We investigate the effects of magnetic energy release by local magnetic dissipation processes in Poynting flux-powered GRBs. For typical GRB parameters (energy and baryon loading) the dissipation takes place mainly outside the photosphere, producing non-thermal radiation. This process converts the total burst energy into prompt radiation at an efficiency of 10-50%. At the same time the dissipation has the effect of accelerating the flow to a large Lorentz factor. For higher baryon loading, the dissipation takes place mostly inside the photosphere, the efficiency of conversion of magnetic energy into radiation is lower, and an X-ray flash results instead of a GRB. We demonstrate these effects with numerical one-dimensional steady relativistic MHD calculations.