UAE banks are able to afford VAT

The capability of banks operating in the UAE, to meet the 5% VAT obligation is better than individual customers because of their strong financial position, high levels of capital and good rates of liquidity and profitability.

Experts stated that banks in the Emirates have the appropriate mechanisms to pass part of the tax to the end users, including the increase in fees for companies. Banks are also able to raise the interest on some products and reduce the return on deposits, but this may affect the competition between Banks and availability of products at competitive prices for existing customers.

They said the impact of VAT would likely be between 2 and 5 percent on net bank income this year.

The Central Bank obliged the banks and finance companies operating in the country to bear the value added tax, which was introduced in the UAE at the beginning of this year at the rate of 5% on most goods and services.

The bank issued a notice last December on “clarifications on the application of value added tax”. Banks and finance companies were obliged to comply with Central Bank Regulation No. 29/2011 regarding bank loans and other services provided to individuals. The fees for services received from customers should be within the limits set out in the regulation. Banks and finance companies are not allowed to exceed the fee structure set for individual customers due to VAT.

For his part, Mubarak Rashid Al Mansouri, Governor of the Central Bank of UAE, said that the bank is currently studying the levels and structure of fees for banking services to ascertain their suitability.

During the “Ninth World Financial Markets Forum” he recently stated, that the Federal Tax Authority did not specify who will pay the tax and did not require the loading of customers but it is important to pay the tax to the state. Al-Mansouri added that the Central Bank recently asked banks to adhere to the levels of fees declared and specified in advance until the study of their suitability in the context of the current situation.

Abdul Aziz Al Ghurair, Chairman of Emirates Banks Union, said that the Central Bank is currently studying the situation and assessing the impact of banks’ tax burden on the performance of the sector. The results of the study are expected to determine who will pay the value added tax on banking services during the next two months.

With reference to the possibility that some banks are passing VAT to customers by raising fees or reducing interest rates on deposits, Al-Ghurair added that most banks are committed to carrying value added to retail services, but the customer still bears other un-priced services and large corporate services.

Mohamed Damak, the global head of Islamic finance at Standard & Poor’s, estimated that the impact of VAT on UAE banks’ profitability for 2018 could amount between 2% to 5% of total net bank income. Banks have the option to absorb the tax or decide passing the obligation to the customer.

He further stated that “It will also depend on the way banks will compensate their employees for inflation, which will rise because of the tax.”

On what banks could do to mitigate the impact of tax on their profits, Damak said: “It depends on the banks’ decision to target the segments to be taxed.”