Corporate tax will benefit federal and emirate government credit strength

“The new tax will broaden the revenue base for the federal government and, most likely, also for the individual emirates, in line with the current approach to distributing VAT revenue – representing a new source of revenue in addition to license fees, service charges and volatile land sales,” ratings agency Moody’s said in a commentary.

An additional source of government revenue and greater diversification away from oil should broadly protect fiscal strength from oil price volatility.

“The UAE’s introduction of corporate income tax is the most significant tax reform since 2018,” Moody’s said.

Only Oman in the GCC currently has a corporate income tax that applies to companies owned by citizens and foreigners. Most of the other GCC countries impose corporate taxes on foreign companies, with the sole exception of Bahrain which does not impose any foreign companies.

The UAE economy has maintained strong credit ratings amid the unprecedented economic crisis caused by COVID-19 and the resulting collapse in oil prices.

While Fitch Ratings has a long-term foreign currency issuer default (IDR) rating of ‘AA-‘ with a stable outlook reflecting a moderate level of consolidated public debt, a strong net external position and high GDP per capita, Moody’s also assigned an Aa2 sovereign rating reflecting strong creditworthiness.

The UAE Federal Government raised $4 billion in its debt capital market debut with orders over $22.5 billion, a 5.6x oversubscription. This is the first time the UAE has raised funds at the federal level. The bonds were issued in three tranches with tenors of 10, 20 and 40 years at a narrower end of the price range with $1 billion in the 10-year tranche at 70 basis points (bps) from the US Treasuries (UST), $1 billion in 20-year bonds at 105 basis points above the UST and $2 billion in 40-year bonds at 3.25%.

The introduction of a 9% corporate tax in the United Arab Emirates, one of the lowest corporate income tax rates in the world, is expected to put some pressure on corporate cash flow in short term

“The federal corporate tax of 9% is overall negative for domestic businesses in the UAE, as it will reduce their operating cash flow. However, the overall impact on the credit profile of large companies will be mitigated because they have several compensating levers, such as increasing the prices of products or services, optimizing their cost structure and reducing dividends. shareholders,” Moody’s said.

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