Taxation has been fairly new for UAE business owners. The Value Added Tax (VAT), introduced January 1, 2018, was the first tax regime that impacted businesses across the UAE.
For the coming corporate tax, business owners are naturally comparing the corporate tax with VAT. They don’t want to repeat the mistakes they made during the VAT implementation. Business owners must understand that CT is different from VAT.
Given the nature of VAT, it was important to be ready by January 1, 2018 itself. Any errors or delays would have caused financial losses as well as penalties. Corporate tax per se will not impact any on-going business operations immediately (from June 1, 2023). Businesses need to be mindful of the differences to avoid a rush while preparing for corporate tax.
Different tax base
VAT is a transaction-based tax that can generally be collected from the customers. As the opportunity to collect VAT from the customers is time-bound, it is important to correctly determine the nature of each transaction before it is completed.
Referred to as ‘direct tax’, CT is a tax on business income. The taxable income will be derived from the financial books of account. Whether a transaction is taxable under the VAT laws or not, it will remain the entity’s business revenue/expense for the financial books of account.
Time for tax compliance
The VAT is required to be paid periodically, whether every month/quarter. Any error and/or delay results in financial costs and penalties. It becomes imperative that tax compliance is correct on a real-time basis.
On the other hand, CT needs to be paid within 9 months from the end of the financial year. For financial year January 1 to December 31 2024, the return and tax payment will be due only by September 30, 2025. Even if one or more transactions have been incorrectly accounted for during the year, businesses will have months a further 21-9 months to audit and review accounting entries and make corrective adjustments to perform the tax computations.
The final CT tax return could be prepared after such review and corrections without any penalties.
Transfer pricing has also caused an unnecessary confusion amongst businesses. The transfer pricing analysis is often done at the end of the financial year. The aggregate value of the relevant transactions during the financial year should generally be at arm’s length.
Accordingly, the transfer pricing adjustments could be made in the books of account at the year-end. Alternatively, if the relevant transactions are not at arm’s length, the taxable profits could be appropriately adjusted to calculate the net tax. Transfer pricing regulations do not stipulate penalties if the transactions are not at arm’s length as long as the taxable income is duly adjusted.
Even for domestic transfer pricing, e.g. salaries paid to the owners/directors, it is not required that the salary amount has to be at arm’s length from day one. It only needs to be ensured the total salary paid to ‘connected persons’ during the financial year is at arm’s length.
On the other hand, the VAT laws require that valuation of the inter-company transactions, wherever applicable, should be correct at the time of the transaction itself.
For VAT, the nature of business expenses needs to be correctly identified while recovering the input credit itself. If any ineligible input credit - e.g. entertainment expenses - are recovered, any correction thereafter could result in penalties.
For CT, the nature of expenses such as entertainment expenses could be reviewed anytime during the year or nine months thereafter, i.e. before preparing the tax computations. Any accounting correction in the books of account should not result in penalties.
Certain tax structuring, business model optimisation, free zone operations and analysis would certainly be required in advance for transition into CT. However, anti-abuse rules are already effective and enforceable.
Any transaction and/or arrangement, without valid commercial reasons and aimed to gain tax benefits, could be disregarded by the tax authorities, under the anti-abuse rules, to calculate the correct taxable profit. In such scenarios, penalties could also become applicable. Business owners should ensure to obtain accurate guidance on anti-abuse rules.
The anxiety about the forthcoming corporate tax is understandable. Finance personnel and business owners must understand the tax regime comprehensively and take proactive steps towards that goal. The VAT implementation experience should however not lead the business owners to a belief that CT would be same as VAT.