UAE banks willing to comply with U.S. tax laws

June 24, 2015

There has been a trend of banking growth in the United Arab Emirates, and the swelling numbers are expected to continue. According to a report from the Khaleej Times, the UAE banking sector is presumed to experience year-on-year deposit growth of 13.6 percent from 2015-2017. Asset growth is expected to rise by 12.2 percent in the same time period.

Renaissance Capital is a leading emerging and frontier markets investment bank, which believes UAE banks promote an avenue for growth within the Middle East/North Africa region, and even further. Renaissance Capital forecast fiscal spending, private sector growth, increases in population and the region’s status as a growing business hub will continue to aid the rise in banking from Africa to South Asia.

“The UAE banking sector is experiencing significant growth.”

Additionally, the projection presumes any action taken by the U.S. Federal Reserve to bump up rates will also help to benefit bank margins.

“The peg to the dollar provides some defense against adverse forex moves, while [U.S.] Fed action should, on balance, benefit bank margins,” the forecast from Renaissance Capital stated, as noted by the Khaleej Times. “The UAE continues to show a relatively attractive macro picture, in our view, comprising large fiscal savings, strong population growth and the [Gulf Corporation Council’s] strongest non-oil economic base. We see limited risk of system shocks, while the International Monetary Fund expects real gross domestic product, GDP, growth to average 3.2 percent in 2015 – 2016 [4.5 percent for non-oil growth].”

Central Bank of the UAE Governor Mubarak Al Mansouri shared his views regarding the region’s credit growth as it continues to climb. The central bank also mentioned implementing new regulations to control and monitor bank liquidity, as there is currently an excess of it in the banking system.

Amid the expanding banking framework of the region, the UAE has joined forces with the U.S. to facilitate the implementation of the Foreign Account Tax Compliance Act.

No longer a tax haven?
It was only months ago that UAE’s banking policy had been inviting for those looking to take advantage of easy tax compliance regulations. According to Emirates 24/7, a report released by PricewaterhouseCoopers in March 2015 revealed the UAE had the lowest average total tax rates in the world, as well as the easiest tax compliance regulations.

“The Middle East continues to have the least demanding tax framework, with the lowest average total tax rate and time to comply; Qatar and UAE share equal first place globally, with Saudi Arabia in third position,” according to the report.

Some of the leniencies include: no direct taxes on personal income, no capital gains tax, value added tax, withholding tax or corporate tax. Also, Abu Dhabi, the capital of the UAE, revealed plans to create a financial-free zone, which would allow banks from all over the world to join, but would contain its own administration, court system and tax incentives. It will be known as the Abu Dhabi Global Market, and the belief behind the move is that two financial regulating bodies will generate competition and increase growth, according to Arabian Business

“It is good to build two financial clusters in the UAE,” said Essa Kazim, chairman of the board of the Dubai International Financial Centre Authority. “Look, we decided back in the 1980s/1990s to invest in developing two UAE airlines [Emirates and Etihad] – and decades later they are both expanding and doing very well. Scale is important for the region, as well as the activities covered. But DIFC will continue to focus on its own strategy, independent of [ADGM], and we are happy with the growth we are achieving.”

Kazim also stated that this might keep the door open for foreign businesses to still find a tax haven at a time when the DIFC is partnering with the U.S. to curb the practice and implement FATCA regulations across the region.

Abu Dhabi is set to create a financial-free zone.
Abu Dhabi is set to create a financial-free zone.

FATCA coming to the UAE
This month, the UAE and U.S. came to an agreement on implementing FATCA compliance measures, which will require all financial institutions in the UAE to provide financial information pertaining to any accounts held by American citizens, Albawaba Business reported. However, the agreement made it clear there are some government institutions, sovereign wealth funds and international organizations that do not have to disclose financial details.

There are currently more than 50,000 U.S. expatriates residing in the UAE, according to Business Standard.

The negotiations were conducted by several legal and technical committees, including the Minister of State for Financial Affairs, the Minister of State for Foreign Affairs and the Governor of the UAE Central Bank, noted Gulf News.

For more information about global tax compliance and FATCA regulations, visit our Global Tax Solutions page.

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Sovos was built to solve the complexities of the digital transformation of tax, with complete, connected offerings for tax determination, continuous transaction controls, tax reporting and more. Sovos customers include half the Fortune 500, as well as businesses of every size operating in more than 70 countries. The company’s SaaS products and proprietary Sovos S1 Platform integrate with a wide variety of business applications and government compliance processes. Sovos has employees throughout the Americas and Europe, and is owned by Hg and TA Associates.
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