Stock - Corporate Tax
Every little detail matters when it comes to book keeping and being on the right side of the UAE corporate tax laws. Any acts of omission face the risk of penalties. Image Credit: Shutterstock/Vijith Pulikkal

Dubai: UAE businesses, especially the small and mid-sized ones, will need to maintain meticulous records of all their transactions if they don’t want to fall foul of their upcoming corporate tax obligations.

Industry sources say that the process will be relatively straight forward where the bigger entities are concerned, but it could be a whole lot complicated others.

One grey area could be in recording ‘inter-company service agreements’. “Business typically do not maintain any contractual agreement for such services,” said Rakesh Nair, Director for Corporate Tax at the consultancy Crowe UAE. “These agreements would be crucial from a ‘transfer pricing’ perspective.”

In a business environment such as the UAE (and the wider Gulf), single shareholder (or a group) owned companies are the norm. And it’s also standard practice for these companies to share services.

With the UAE’s corporate tax in effect, such shared services have come under greater scrutiny.

What companies should ‘record’

According to Nair, copies of all invoices ‘substantiating the claims of expenditure’ need to be maintained. And there should be ample proof offered for free zone enterprises to show they have significant economic ‘substance’.

“Businesses should also show supporting calculation for cost sharing arrangements (if any),” said Nair.

There should also be bifurcation between expenses incurred for employees and business partners in case of events where both employees and business partners are present.

- Rakesh Nair of Crowe UAE
  1. Records or documents should be maintained on yearly basis and should be legible, easily retrievable, etc.
  2. In case there are multiple entities in a group, then the documents/invoices should be in the name of the respective entity.
  3. All related party documentation should be maintained on priority basis.
  4. Reporting made under ESR (Economic Substance Regulation), free zone regulation and corporate tax should be corroborative, and any difference should be reconciled.

VAT and corporate tax compliance

Since UAE businesses have been operating under VAT regime since 2018, and which also requires extensive maintenance of financial records, one would have thought with corporate tax, it will be more of the same.

But industry sources point out there are marked differences.

“VAT essentially comes into effect at the above-the-line transactions (i.e. on the revenue side),” said a consultant. “With corporate tax, it’s all about the below-the-line impact, in effect about expenses and can refer to cash as well as non-cash (depreciation, for instance) items.”

What are the penalties?

The penalties for faulty or inconsistent maintenance of records can pinch:

For instance, failure of the person conducting a business or having a tax obligation to keep the required records will get hit with Dh10,000 fine for each violation. And Dh20,000 in each case of repeat violations within 24 months from the date of the previous violation.

And for failure to settle the payable tax? A monthly penalty of 14 per cent per annum, for each month (or part thereof) on the unsettled payable tax amount from the day following the due date of payment and on the same date monthly thereafter.

These aren’t the only penalties…

Better get on top with record keeping

“Records are required to be maintained by the company and do not require certification unless mandated by law,” said Nair. “For example, if the financials are required to be audited as per the law, then it has to be certified by auditors.

“The records and any other documents related to tax can be submitted in English or Arabic. However, the records and documents related to tax needs to be submitted in Arabic to the Federal Tax Authority when requested.

“If the company has resources available, then there is no additional cost for maintaining records. Audit fees (in case of mandatory audit) would be an additional cost if financials were not audited in prior years.”

Businesses in the UAE, the SMEs in particular, thus have their work cut out on what they should do to be fully in compliance. A good start would be to have a firm grip on all their records…