How the UAE’s new corporation tax will benefit businesses in the region

The United Arab Emirates recently made headlines around the world by announcing it would introduce a 9 per cent corporation tax. It’ll take effect in June 2023 and is the first such tax implemented by the UAE government.

Whenever a government announces a corporation tax, businesses typically view it as a bad thing and are highly skeptical. But I genuinely believe that this tax rate could actually be a unique opportunity for businesses operating in the UAE.

In light of the new corporation tax, businesses can make three different decisions.

The first is to put up prices in order to reach an identical post-tax profit. Their second option is to pursue higher investments and costs, decreasing the tax burden. Should businesses be reluctant to choose one of the first two options, they’ll need to deal with the fact that their net profits will fall by 9 per cent. That, however, is something most businesses will want to avoid. And, for that reason, I’ll talk more about the first two options in this article.

Many companies will be tempted to increase their prices in a bid to cover the financial burden of the 9 per cent corporation tax rate, but this is a move that could potentially upset consumers and result in a barrage of customer complaints. It certainly wouldn’t work for every industry, although it might be a feasible option for “high pricing power” companies. These are businesses in a position to increase prices without decreasing product demand and sales.

Traditionally, a business with “high pricing power” operates in industries with high market entry barriers. Two notable examples would be the pharmaceutical and biotechnology sectors. People and businesses using products in these industries would unlikely opt for a competitor, such as software, as it would be pretty difficult.

A business with “high pricing power” will likely have a strong brand, control over product distribution and reduced competition. Think luxury brands, tech giants like Apple and telecoms firms. What’s more, these companies spend a lot of money on innovation and product development, particularly patents. As a result, they’re at the forefront of their industries and are harder to be copied by competitors.

I’ve seen a lot of businesses in the region focus on providing their owners and shareholders with a maximum dividend payout because they won’t be affected by tax costs. Indeed, the owners of these companies probably viewed them as cash cows. Our research shows that the GCC has one of the lowest percentages of net profits invested in research and development globally.

When this 9 per cent tax rate enters the law books next year, I anticipate a sharp growth in reinvestment – specially funding for research and development – in the UAE. Businesses in the region will shift away from investing in costly innovations and instead spend their money on product and service quality, allowing them to become more competitive in the long-run.

Overall, the tax rate unveiled by the UAE government will be a big win for the region’s businesses. They’ll benefit from a higher business valuation, more investors and increased competition. At the same time, the UAE will emerge as one of the world’ leading innovation hubs.

Lovrenc Kessler is the managing partner of Simon Kucher & Partners