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29 March 2024

UAE has the fourth-best tax regime in the world

UAE has the fourth-best tax regime in the world. (EB FILE)

Published
By Nissar Hoath

The UAE has the fourth-best tax regime in the world for businesses and this helped the country to continue to attract direct foreign investment during the global meltdown, according to a new study.

The report Paying Taxes 2010 – The Global Picture places the UAE among the top 10 economies with the lowest total tax rates (TTR) and simplest compliance requirements for doing business. The study was produced jointly by the World Bank Group, PricewaterhouseCoopers (PwC) and the International Finance Corporation.

Qatar leads in the GCC and is second in the world. Globally, Maldives tops the list while Hong Kong is placed third.

The study is part of the World Bank Group's annual Doing Business project and covers 183 economies with data based on domestic laws and regulations as well as administrative requirements.

The annual report, now in its fifth year, provides information to help inform policy decision-making and tax reforms and to facilitate a comparison of tax regimes from the point of view of companies. Besides, it looks at both the tax rates and the cost of complying with a tax regime and is designed to raise awareness about the business taxes contributed by companies as well as corporate income tax.

According to the report, tax reform remains on governments' agendas and 45 economies have made it easier to pay taxes in 2009. Corporate income tax is only part of the tax burden on businesses and represents 12 per cent of payments, 26 per cent of time and 38 per cent of TTR.

All the GCC states except Kuwait and Bahrain are on the top 10 list. Saudi Arabia is placed seventh and Oman is eighth. Kuwait is in 11th place and Bahrain 13th. However, experts believe the UAE and the other countries in the region have to be very cautious when reforming their tax regimes if they want to maintain the economic growth they achieved during the global slowdown.

"Talking specifically about the UAE, it is a wonderful achievement to finish fourth among the 183 countries," PwC Middle East Tax Leader Dean Rolfe, who contributed to the report, told Emirates Business.

"It sends the right message that the UAE is open for business. In fact, it is a jurisdiction structured in such a way that it attracts and encourages direct foreign investment."

But he said any new taxes in the region would affect the rankings. "Taxation is a complex issue and new taxes can increase complexity, which could affect these countries' rankings in Doing Business reports."

The study says the UAE has some of the simplest compliance requirements and lowest tax rates, factors that attract manpower and encourage international businesses to invest in the country.

Even countries such as the UK and the US, with some of the most advanced and earliest modern-day tax regimes, lag far behind. In the ease of paying tax rankings, the US ranks 61st and Britain 16th, while the UAE is fourth. In the total tax rate list, the US ranks 118th and Britain 67th while the UAE is sixth. The UAE's ranking for tax payments is 43rd while it comes second in the time to comply rankings.

"You only have to look at the boom in the emirates over the last three to four years and see how many international businesses have set up regional operation here," said Rolfe. "And I really don't see any reason for that trend to stop now."

He described the study as a "wonderful tool" that allowed global businesses to determine the likely tax costs in different parts of the world. "It does not just take tax on profits into account because this is only one tax that a government can levy. A government can levy tax on property, turnover, social security and so on. All those taxes have a role to play in helping governments to raise revenue. Taxes are now a model of any society because they raise revenue, especially for social security programmes – hospitals, schools and all the other things."

Rolfe said the biggest challenge in the region was the compliance burden, a problem not restricted to the Middle East but common around the world as clients preferred simple tax systems.

"If you have tax laws drafted in ways that do not address specific issues this can create some uncertainty because taxpayers try to comply with a particular law but can't read the law and understand what it means.

"Sometimes a complex tax law makes it very difficult for businesses to comply because they have to read a lot of legislation, and sometimes laws are contradictory. This is the feature of the Middle East now."

He said some regional economies were planning changes in their tax regimes, a trend that began in Saudi Arabia in 2004 and was followed by Oman, Kuwait and Qatar.

"There is a wide-ranging reform agenda here in the Middle East, particularly in the GCC region," said Rolfe.

He said Saudi Arabia had tried to introduce personal income tax but had to abandon the move as expatriate businesses and workers started to leave the country.

"Many people work in this part of the world because of the absence of personal income tax and this has allowed the region to attract labour, which would not be possible if income tax were levied,'' said Rolfe.

"No one likes paying taxes. The most important thing is education. People need to be aware and educated about paying taxes. They want to know what they are paying for and what benefits they get out of it."

He said the best form of tax for the GCC states, where the majority of the population is expatriate, would be a consumption tax, but it would have to be introduced in a transparent manner.

"Hopefully governments in this part of the world will take the best practices from this study and focus not necessarily on just tax rates but what sort of taxes should be levied – should it be personal income tax, consumption tax or corporative income tax.

"And there will always be critics who can justify why taxes should not be introduced. In terms of what tax should be introduced, there are obviously arguments for and against.

"I think the introduction of a consumption tax is fair because it is levied only on consumption of luxury goods – the more you consume the more you pay. The International Monetary Fund believes the purest form of consumption tax is a very, very fair tax."

He said there was much talk about free trade agreements in the Middle East. "If the UAE, for example, signed a free trade agreement then there is a likelihood of customs duties being removed, so other taxes would have to be considered as a replacement."

Rolfe advised GCC companies investing overseas to exercise caution and plan carefully as they might face unfamiliar tax regimes.

"Many people here don't pay income tax so when they invest abroad it is not something that is on their radar screens. Sometimes investment decisions are made without giving due consideration to the likely tax costs."


Tax collection is an unpopular task

Collecting tax is one of the most difficult tasks for government, and there is a saying, "it is as difficult as milking a tiny earthworm". And paying tax is as painful as it is difficult to collect – ancient histories prove this.

According to research on the daily life of the Egyptians by Oracle Education Foundation's ThinkQuest programme, even the pharaohs had difficulties collecting taxes from their subjects. One incident dates back to the 18th dynasty when the king had to send his tax collectors several times a year.

"The king sent tax collectors three times a year," says the ThinkQuest study. "They were accompanied by a scribe. The scribe kept records. He wrote down the names of the peasants and measured the fields. On the second visit the scribe and collectors returned to inspect the new crops. From this they calculated the taxes owed.

"The tax collector made the third visit during the harvest to collect the king's share. The taxes were paid in sacks of grain."

Introducing taxes is a very difficult task for governments as no one likes paying them, according to Dean Rolfe, PwC Middle East Tax Leader. "The introduction of taxes needs courage because it is a very sensitive matter that needs a very brave government."

The World Bank Group's annual Doing Business project for 2010 puts all the GCC states among the leading countries out of the 183 examined for best practices in taxation

The report, which ranks the GCC countries from top second to 13th, says a number of countries outside the GCC in the wider Middle East are moving up fast in terms of tax reforms, introducing easy and low taxation. But the report says the overall picture in the Middle East is largely unchanged, and plans to introduce new taxes may push down the GCC's ratings over the next year.

The study highlights a number of changes and developments about to take place in the Middle East. It says those involved in outbound investment from the region through sovereign wealth funds, other funds and companies going global need to understand and plan for high tax rates and complex systems overseas.

 

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