was interested in aligning itself with multilateral economic regulatory structures, it could begin enforcing United Nations-endorsed workers’ rights policy.
Back to taxes.
The government still profits heavily from oil, so this is only the beginning of their new economic doctrine. As oil profits fall, the Emirates will pursue revenue streams that exploit their immense infrastructural investments over the previous several decades. A thriving economy means the potential to profit wildly off of taxation. Business leaders and investors can reasonably expect to see increasing, but mild, taxation as the young government enters the middle of the twenty-first century.
