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Saturday, April 13, 2024

Dubai Customers to Prevail Amidst a 20% Tax Increase on Foreign Banks

Dubai  Customer Resilience Amidst 20% Tax on Foreign Banks

Finance experts have been closely examining the implications of a recent announcement regarding a 20 percent tax on foreign banks’ income in Dubai. This measure, aimed at aligning the Emirate-level Corporate Tax regime with the newly introduced Federal Corporate Tax regime, has sparked varied perspectives on its potential ramifications within the banking sector.

The tax, which applies to all foreign banks operating in Dubai except those within the Dubai International Financial Centre (DIFC), seeks to address double taxation concerns and create coherence between existing and new tax regulations. Renan Ozturk, a senior director specializing in indirect tax and Middle East FS tax leadership, notes that while this adjustment doesn’t significantly alter Dubai’s tax landscape for foreign banks, it serves the broader purpose of tax regime alignment between the Emirate and federal levels.

Dubai  Customer Resilience Amidst 20% Tax on Foreign Banks
Dubai  Customer Resilience Amidst 20% Tax on Foreign Banks

As of the third quarter of 2023, the UAE Central Bank reported 61 licensed banks, with 39 being foreign banks. Ozturk explains that the law will impact tax periods beginning after its official release on March 8, 2024, potentially leaving a gap for double taxation between June 1, 2023, and March 7, 2024. Nevertheless, he anticipates that future details will provide clarity on this matter.

Regarding the potential responses from foreign banks, Vikas Lakhwani, Chief Revenue Officer at CPT Markets, suggests that many institutions may resort to increasing service fees or interest rates to offset the tax burden. However, he highlights that the extent of this adjustment will hinge on competition dynamics and profit margins within the sector.

Conversely, Joseph Dahrieh, Managing Principal at Tickmill, emphasizes that while banks could reevaluate fees, the competitive environment in Dubai might constrain their flexibility. He suggests that some banks may opt to absorb a portion of the tax costs to maintain competitive pricing and customer retention. This strategy aligns with Dubai’s banking landscape, which prioritizes a reasonable fee structure to attract and retain customers.

Both Dahrieh and Lakhwani anticipate that despite the tax, foreign banks are likely to sustain strong profitability due to Dubai’s robust macroeconomic environment and high-interest rates. However, they acknowledge that banks with higher margins may be better positioned to weather the tax impact, while efficiency will be crucial for minimizing adverse effects.

In assessing the broader implications, Lakhwani notes that the tax may not dissuade foreign banks from operating in Dubai, especially considering the city’s favorable business environment and infrastructure. However, he underscores the importance of balancing cost adjustments with customer satisfaction to maintain market competitiveness.

Ultimately, the response of foreign banks to the new tax regime will depend on a delicate balance between managing costs, sustaining profitability, and retaining customer loyalty. While adjustments in fees and interest rates are likely, the competitive dynamics of the banking sector and Dubai’s economic resilience are expected to mitigate potential disruptions, ensuring continued stability in the financial landscape.

As foreign banks in Dubai navigate the implications of the newly announced 20% tax on their income, analysts delve deeper into potential outcomes and strategies for managing the impact. While some anticipate an adjustment in fees to maintain profit margins, the competitive dynamics of the banking sector could pose constraints on such maneuvers.

Renan Ozturk, senior director for indirect tax and Middle East FS tax leader at Alvarez & Marsal Middle East, elucidated that the intention behind the tax aligns with the broader objective of harmonizing the corporate tax landscape between the emirate and the federal level. This move not only aims to prevent double taxation but also offers clarity regarding the treatment of the new tax within the existing framework.

The law, effective from March 8, 2024, presents a structured approach for future tax periods, albeit leaving a potential gap for double taxation between June 1, 2023, and March 7, 2024. However, Ozturk expresses optimism that forthcoming details will address such concerns, providing a smoother transition for affected businesses.

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