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Dubai: New 20% tax on foreign banks - Will consumers pay extra?


Analysts are divided in their assessments of the ramifications of a recent announcement regarding a 20% tax on foreign banks' income in Dubai. Some argue that this tax may prompt foreign banks to raise fees, passing on the added costs to customers. Conversely, there are suggestions that certain banks may opt to absorb the tax themselves to remain competitive in the market.

The implementation of a 20% tax on foreign banks in Dubai is intended to harmonize the Emirate-level Corporate Tax regime with the newly introduced 9% Federal Corporate Tax regime and presents an opportunity to mitigate double taxation. This tax law applies to all foreign banks operating in Dubai, with the exception of those within the Dubai International Financial Centre (DIFC). As of the third quarter of 2023, there were a total of 61 licensed banks in the UAE, with 39 categorized as foreign banks, according to data from the UAE Central Bank.

Renan Ozturk, Senior Director for Indirect Tax and Middle East FS Tax Leader at Alvarez & Marsal Middle East, notes that the new tax law does not signify a significant shift in Dubai's tax landscape for foreign banks, but rather aims to align the previous Emirate-level Corporate Tax regime with the newly introduced Federal Corporate Tax regime. Ozturk emphasizes that the law provides clarity regarding the creditability of the Federal Corporate Tax rate against the Dubai Emirate-level tax, which addresses concerns regarding potential double taxation.

The law, effective from March 8, 2024, applies to tax periods commencing after this date, providing affected businesses with clear guidance for future tax periods. However, it raises concerns about potential double taxation for tax periods occurring between June 1, 2023, and March 7, 2024. Analysts await further details on this matter in the coming months.

Regarding the potential impact on consumers, Vikas Lakhwani, Chief Revenue Officer at CPT Markets, suggests that foreign banks may increase service fees or interest rates to offset the tax burden. However, the magnitude of these adjustments will depend on the level of competition and profit margins within the banking sector. Customers may experience indirect consequences, such as higher service charges, interest rates, and a reduced selection of products and services.

Joseph Dahrieh, Managing Principal at Tickmill, highlights the competitive nature of the banking sector in Dubai, suggesting that banks may absorb some of the tax costs to maintain competitive pricing. He notes that banks will consider factors such as operational efficiency, market strategy, and customer relationships before adjusting prices. Dahrieh anticipates that most foreign banks will continue to experience strong profitability due to Dubai's robust macroeconomic environment and dynamic business activities.

In conclusion, while the introduction of a 20% tax on foreign banks in Dubai may lead to adjustments in service fees or interest rates, the competitive banking landscape and favorable business environment are expected to mitigate the overall impact on profitability and customer relations.

March 18, 2024 12:25 p.m. 5943

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