UAE's VAT rules will have bearing on certain corporate tax provisions - and vice versa

Since the introduction of taxation in the UAE in 2017-18, we have often cautioned that taxation as such is not a new concept. A good deal of jurisprudence, research and tax-related controversies exist globally.

It would be inappropriate to treat UAE’s taxation as a new subject and reinvent the wheel while advising businesses. With Value Added Tax (VAT) having completed 5 years in the UAE, the VAT policy on certain business issues may have an impact under the new corporate tax and vice versa.

Mobile phones for employees

UAE companies often provide mobile phones and mobile user plans to employees for business purposes. As per the prevailing VAT public clarification (VATP028), there could be a potential personal use of such phones and plans. Input VAT can be recovered on such expenses only if a taxpayer has a written policy to restrict personal use and maintains adequate documentation.

Corporate tax is no different. Only such expenditure will be allowed as a deduction, from the taxable income, incurred wholly and exclusively for business purposes. A question arises if mobile phone/plans expense would be disallowed as a deduction for corporate tax if the detailed documentation of its usage is not maintained?

Medical insurance to employees

The VAT laws provide goods/services used for employees’ personal benefit are not eligible for input tax recovery. Accordingly, VAT on the medical insurance of employees’ family members is generally not recoverable.

Interestingly, VAT on employees’ insurance is recoverable only because it is a legal obligation under labour laws. In other words, medical insurance expenses of employees and their families is considered as a personal benefit under VAT laws.

The corporate tax laws do not provide for the deductibility of expenses incurred as a legal obligation. Only expenses incurred wholly and exclusively for business purposes are allowed as deduction under corporate tax.

Considering the personal benefits presumed under VAT laws, the deductibility of medical insurance expenses could be questionable under corporate tax.

Directors’ fees

Until December 31, 2022, an individual working as a member of board of directors could be subject to VAT. Effective January 1, 2023, a deeming provision was added to exclude such director’s functions as a supply of service.

It could be inferred such functions were specifically excluded from VAT as it inherently amounts to conducting a professional business in an individual capacity.

Individuals conducting business in the UAE are treated as taxable person under corporate tax. However, only such business activities would be subject to corporate tax as specified in a cabinet decision (yet to be issued). It is yet to be seen whether the VAT position on such individuals for the last 5 years could play a role under the corporate tax.

Are you claiming all eligible input VAT?

Under corporate tax, no deduction will be allowed for the amount of input VAT recoverable by a taxpayer. The law refers to such input VAT that is recoverable as compared to the input VAT actually recovered in the VAT returns. Can a corporate tax audit/assessment include a review of such input VAT, which is otherwise eligible but not claimed by a business in its VAT returns?

It is a known fact that many businesses have opted to forfeit otherwise eligible input VAT credits for multi-fold reasons. The business owners may have to revisit their VAT positions and policies.

Salaries paid to owners

The UAE’s VAT is not applicable on employment/salary income of an individual. The expression ‘employment’ is not defined under the VAT laws.

When it comes to corporate tax, the ‘employment’ has been referred to in the frequently asked questions (FAQs) released earlier. Employment may include a continuing service relationship where all or most of the income of the individual is derived from one customer, and the service income is essentially remuneration for the natural person’s labour.

The FAQ requires that the employment/salary income should be derived from one customer (aka employer). Many business owners have already started drawing out salaries from multiple companies owned by them. It needs to be asked whether such transactions would be considered as ‘salaries’ or as ‘business income’, if drawn from multiple companies?

The anti-abuse rules will also have an impact on such transactions.

Ask the right questions

Osman Sultan, an author and business personality, often advocates ‘The answers already exist out there - are you asking the right questions?’

While guidance is awaited from the Federal Tax Authority (FTA), business owners should take note of their tax positions and ask questions regarding the impact of corporate tax on their tax policies. With the objective to share tax insights, Gulf News and AskPankaj will be bringing to you knowledge events over the coming months.