UAE corporate tax: Regulations on trade to consider

With a rich maritime history and world-class airports, the UAE stands as a key player in the global trade network. The implementation of corporate tax will not alter this status. Instead, it will prompt us to focus on effectively managing the additional compliance and accounting requirements.

Central to this discussion are Incoterms. Incoterms are a set of internationally recognised rules that are widely utilised in global trade. They establish the roles and responsibilities of the parties involved in a specified sale-of-goods structure.

In any sale and purchase transaction, the buyer and seller are the primary parties involved. However, there are several other key players that support and facilitate the process. These include insurers, customs officials, logistical supply agents, and the provider of the means of transfer, such as a plane or a ship.

These all play crucial roles in ensuring the smooth and efficient completion of a transaction.

Let’s begin with something we all know. Revenue recognition.

In a transaction, there comes a crucial moment when the seller can officially recognise the revenue from the goods sold. These goods possess two distinct characteristics, typically acquired by the buyer in a specific sequence.

When a person drives a car out of the showroom for which they have not yet paid, but the sale has been agreed on, they assume the risk associated with the goods.

In the event of an accident or damage to the car, the responsibility falls on the buyer, regardless of whether payment has been made. The goods are in their custody and they are accountable for their care and protection.

Next in the process is obtaining title to the goods. This occurs once the goods have been completely paid for. Making partial or scheduled payments over a period of time does not transfer title to the goods.

Let's now apply the relevant Incoterm. For simplicity, these are generally referred to by their three-letter acronyms. The car mentioned earlier was sold under the EXW – Ex Works term.

Under this term, the seller makes the goods available at their property and the buyer is responsible for picking it up, declaring themselves satisfied, and leaving.

From a corporate tax standpoint, qualifying revenue is recognised when the car is sold and leaves the showroom. The cost of the vehicle is then subtracted from the revenue to determine taxable profit, on which a 9 per cent levy will be imposed.

With numerous Incoterms available, it is time to delve into the intricacies and nuances of these international trade terms.

A company based in the UAE has procured goods from outside the GCC and is currently in the process of shipping them to a buyer within the Emirates. The agreement between the parties is CIF – Cost, Insurance and Freight.

Under this agreement, the seller is responsible for overseeing the transportation of the goods to a location agreed upon by the buyer. Furthermore, the seller is also obliged to provide insurance coverage for the goods during transit.

Revenue is recognised upon the buyer taking possession of the goods. In the event that the goods are delayed outside the port, such as in cases where there is a backlog of vessels awaiting reception and unloading, there may be a one-week delay in revenue recognition.

The seller's fiscal year runs from January to December. Their shipment typically arrives on December 30 and is unloaded by January 5. Despite the fact that the majority of the funds have been invoiced and paid by the buyer in advance, the revenue from this shipment must be accounted for in the new fiscal year.

As a result, any taxes owed on this revenue must be settled no later than the end of September the following year.

The corporate tax laws in the UAE will adhere to the International Financial Reporting Standards (IFRS). The specific example mentioned falls under IFRS 15.

The treatment of VAT is unique and distinct. Each invoice issued to the buyer must be included in the VAT reporting cycle based on its date. In cases where invoices are generated only after payments have been made, the seller is allowed a grace period of up to 14 days to comply with the aforementioned conditions.

Determining the payment schedule is actually simpler than it may seem, as it is typically outlined in the contract of sale between the parties involved.

In terms of the seller's costs, the deductibility for corporate tax purposes will align with the revenue generated. While this general rule applies, there may be exceptions worth noting. Allow me to provide an illustrative example.

The delay in docking is expected to result in demurrage charges being incurred by the seller. Demurrage is a fee paid to the owner of a chartered ship when there is a failure to load or unload the ship within the agreed-upon timeframe. In this case, the seller is one week behind schedule.

Since the cost is usually incurred on a daily basis, it will span two separate corporate tax years. Given that this charge is not a direct cost associated with a sale, but rather incidental, I believe it can be expensed and deducted in the corresponding periods.

It is important to note that there is a significant amount of detail regarding UAE corporate tax that remains unknown. Therefore, it is imperative that we carefully assess our trading practices and identify any gaps where applicable rules, international frameworks, and common sense should be applied.

By doing so, we can ensure compliance with regulations and make informed decisions regarding taxation.

I would like to leave you with a thought to ponder: Shipping falls under the corporate tax-exempt business category for freezone entities, but what exactly does shipping entail?

David Daly is a partner at the Gulf Tax Accounting Group in the UAE