At 9%, UAE's corporate tax will be among the lowest in the world. But businesses need to map out all the processes well ahead of the tax regime kicking into gear in June 2023. Image Credit: Shutterstock

A 9 per cent corporate tax to be introduced in the UAE from June 2023, with a higher percentage set for multinationals. In some ways, this reminds me of the months leading up to the introduction of VAT in 2018.

The response from the business community to the news was comparatively subdued. The introduction of VAT brought a shift in a country that had an almost non-existent compliance and reporting culture until then. I recall there were people who, until the eve of January 1, 2018, believed that VAT will be called off. Of course, that did not happen.

Over time, the business and the wider community pretty much accepted VAT. They are probably thankful that the rate has not gone up from 5 per cent unlike in certain GCC counterparts. Businesses are now used to complying and reporting and paying.

What is more, additional regulations have been introduced and enforced at regular intervals since then, such as the Ultimate Business Ownership (UBO), Economic Substance Regulations (ESR) rules. Let us not forget the excise tax – I doubt if people think much about it now even when they drink their cokes unless their business is directly affected by it.

Tax learning on the go

A corporate tax just brings more of all these - complying, reporting and paying. A Google search shows only 14 countries without some form of corporate tax. The only one in the list from the GCC (apart from the UAE until now) is Bahrain.

In fact, corporate taxation is nothing new even to the UAE though the vast majority of businesses were hitherto not touched by it. Oil and gas companies pay up to 55 per cent of their profits as tax. Branches of foreign banks pay 20 per cent tax on profit. International courier companies pay a 10 per cent levy computed on revenues earned from certain types of transactions.

Municipality tax is levied on commercial rent in Dubai as also on residential rent. Then then there are the different types of fees that businesses pay for various government services. One key question is what will happen to all of these when the new broad-based corporate tax comes in?

A pullback on government fees

The initial list of FAQs from Ministry of Finance (MOF) briefly alludes to the topic. The Dubai government made a welcome announcement that fees will be reduced. And we have seen some government fee reductions in Abu Dhabi preceding the tax announcement.

Another thing that comes to mind is the number of business licences that many UAE businesses – even small businesses – typically hold. Reasons for this vary. Certain activities are not allowed to be grouped under the same licence forcing business owners to take additional licence(s). Visa number restrictions maybe another reason.

No matter what the reason is, many a times, businesses do not clearly demarcate between different licences in terms of their business activities, people and most importantly, accounting. VAT introduction brought a bit of introspection to businesses in this regard as they considered whether and how to VAT-group their myriad entities. But the need for and/or the habit of acquiring multiple licences did not go away.

The UAE has tightened the corporate regulatory landscape, with the Ultimate Beneficial Ownership and Economic Substance Regulations.

A straight-forward process

With corporate taxation coming in, can this viably continue without adding significant unwarranted complexities? As of yet, we do not know how the grouping rule for corporate taxation is likely to be.

If some of the licences of a business cannot be grouped together for whatever reason, then all kinds of intricacies can crop up. Mainly, in terms of proper accounting of inter-company transactions and application of domestic transfer pricing rules, which are intended to ensure that the businesses are not ‘managing’ their inter-company pricing policy to reduce their overall tax liability.

For the uninitiated, a country’s right to tax your business stems from two relationships – either because your business is a resident in that country (the residence rule) or because its income is sourced from that country (the source rule). There are a number of international businesses which have made the UAE their regional or global headquarters. At least some of them, especially those with complex group structures, will have to do some hard soul-searching on how the tax residence and source rules will apply to them.

Multinationals have work to do

In some other GCC countries, we are witness to some really cumbersome and time-consuming tax audits and assessments primarily because of the unwillingness or inability of taxmen to make decisions on such judgemental matters. And the decisions, when finally made, sometimes tend to be extremely one-sided.

While this may add to the tax authority’s kitty in the short-term, it will reduce the attractiveness of the country as a business destination in the long-term.

The ESR was introduced because of the UAE’s no-tax economy, with the objective of asking businesses to prove that they are not located in the UAE purely to save tax. With corporate taxation introduced, the reason for ESR has simply disappeared and with that, will ESR rules too, at least for the mainland companies?

This also brings into question how the free zone tax concession rules will apply. The FAQs conditionally promise that the tax incentives offered to free zone businesses will be honoured.

The 9 per cent is actually one of the lowest rates globally. UAE, through the way it has managed VAT so far, has proven its desire and ability to act fast and keep things simple. Having a corporate tax regime in the UAE may make it easier for businesses with international presence to justify their UAE-related transactions in their other tax jurisdictions.

More prepared

In any case, the business community seems ready for the corporate tax introduction, and their preparedness is better with the VAT experience behind them. There is still a lot more work to do. As we wait for more directions from MOF and FTA, let us start looking at our businesses internally and start planning and preparing for the changes ahead.