Beyond the bottom line: How UAE companies can turn tax compliance into competitive advantage

Businesses must explore how different tax regimes affect them. Getty Images

This column focuses on different treatments of tax law. If you are in a certain industry, what is the correct timing when invoicing? What information is mandatory on supplier invoices? You can continue to ask questions of this nature up to and including internal document management and compulsory filing with external parties.

By way of consequences, inevitably it is the stick, not the carrot, that delivers the greatest response. It is important to understand what penalties can be applied and the sum value of interest on those. This is because it is typically at a later time that problems are discovered.

Focusing on the carrot, let us reframe this as a positive business proposition. It is a useful exercise to revisit, line by line, component by component, your profit-and-loss statement to see if contributing elements are optimised.

One part often overlooked is tax. Not just corporate tax, but VAT – and depending on your business activities – excise and customs duties.

You can tell a lot about a chief executive's leadership by what draws their attention first.

“Sales is vanity, profit is sanity and cash flow is reality.” In uncertain times this adage is never more true.

The UAE's corporate tax law explained: Business Extra

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Let’s start with sales. From an organisational viewpoint, the location of sales should cause you to consider having a separate entity for non-Gulf business. Depending on what and where you do it, this business might be exempt from corporate tax.

At the very least, you can elect to sit outside the UAE's VAT system having satisfied the relevant authorities that you comply with their conditions.

What would be lost in reclaimable VAT would be counterbalanced by not having to comply with rules of treatment for client and supplier invoices. Add to that reporting and the potential for disruptive external audits to normal internal operations.

Let us add another layer. As more rules are introduced to a tax regime, it requires more effort to manage the increased difficulty. Several regimes that are adding new or amending existing rules, often tugging operational practices in different directions, require an alternative management approach.

The worst outcome is when the rules of one tax regime are permitted to dictate the actions of another and do so incorrectly.

For example, I’ve worked with people who, for years, thought that VAT did not apply to their revenue. These businesses will discover that the people to whom they are filing their annual corporate tax return, detailing their revenue, are the same as those they are not reporting their VAT related revenue to.

If this is the position you find yourself in, admit the error. The relevant authorities will work with you to correct matters. Yes, with penalties, but having dealt with and settled your dues, the issue is considered resolved and everyone moves on.

The above are examples of what you might find when you review your sales processes. It’s not a comprehensive list. Let us move on to cost of goods and services. Does your business track the profitability of each piece of work it does at a consolidated level?

For a corporate tax perspective, you are interested in whether any of your suppliers are related or connected parties. This means understanding the different parties that make up your supply chain. While you are looking at that, take a look at your margins.

While we are talking about transfer pricing, what happens when a related party is not a direct supplier, but instead supplies one who is. Do the same rules of proving that transactions are being carried out at arm’s length apply?

I do not know. It’s possible that a business might be unaware that it’s happening. Given ignorance is no defence in law, that might not be sufficient, should it be discovered.

Would the value of such business matter? A one-off transaction of value verses multiple micro transactions.

Given the breadth of what constitutes a related party in the UAE, it might be easier than you think to find your organisation in this position.

Repeat the same exercise for your overheads. Line by line. Know your business.

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