Preparing for the introduction of Corporate Tax requires businesses in UAE to take a holistic approach. Image Credit: Shutterstock

On January 31, 2022, the UAE announced plans for the Corporate Tax, effective from June 1, 2023. This signifies the most exciting tax development in the UAE since the VAT, and a detailed legislation is expected to be released this year.

While most businesses will have two years before they need to file their first CT returns, recent experience of implementing VAT has taught that it is prudent to give yourself as much time as possible to prepare. Although businesses are now much better prepared for the introduction of a new tax than they were five years ago, CT will bring its own challenges and will be expected to be the main focus of attention for businesses for the next few years. It is important not to forget about CT’s older sibling – VAT – and the impact it may have on different phases of the implementation.

A thorough review

The basic CT implementation activities will include businesses assessing the applicability on in-scope entities, reviewing its impact on financials, and implementing the necessary changes to supply chains, processes and systems. VAT being a transactional tax has a direct impact on business revenues, processes, and systems relevant to the CT implementation. Ensuring businesses have an accurate understanding of the impacts of VAT on existing operations will help to ensure subsequent CT implementation activities are conducted on the basis of correct information and reduce the administrative and financial burden of implementing.

While it is important that businesses have a comprehensive understanding of their VAT affairs before commencing Corporate Tax implementation, it is equally crucial to remember VAT will be a major consideration during restructuring activities that may accompany this. CT will not apply to all businesses equally – while the default rate will be 9 per cent, some entities may be subject to a 0 per cent rate, 15 per cent, or be exempt.

These differences mean businesses are likely to evaluate various structures to optimise financial performance. The extent of restructuring will depend on the nature of business and may include changes to existing ownership structures, transfer or disposal of assets, shifting business operations within or outside the UAE, introducing new charges, and similar activities. VAT will have an impact on most restructuring activities, and businesses should reflect on them in advance – this will ensure there are no unexpected and costly surprises down the line.

Continue the process

This holistic approach to taxation – i.e., examining the impact of business decisions on all taxes – will need to be maintained after CT comes into effect. The Federal Tax Authority will have access to new sources of info about businesses, which can be used to identify potential cases of non-compliance. For example, the revenue information reported by a taxpayer for CT and VAT purposes can be used to find inconsistencies in reported figures. It is essential businesses have a good understanding of all tax obligations and can justify their tax positions to the FTA.

The introduction of CT introduces a new layer of complexity and will force businesses to dedicate substantial efforts to prepare. However, businesses are expected to be compliant with all taxes at all times and should use the time they have before being occupied with CT to review and get their VAT basics right. In the long run, tax functions will have to become more sophisticated as they continue juggling multiple taxes.

Tax trends in other GCC countries (increases in VAT rates and introduction of e-invoicing) indicate that this may not be the last tax reform on the horizon in the UAE.