KARACHI: Dubai’s tax laws are not just aimed at promoting investment, but also attracting the best talent, leaving room for fiscal optimisation that can help redirect finances to research and development as well as expansion, say experts.
There are many factors that attract businesses, and subsequently talent, to Dubai and arguably the most important of these is its tax exemptions, they said.
Crucially, unless you are an oil company or foreign bank, you pay 0% corporate tax (for perspective, firms in Pakistan pay about 29% in corporate tax, while those in the US and UK pay around 20%), which means companies have more flexibility with what to do with their earnings.
“Dubai’s tax exemptions offer companies an important fiscal optimisation factor through which they could redirect tax savings towards research and development, hiring, and investing,” Achraf Drid, Managing Director at XTB Middle East, a global FX brokerage, told Business Recorder.
The company’s subsidiary, XTB MENA Limited, has only recently secured a licence from the Dubai Financial Services Authority (DFSA) after it incorporated its new subsidiary in the Dubai International Financial Centre (DIFC) in January 2021.
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“The cash surplus that companies can preserve enables them to seek new growth venues. As a result, these tax exemptions help firms thrive.”
Last year it was announced that all companies operating within the Dubai Multi Commodities Centre - one of the world’s largest free trade zones, with more than 16,000 businesses registered in a wide range of sectors, including agribusinesses, energy and financial services, diamonds and gold - would be exempt from paying taxes, including income tax, for 50 years.
What’s more, the UAE has agreements in place with most of its trading partners that mean businesses don’t need to pay double taxation on overseas investments. Double taxation is when similar taxes are imposed in two countries on the same taxpayer on the same tax base.
Tax laws also play another key role in Dubai: they attract the best talent from around the globe.
This is partly because exemptions leave more revenue for businesses to direct towards recruitment and offering competitive salaries.
And partly because there is no income tax or even inheritance tax or stamp duty (in the UK, for instance, stamp duty ranges from 2% to 12% when buying property), a factor that pulls in expats in droves.
The talent pool that is attracted “provides the necessary skills and helps companies grow. Often cities with a low concentration of talent have a hard time growing their companies and their economies,” said Drid.
One of the most significant changes to Dubai’s tax laws in recent times has been the 5% VAT that came into effect in January 2018 in order to reduce the city’s dependence on income from oil. The tax is applicable to businesses with taxable supplies and imports in excess of Dh375,000.
It could often mean end users of goods and services end up paying higher taxes, but the rate is still much lower than the rest of the word. It allows Dubai to make changes, like upgrading its infrastructure, which can be helpful to businesses in the long run, and promotes transparency in businesses.
An article in the Khaleej Times called the move a “masterstroke” because it allowed the UAE government to raise Dh27 billion in the first year alone, but was low enough to have minimal impact on businesses and residents.
The article also pointed out that Dubai’s agile policy making played a significant role in minimising the negative impact of the VAT on some sectors. Case in point would be diamonds, gold, and jewellery industry that represent a big chunk of Dubai’s non-oil economy.
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Following the introduction of VAT, imports of rough diamonds dropped by 33% and exports fell 26%.
The government was quick to approve a VAT reverse charge mechanism on commercial transactions between registered dealers “and as a result managed to protect the UAE’s position as a strategic trade centre with only a small amount of reputational damage caused by the first five months of VAT uncertainty”.
Meanwhile, Drid noted that besides taxes, “Dubai is attracting businesses and individuals thanks to its continuous efforts to modernise by simplifying administrative procedures and by reducing the cost of doing business overall.”
He said initiatives to create industry-specific zones are also helping, as are frequent investment programmes.
Culturally, he said “the city is increasingly becoming a world hotspot and cultural melting pot, which attracts skilled individuals from around the world. The flurry of events, festivals, and venues the city provides is an undeniable advantage.”
Mohamad Ibrahim, Regional Director at Exness, told Business Recorder that “only an ongoing effort to modernise and reform could help a country stay at the forefront of the global economic competition” and other countries can learn from how it has created the right economic and cultural conditions that help companies thrive and make expat employees feel welcome.
Copyright Business Recorder, 2022
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