Dubai: Will customers pay more after new 20% tax on foreign banks? – News

Analysts have divergent opinions in assessing the impact of the recent announcement of a 20 percent tax on foreign banks’ income in Dubai. Some argue that foreign banks could raise fees in response to the tax, passing the extra cost on to customers. On the other hand, there are suggestions that some banks could choose to absorb the tax burden themselves to remain competitive.

Experts said a 20 per cent tax on foreign banks in Dubai aims to align the ‘old’ Emirates-level Corporate Tax regime with the recently introduced 9 per cent Federal Corporate Tax regime and provides the opportunity to mitigate double taxation.

The newly announced law applies to all foreign banks operating in the emirate, including free zones, except the Dubai International Financial Center (DIFC).

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According to the UAE Central Bank, there were 61 licensed banks in the UAE, of which 22 were domestic banks and 39 were foreign banks as of the third quarter of 2023.

“Foreign banks operating in Dubai were already paying a 20 per cent tax on profits at the Emirate level, so the new law does not represent a significant change to the tax landscape of foreign banks in Dubai and is more targeted. to align the ‘old’ Emirate of Dubai-level Corporate Tax regime with the newly introduced Federal Corporate Tax regime (9 percent), which was the main objective of the Dubai government,” said Renan Ozturk, senior director of indirect taxes and Middle East FS tax leader for Alvarez & Marsal Middle East. .

“The new law provides the opportunity to mitigate double taxation in the face of the new Federal Corporate Tax (CT) regime, as it clarifies that the main rate of 9 percent of the Federal CT announced in 2022 and effective for periods beginning from from June 1, 2023, will be creditable against the tax at the Emirate of Dubai level, which is an issue that many banks have been eager to understand,” he said.

The law will apply to periods beginning after its official publication on March 8, 2024, thereby providing affected businesses with clear guidance for future tax periods. However, it potentially leaves the tax periods between June 1, 2023 and March 7, 2024 open to double taxation under the Emirates level and the federal CT regime. “We hope to receive more details on this in the coming months,” Ozturk said.

Given that each emirate is capable of making its own rules in this regard, he said it should come as a relief to foreign banks operating in Dubai that the two regimes are not expected to diverge significantly.

Rates, charges to increase.

Vikas Lakhwani, chief revenue officer at CPT Markets, said there is a high probability that foreign financial institutions will increase their service fees or interest rates to offset the tax. “However, the magnitude of the increase will depend on the level of competition represented by national banks and their profit margins,” he said.

Lakhwani added that customers may experience indirect impacts, including higher service charges and interest rates and a more limited selection of products and services, as they may prioritize profitability over variety.

absorption cost

Joseph Dahrieh, CEO of Tickmill, said banks often take steps to manage such costs to maintain competitive prices in a market as dynamic as Dubai.

“While banks could review their fees to manage profit margins, the competitive nature of the banking sector here could limit their ability. The decision to adjust prices will be influenced by each bank’s operational efficiency, market strategy and the need to remain competitive while managing their tax obligations,” Dahrieh added.

He said the competitive banking environment in Dubai plays an important role in encouraging a reasonable fee structure, and foreign banks may choose to absorb some of the tax costs rather than increase prices for their clients.

“This would help them retain customers and remain attractive compared to local banks. “Banks are likely to carefully consider their competitive position and customer relationships before making any price adjustments,” he added.

Profitability to stay strong

Joseph Dahrieh expects most foreign banks to continue to experience strong profitability due to Dubai’s strong macroeconomic environment, along with the benefits of high interest rates that typically improve banks’ profit margins.

“Furthermore, the dynamic trading and trading activities within Dubai are expected to sustain non-interest income, further cushioning the effect of the tax on banks’ profits.”

Vikas Lakhwani added that foreign banks with higher margins will be better equipped to handle the tax, and banks that operate more efficiently may experience less impact.

“Customers may opt for local banks if foreign banks substantially increase their costs,” he said.

Compared to other major financial centers, he added that a 20 percent tax may not deter foreign banks from operating, especially since the city offers additional advantages such as strong infrastructure or a favorable business environment.

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