Doubt surrounds e&’s earnings as UAE tax rise looms

Alamy via Reuters

• Rules put e& in high tax bracket
• Telecom pays royalty of 38%
• Majority-owned by government

There is uncertainty over whether e&, the UAE’s former telecom monopoly, will pay more of its profit in taxes after the federal government announced it would raise corporate tax for multinational companies operating in the country from 2025.

Emirates Telecommunications Group, which rebranded as e& but is better known under its previous name Etisalat, is the UAE’s fourth largest listed company by market capitalisation.

Currently it pays a royalty of 38 percent on the profit from its domestic operations and zero on its various foreign units, plus 9 percent corporate tax.

The UAE will increase corporate tax on some companies to 15 percent from January 1 2025. The higher rate will apply to multinational companies with global revenues of €750 million ($793 million) or more in at least two of the four financial years immediately preceding the financial year in which the tax applies. Based on these criteria, Etisalat should be included in this higher tax bracket.

The amendment comes a year after the UAE introduced corporate tax as part of the country’s commitment to meet taxation targets set by the Organisation for Economic Co-operation and Development (OECD).

Prior to the introduction of corporate tax Etisalat had been paying royalties of 15 percent on its domestic revenue and 30 percent on its domestic profit after the revenue royalty had been deducted.

“It’s too early to say if the (higher corporate tax rate) will affect Etisalat’s tax and royalty rates because the fine print has yet to be published,” said Nishit Lakhotia, head of research at Bahrain’s Sico Bank. “It would be harsh if its tax rate were to increase, considering its high royalty rate.

“Etisalat could be mandated to pay 15 percent in corporate tax as per the new government criteria. But we’ll have to wait to see if this gets offset at the royalty level. Until we get more clarity there is a risk to its earnings.”

In the nine months to September 30 Etisalat paid AED4.03 billion in royalties, up from AED2.2 billion in the prior year period. Its nine-month corporate tax bill was AED1.00 billion, down from AED1.08 billion a year earlier. The company did not respond to requests for comment.

“Whether the corporate tax increase is applied fully or not to Etisalat, it will likely prove neutral for the company’s profits. The royalties will probably be adjusted so that the effective tax rate remains similar,” said Omar Maher, a telecoms analyst at EFG Hermes in Cairo.

In dollar terms, Etisalat paid $1.37 billion in taxes and royalties on a pre-tax nine-month profit of $3.61 billion, meaning it paid an effective tax rate of 38 percent, according to AGBI calculations.

That is a substantially greater burden than the other major Gulf former telecom monopolies. Saudi Telecom Co’s (STC) effective tax rate was 6 percent, while those of Qatar’s Ooredoo and Kuwait’s Zain were 17 and 12 percent, respectively, although these companies also pay fees on their revenues.

Etisalat and domestic rival du are both majority-owned by the UAE federal government. They pay substantially higher fees and taxes in total than their counterparts in other Gulf countries. But the UAE duo benefit from a high average revenue per user due to regulations that restrict some applications such as WhatsApp voice calling, said Lakhotia.

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Etisalat and du also paid minimal licence fees, while those for operators in other Gulf countries have been much higher generally. In Saudi Arabia, for example, Zain Saudi paid $6 billion for a licence to become the kingdom’s third mobile operator.

“The UAE is charging its telecom companies in a different way – instead of levying large upfront fees in the form of a licence, the government receives regulatory fees and royalties annually,” said Maher. “The royalties are an indirect tax on UAE residents.

“Etisalat and du are a duopoly in a benign competitive environment with little priced-based competition. That enables them to achieve bigger margins and higher revenue-per-user than in much of the Gulf.”

The differing tax rates mean that while Etisalat’s nine-month pre-tax profit was $592 million more than that of STC, the Saudi Arabian company’s post-tax profit topped its UAE counterpart by $596 million.

“The investor return profile for Etisalat is quite healthy even with the company’s high effective tax rate,” said Maher.