UAE Corporate Tax: How prepared are business owners as first tax year comes into sight
While first corporate tax payment is due only by Sept. '25, much still needs to be done
A ‘paradigm shift’ – an expression often used for UAE’s launch of a corporate tax – aptly describes its significance. For UAE businesses, it is important to take a panoramic view of UAE corporate tax.
Tax fundamentals
The experience with the VAT implementation from 2018 should not create misconceptions about corporate tax and that it is just another form of tax. VAT is a transaction-based tax and requires that a correct tax treatment is recorded and reported at the time of transaction itself. Any error could result in penalties as well as a lost opportunity to recover VAT from customers.
Unlike VAT, corporate tax is not directly recoverable from the customers. Businesses are not expected to show corporate tax on their invoices or price negotiations.
There is no real time reporting of corporate tax during the financial year at the time of each transaction. Even at the end of the financial year, businesses will have a further 9 months to review their books of account, make corrections/reclassifications (wherever required), compute their tax liability, prepare tax returns and deposit the necessary tax that’s due from them. That’s why many penalties which would otherwise be applicable under VAT may not be relevant under the corporate tax laws.
Export of goods and services
Akin to VAT laws in many countries, the UAE’s VAT incentivises export of goods and services by zero-rating such exports. Such a zero-rating policy ensures a country’s goods and services remain competitive in the global market.
Corporate tax command a different policy criteria. Most countries do not provide corporate tax incentives on exports of goods and services. A few like India have provided tax holidays in relation to income from goods/services exports in the past - a tax policy decision in the specific context of the respective county. To illustrate, a country may aim to earn foreign exchange by promoting exports through corporate tax incentives.
I come across business owners mistakenly assuming that, similar to VAT, exports would also not be taxed at 9 per cent. The free zone based service exporters such as consultants often believe so. The income from the export of goods and services is generally not excluded from the purview of UAE corporate tax (except for certain free zone incentives).
Proactive free zone planning
Business operations will not undergo a sudden change from the beginning of the tax/financial year. Businesses will have 9 months to correct errors in the financial statement to prepare their corporate tax return.
A proactive approach and immediate actions are required for specific scenarios such as free zone tax benefits, tax groups, and year-end inter-company balances. Recently, a new cabinet decision and a corresponding ministerial decision - repealing earlier decisions – were issued with retrospective effect from June 1, 2023.
To avail the free zone preferential tax rate of 0 per cent, detailed planning is required as the opportunity once lost would block the incentives for the following four years.
Correct accounting
Corporate tax requires focused accounting of the transactions asper its actual nature. The errors in identifying and/or accounting of transactions could result in compliance errors and consequential penalties.
Even transfer pricing is examined for relevant categories of transactions, not for each single transaction. Periodic adjustments can be made in the book of accounts to ensure that related party transactions are at arm's length. A robust accounting and record keeping will ensure smooth corporate tax compliance.
Road ahead
The Ministry of Finance has stated that the corporate tax law has been kept simple. The general anti-abuse rules ensure that the tax law need not be voluminous. To keep pace with the business and economic requirements, tax guidance and amendments can be expected from time to time.
With the first January-December tax period cycle about 40 days away, asking the right questions is important for the business owners to understand their entitlements - and also their obligations.