Dubai: That the UAE will introduce a tax on corporate profits was rated a near certainty in the local business and audit circles. Such a tax would be a natural progression to the VAT introduced in 2018 – but it was events at the global level that might have speeded up the process of introduction of a corporate tax.
The UAE’s corporate tax rate is the lowest in the Gulf – Qatar is at 10 per cent, Oman and Kuwait at 15 per cent, and Saudi Arabia at 20.
The UAE corporate tax regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses. In addition to the UAE's extensive network of double-tax treaties, the new regime will strengthen the UAE's status as a world-leading hub for business and investment
In October last, leading global economies moved towards a minimum corporate tax rate. As many as 136 countries had entered an agreement to impose a minimum tax on large multinational corporations operating across national borders.
The fact that the UAE’s corporate tax regime will come into effect from June 1, 2023 gives businesses – and all concerned – ample time to prepare. “There is usually a surprise element when most governments plan on introducing any kind of tax,” said Atik Munshi, Managing Partner at Enterprise House, a consultancy. “So, a window of a year should actually be sufficient for business houses to plan.
Corporate taxes will bring discipline within the corporates culture. As such, it was the need of the hour. The UAE needs revenues to sustain the growth
“It would have been even better if more time was allowed. The tax move is expected to bring more financial discipline in businesses and record keeping will definitely improve.”
Need to tax
Why do governments want a global minimum corporate tax rate? Large multinational corporations have traditionally been taxed based on where they declare their profits rather than where they actually do business.
The corporate tax announcement was expected for the past months. With Golden Visas and other residency benefits being issued, the UAE has given all the right signals for attracting long-term investment. This will also require large investments in the infrastructure to support this growth and corporate tax will be handy in meeting those commitments.
This allowed several large companies to avoid paying high taxes in countries where they do most of their business by shifting their profits to low-tax jurisdictions.
However, it’s interesting to note that global corporate tax rates have steadily declined since the 1980s. The average global corporate tax rate was over 40 per cent in the early 1980s and dropped to well below 25 per cent in 2020 as governments competed to lower their tax rates to attract businesses and talent
With the tax rate below 10 per cent and an exemption limit of Dh375,000 profit, the UAE is a very attractive place to do business. The business community will take this in their stride and be part of the UAE success story
A number of tax experts affirm that the most immediate trigger for the current global tax agreement may have been the COVID-19 pandemic, which battered economies worldwide and affected the tax revenues of governments. Amidst all this, US tech giants – Google, Facebook (or Meta), and the likes – were pulling in record profits.
The 9 per cent rate by the UAE is still among the most competitive in the world. According to Nimish Goel, Partner at Dhruva Advisors, “It is probably one of the lowest in the world. Companies have been given ample time to prepare themselves for the new regime commencing June 1, 2023.
Zero per cent tax to small businesses and startups is well aligned with the investor-friendly outlook of the UAE Government.
Planning for tax regime starts now
As was the case when the VAT announcement was made leading up to the introduction in January 2018, the next 16 months will be about businesses preparing for the change. “Firms in the line of auditing, book-keeping and tax advisory must prepare well in advance to integrate corporate tax into a company’s reporting system and to push for stricter compliance from all their clients,” said Kunal Bilakhia of Taxpro Advisors.
We will have to analyse the implications of the corporate tax on small and medium-sized businesses. As far as larger companies are concerned they may be happy paying taxes in UAE considering the relatively low rate as compared to other countries and also taking into account the BEPS provisions
The Federal Tax Authority will be responsible for the administration, collection, and enforcement of UAE’s corporate tax collections.