Taxation is a relatively new concept for UAE business owners. The Value Added Tax (VAT), which went into effect on January 1, 2018, was the first tax regime that affected enterprises in the UAE. When it comes to the upcoming corporate tax, company owners are naturally comparing it to VAT. They don’t want to make the same mistakes they did during VAT introduction. CT is not the same as VAT, which business owners must understand.
Given the nature of VAT, it was critical to be prepared by January 1, 2018. Any mistakes or delays would have resulted in monetary losses as well as penalties. Corporate tax, in and of itself, will have no direct impact on any ongoing corporate operations (from June 1, 2023). Companies must be aware of the distinctions in order to avoid rushing while preparing for corporate tax.
VAT is a transaction-based tax that is generally levied on customers. Because the opportunity to collect VAT from customers is limited in time, it is critical to correctly identify the nature of each transaction before it is completed. CT, sometimes known as ‘direct tax,’ is a tax on corporate income. The financial books of account will be used to calculate taxable income. Whether or not a transaction is taxable under VAT legislation, it will be recorded as business revenue/expense in the entity’s financial books.
VAT must be paid on a regular basis, whether monthly or quarterly. Each mistake or delay incurs financial fees and penalties. It becomes critical that tax compliance is correct in real time.
CT, on the other hand, must be paid within 9 months after the fiscal year’s end. The report and tax payment for the fiscal year January 1 to December 31, 2024, shall be submitted only by September 30, 2025. Even if one or more transactions were erroneously accounted for throughout the year, businesses will have 21-9 months to audit and verify accounting entries and make necessary changes in order to conduct tax computations.
Transfer pricing has also generated unneeded consternation among firms. Transfer price analysis is frequently performed towards the end of the fiscal year. The aggregate value of the relevant transactions during the fiscal year should be at arm’s length in general. As a result, the transfer pricing adjustments could be made in the books of account at the end of the fiscal year. If the necessary transactions are not at arm’s length, the taxable earnings can be appropriately adjusted to determine the net tax. If the transactions are not at arm’s length, no fines are imposed as long as the taxable income is appropriately adjusted.
Even for domestic transfer pricing, such as wages given to owners/directors, the compensation amount does not have to be at arm’s length from the start. It is sufficient to verify that the total remuneration paid to ‘related people’ during the fiscal year is at arm’s length. The VAT laws, on the other hand, demand that the valuation of inter-company transactions, if applicable, be exact at the time of the transaction.
Any transaction and/or agreement without valid commercial objectives and aimed at obtaining tax benefits may be rejected by the tax authorities in order to determine the right taxable profit under anti-abuse laws. Penalties may also become applicable in such cases. Business owners should seek accurate guidance on anti-abuse regulations.
It’s fair to be concerned about the impending business tax. 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.
