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UAE telecom companies lose value after tax announcement

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December 11, 2012 12:28 by



Shares in Etisalat, the United Arab Emirates’ biggest telecoms firm, and rival du both fell sharply on Tuesday following government changes to the way it taxes the sector.

Dubai-listed Du was down 9.8 percent at 0621 GMT, slumping to a two-month low while Etisalat fell 9.6 percent on the Abu Dhabi bourse to its lowest level since June.

In a brief statement on Monday the government had said Etisalat, formally known as Emirates Telecommunications Corp, would now pay royalties, or taxes, on revenue as well as profit. The government also said it would steadily increase royalty fees for du over the next few years.

That was enough to cause some investors to sell on Tuesday, although the companies suggested that the impact from the tax changes may not be that significant for Etisalat and potentially beneficial for du in the short term.

Etisalat, which operates in 15 countries across the Middle East, Asia and Africa, previously paid 50 percent of its profits in royalties, or taxes, but from 2012 to 2015 it will pay 35 percent of its profit in royalties, plus a further 15 percent of revenue.

That would have seen Etisalat’s tax bill rise by about 32 percent for the nine months to Sept. 30, 2012, according to Reuters calculations. But the operator on Tuesday issued a statement explaining that the revenue royalty would only apply to domestic earnings.

Its international units accounted for 28 percent of group revenue this year to Sept. 30, so excluding these from the revenue royalty is a potentially significant move, especially as Etisalat tries to reduce its dependence on its home market.

The new royalty regime will also end double taxation on Etisalat’s foreign profits – previously it would pay tax according to local tax rules abroad and then be taxed again at home.

“We do not anticipate a significant impact on consolidated net profits for the year 2012,” Etisalat said in a statement to the Abu Dhabi bourse.

Du launched services in 2007, with the government allowing it to iniitally pay lower royalty rates than the more established Etisalat.

Last year du paid 5 percent of its revenue in royalties, plus 15 percent of its profit, but for 2012 it will pay 5 percent of revenue and 17.5 percent of profits. This will steadily increase to 15 and 30 percent respectively in 2016, with Etisalat paying the same rates as du that year.

Crucially, however, du on Tuesday said the revenue royalty will be deducted from its profit before the profit royalty is calculated.

This was not the case last year, meaning du effectively paid a profit tax rate of about 39 percent. Had the new formula been applied in 2011 it would have reduced this to about 36 percent, according to Reuters calculations.



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