How will the new 20% tax on foreign banks affect consumer costs?

When it comes to assessing the effects of the recent imposition of a 20 percent tax on international banks’ income in Dubai, analysts are divided. Some say foreign banks may increase fees in reaction to the tax and pass the higher costs on to their customers. However, there are signs that some banks may decide to shoulder the tax burden themselves to remain competitive.

A twenty percent tax on international banks operating in Dubai seeks to reduce double taxation by aligning the “old” Emirates-level corporate tax regime with the recently nine percent federal corporate tax regime, experts say. implemented.

With the exception of the Dubai International Financial Center, the recently announced law is applicable to all international banks operating in the emirate, including free zones.

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

Renan Ozturk, Senior Director at Alvarez & Marsal Middle East, explains that the recent law imposing a 20% tax on foreign banks in Dubai does not represent a significant change in the tax landscape. Rather, it aims to align the previous 20% Emirates-level tax with the newly introduced 9% Federal Corporate Tax regime. This alignment seeks to avoid double taxation and streamline tax procedures for foreign banks.

The new law ensures that the federal corporate tax rate of 9%, effective from June 1, 2023, will be offset by the tax at the Emirate of Dubai level. This clarification addresses concerns among banks about possible double taxation. Although the law has been in force since March 8, 2024, there is ambiguity regarding the tax treatment between June 1, 2023 and March 7, 2024. Öztürk expect more clarifications in the coming months.

Öztürk He highlights that each emirate has the flexibility to establish its tax rules. However, it assures foreign banks that the two tax regimes are expected to remain aligned, providing relief to affected entities.

Rates, charges to increase.

According CPT Markets Chief Revenue Officer Vikas Lakhwani There is a good chance that foreign financial institutions will increase their interest rates or service costs to offset the tax.

“However, the extent of the increase will depend on the degree of rivalry between national banks and their profit margins,”

he stated.

Lakhwani He went on to say that because they might put profitability over diversity, customers could suffer indirect effects such as higher interest rates and service fees, as well as a smaller range of goods and services.

absorption cost

Joseph Dahrieh of Tickmill points out that while Dubai banks can review fees to manage costs, competition limits this. Banks will weigh operational efficiency, market strategy and fiscal management when making pricing decisions. Dubai’s competitive banking sector promotes fair fees; Foreign banks can absorb taxes to retain customers, prioritizing competitiveness over price increases. Dahrieh emphasizes banks’ deliberation about competitive position and customer relationships before adjusting prices.

Profitability to stay strong

Joseph Dahrieh anticipates continued strong profitability for most foreign banks in Dubai due to the strong macroeconomic environment and high interest rates, which reinforce profit margins. It notes that brisk business activities will sustain non-interest income, offsetting the tax impact on banks’ profits.

Vikas Lakhwani suggests that foreign banks with higher margins are better equipped to handle the tax burden, and those that operate efficiently may experience minimal impact. However, customers may favor local banks if foreign banks significantly increase costs.

Compared to other financial centers, Lakhwani believes that a 20% tax cannot deter foreign banks from operating in Dubai, given its strong infrastructure and favorable business environment.

News Source: Khaleej Times