Introduction
The United Arab Emirates (UAE) has established itself as a leader in both economic prosperity and environmental sustainability. As the host of the 28th United Nations Climate Change Conference (COP28), the UAE’s fiscal policies, encompassing various taxes at Emirate and Federal levels, play a pivotal role in supporting COP28’s environmental objectives. This article aims to explore how the UAE’s fiscal policies, shaped by various taxes at both Emirate and Federal levels, play a critical role in supporting the environmental objectives set forth by COP28.
Oil and Gas Taxes (Emirate-level)
The backbone of the UAE’s economy has long been its oil and gas sector. At the Emirate level, the imposition of taxes on oil and gas activities reflects a forward-looking approach. In fact, the progressive Emirate-level Corporate Tax for businesses in the petroleum sector is imposed up to 55%, which is more than six times the applicable rate of Corporate Tax on a Federal level.
These taxes serve not only as a source of revenue but also as a strategic lever to encourage a gradual shift towards a more diversified and sustainable economy. Such gradual shift is already taking place, evident from the oil share of the GDP proportionately decreasing with time. By attaching fiscal importance to the extraction and production of hydrocarbons, the UAE aims to fund initiatives that align with COP28’s environmental targets.
Excise Tax on Tobacco and Tobacco Products (Federal-level)
At the Federal level, the UAE has implemented Excise Taxes on products that are harmful to human health and the environment. Amongst the goods subject to Excise Tax in the UAE are tobacco and tobacco products, taxed at a rate of 100%, which is more than 20 times the rate of the applicable VAT in the UAE.
This fiscal measure is two-fold. First, it acts as a deterrent to the consumption of products harmful to both public health and the environment. In fact, in a recent report published by the World Health Organization (“WHO”) titled “Tobacco: Poisoning Our Planet”, the WHO states that “Production and consumption of tobacco also contribute to global warming, releasing 80 million tonnes of Carbon Dioxide (CO2) into the environment each year.”
Second, the revenue generated from Excise Taxes is effectively used for environmental initiatives, contributing to the country’s commitment to COP28 objectives. The “sin tax” not only safeguards public health but also supports the broader goal of building a sustainable future.
Introduction of E-invoicing Project
In a move towards greater efficiency and environmental responsibility, the UAE has introduced the E-invoicing project at the federal level. According to the UAE’s Ministry of Finance, “The Ministry of Finance works on the “E-Billing System” project to develop an advanced electronic billing system and activate it at the country level. The system will automate the procedures for filing tax returns with the tax system to facilitate filing tax returns, improve tax compliance, and reduce cases of tax evasion. The project includes different phases and targets that are set to be completed by July 2025.”
While this initiative mainly aims to facilitate tax reporting and compliance, it also aims to digitize invoicing processes, reducing paper consumption and streamlining financial transactions. By minimizing the environmental impact associated with traditional invoicing, the project aligns with COP28’s emphasis on sustainable practices. This forward-thinking approach underscores the UAE’s commitment to leveraging technology for both economic and environmental advancement.
Use of Tax Revenues for Environmental Sustainability
The prudent use of tax revenues is where the UAE demonstrates its commitment to environmental sustainability. A significant portion of these revenues is strategically allocated to projects and initiatives that directly contribute to COP28 objectives. This includes investments in renewable energy, conservation efforts, and the development of sustainable infrastructure. By ensuring that tax funds are channeled towards environmentally conscious projects, the UAE is actively participating in the global fight against climate change.
Key initiatives and investments by the UAE into the sustainability of the planet include:
- Investing in hosting COP28 – the UAE is the first GCC State and second Middle Eastern State to ever host the COP28, showcasing its commitment to investing in the future of the planet.
- A pledge of USD $1 Billion to be invested in climate-smart agriculture and food systems over the next 5 years.
- Investments into keeping Methane emissions at bay, evidenced in the UAE’s hydrocarbon industries having the world’s lowest Methane intensities of 0.01%, with further intention to cut this by 30% by the end of 2023.
- The creation of a blueprint Hydrogen Leadership Roadmap, containing comprehensive steps to establish the UAE as a leading exporter of hydrogen by supporting low carbon industries.
- Setting a goal for planting 100 million Mangrove trees as part of its second NDC (Nationally Determined Contribution). NDCs were adopted from the Paris Agreement.
- Investing in the Barakah Nuclear Plant with the aim of considerable reduction of greenhouse gas emissions.
- A USD $400 Million investment in helping developing countries transition from old methods of energy generation to renewable sources.
- Developing the first of its kind large scale carbon capture facility (CCUS).
- Investment of USD $17 Billion in 27 island nations facing the climate change threat.
- Adopting the “Net Zero 2050” strategic initiative with the aim of making the UAE Carbon-neutral by the year 2050.
Suggested Proposals for Renewable Energy Tax Policies Post-COP28
As the UAE hosts COP28, there is a growing consensus among experts that this global summit could inspire proposals for integrating environmental considerations more robustly into the nation’s tax policies, especially in the renewable energy sector. These suggestions, aimed at supporting and accelerating the UAE’s green energy initiatives, might encompass the following areas:
- Enhanced Tax Incentives: There is a possibility of proposing new or improved tax incentives for investments in renewable energy. This could include the introduction of tax credits or offering reduced tax rates specifically tailored for companies operating in the renewable energy sector.
- Carbon Taxation as a Proposal: Experts suggest that COP28 might spark discussions on implementing a carbon tax, the proceeds of which could be used to subsidize renewable energy projects. This initiative would be in line with international efforts to mitigate carbon emissions.
- Promoting Green Bonds: It is proposed that COP28 could lead to heightened focus on green bonds, with associated tax exemptions, as a means to secure funding for renewable energy ventures.
- Proposals for VAT Adjustments: Adjusting the VAT framework for equipment used in renewable energy, to make it more affordable, is another potential suggestion arising from the summit.
- R&D Tax Benefits: There is anticipation that COP28 might lead to proposals for specific tax incentives aimed at fostering research and development in renewable energy technology.
These suggestions reflect the proactive steps that experts believe the UAE might consider post-COP28, emphasizing the country’s commitment to enhancing its renewable energy sector through strategic fiscal policy adjustments.
In conclusion, the UAE’s fiscal policies are not merely about collecting revenue but are a powerful tool in the pursuit of environmental sustainability. From taxes on oil and gas industries to Excise Taxes on harmful products, and innovative projects like E-invoicing, the UAE is setting an example of how fiscal measures can align with COP28’s environmental targets. As we navigate the path towards a more sustainable future, the UAE stands as a beacon, proving that from taxes to trees, every financial decision can contribute to a greener planet. The upcoming COP28 provides an opportunity for the world to witness the impact of such forward-thinking fiscal policies in action.
Call to Action
Stakeholders in the renewable energy sector, investors, and policymakers should engage in dialogues to shape these anticipated tax policies. It is crucial to ensure that the changes brought forth by COP28 not only foster the growth of renewable energy in the UAE but also set a benchmark for other nations in the global fight against climate change.
This Article was prepared by Marwan Alnooryani, Senior Tax Associate, at Habib Al Mulla & Partners. For further information please contact him or any of the members of our team.
