Question

You are to design a taxation system for the UAE.

a. Explain the different tax rate structures the government can possibly use.

b. How should the burden of government finance be distributed according to the benefit principle or ability to pay principle? Why?

c. How can the government think about reduction in tax evasion?

d. What is the impact of financing capital project using taxation as opposed to borrowing on current and future consumption and saving?

e. Explain briefly user charges and how they impact efficiency.

f. What are the advantages and disadvantages of increasing the money supply to pay for government-supplied goods and services?

Answer 1

• The Federal Government of the United Arab Emirates (UAE) does not levy any corporate income tax or other personal taxes on its citizens or residents. However, most of the Emirates have imposed a corporate tax on companies vide their respective local income tax decrees. The Department of Finance of each Emirate is the authority responsible for enforcing corporate taxes in their respective jurisdictions.For instance, within the Emirate of Abu Dhabi, the Abu Dhabi Income Tax Decree was passed in the year 1995 (as amended). Pursuant to this Decree, corporate tax is imposed on oil and gas producing companies at rates set out within the relevant concession contract in addition to payment of royalties on oil and gas production. Branch offices of foreign banks are taxed at the rate of twenty percent (20%) of their annual revenue. The Taxation Decree Number 4 of 1972 imposes taxation on the person(s) carrying out a trade, vocation, profession or business and the maximum tax rate applicable is 55%. A similar imposition is provided for within the Dubai Income Tax Ordinance of 1969 (as amended) and in the Sharjah Income Tax Decree of 1968 (as amended). To this effect, it is important to clarify that whilst the above Decrees make a provision for corporate tax applicable to all companies, it is only foreign oil entities engaged in upstream oil and gas activities and branches of foreign banks are subjected to such tax.
• There are no withholding taxes in Dubai or anywhere in the UAE. Accordingly, payments made by companies in UAE to other companies or individuals (whether based in UAE or otherwise) towards license and royalties, dividends, etc would not be subjected to any withholding tax.
• Pension contribution of 5% of the salary is payable by employees who are UAE nationals. There is no such contribution for employees who are not UAE nationals.
• The UAE is known for its tax-friendly legislations and dynamic corporate environment. The local tax laws imposed by each emirate are nominal in comparison to other jurisdictions. Therefore, the federal and local governments have not provided for any transaction structures to minimize the tax burden of a chargeable person.
• ransaction structures to minimize the tax burden
• What transaction structures (if any) are commonly used to minimize the tax burden?
• There are no specific transaction structures to minimize tax burden of the parties since the tax liability that has been imposed by the local decrees are already considered minimal in relation to other jurisdictions.Legal mergersTaxes potentially payable
• UAE has not enforced any explicit taxes on mergers and acquisitions. However, in theory, mergers that involve an establishment in JAFZA which holds real estate property in UAE would be liable to pay 4% transfer tax.
• Corporate Income Tax
• Branches and representative offices of foreign companies would be liable to pay taxes since they would fall under the ambit of ‘chargeable person’ in accordance with the local tax legislations. However, this tax is generally only levied from branches of foreign banks and companies indulged in upstream petroleum activities (such as production)
• Dividends
• Companies are not required to withhold tax on dividends and other distributions due to the lack of a federal or local legislation requiring the payment of tax on dividends

• The UAE was long known to be a comparative safe tax haven in the Middle East due to the lack of direct taxes (such as personal income tax) and indirect taxes (such as VAT). However, the country’s recent step towards the implementation is expected to rise the cost of living and impact the dynamic corporate environment in UAE. The void in tax laws has been one of the foremost incentives for foreign investors to establish themselves in the country. Therefore, the government should yearn to reduce the burden placed on the residents and corporate entities in the UAE by carefully implementing VAT in limited sectors and goods and/or services. Further, establishing a dedicated.