UAE corporate tax: What companies need to know

The new law will take effect from June 1

Corporate tax is applicable at a standard statutory rate of 9 per cent from June. Reem Mohammed/The National
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From June 1, when corporate tax is launched in the UAE, many companies are going to find themselves falling under its purview.

Any UAE entity undertaking any onshore business, and whose income exceeds Dh375,000 ($102,000) as per the law, will be deemed liable for the 9 per cent tax on all their taxable profits.

The obvious question is, what constitutes onshore business?

Companies trading with an onshore legal entity, an individual, or legal person, as the decree-law defines them, are regarded as having onshore business operations. This is a particular heads-up for the e-commerce sector.

Yes, there are carved-out sectors that are exempt from the tax, but for the vast majority, the above applies.

UAE to introduce federal corporate tax on business profits

UAE to introduce federal corporate tax on business profits

What about GCC trading?

The UAE's value-added tax (VAT) law was comprised of three tiers of legislation. A GCC framework, federal decree law and executive regulations.

At this time, there is no indication of a GCC-wide approach. This means trading with an entity in Saudi Arabia, on or offshore, does not in itself expose an entity to corporate tax.

Finally, there will be no third tier: executive regulations. Instead, such details may be specified in a decision issued by the Cabinet.

Keeping pace

The next obvious question is, how is one supposed to keep abreast of successive releases of additional details and clarifications? That is your responsibility as a trading entity.

Until 2018, UAE businesses could manage by themselves by reviewing their progress through financial/management accounting or cash movements, or a combination of both.

Then came VAT, which required a different treatment to compute a compliant position for reporting and settlement.

Now comes a fourth: Tax computation. Let’s dive in by way of a single component example.

Purchased assets, for example vehicles, depreciate in value over their useful life. The time period should be reasonable and reporting standards compliant. In the West, the treatment for corporate tax can be different. In the UK, depreciation is removed from your taxable profit’s calculation. Instead, you are allowed Writing Down Allowances. This will not necessarily be very different in value, but it’s a requirement in preparing your tax computation.

You might be wondering how many of these adjustments there will be. As of now, we’re unsure. What I am sure of is that there will be many.

Accounting standards

Adjustments completed, you now have your taxable profits. For those considering armchair hacks, no, you will not be able to employ your five-year-old and charge their salary against taxable profits. I’ve been asked.

Another obvious question, are business accounting functions going to manage this? For some with the requisite technical skills, yes. Given the issues that many are still having with VAT five years later, it might be best to get external support. One of those avenues is your external audit practice.

Personally, in my capacity as a finance director in the UK, I always had my auditors prepare it. However, in the UAE, should this approach be taken, where will liability sit should there be an issue? Will an auditor be considered jointly and severely liable for corporate tax amounts owed years later? What would this mean for their fees? Surely their insurance costs will materially rise.

This assumes you already conduct an annual external audit, something not required by every trade licence issuing authority. That is also about to change.

For those freezone entities that do not conduct onshore trading and elect to sit outside corporate tax, they will require an external audit.

My final questions. What does corporate tax mean for the audit industry? With so many additional entities now likely to require one, are there sufficient resources in the country to meet demand?

Already announced are changes to the requirements to form a practice.

It would be interesting to see what percentage of reporting entities have a December year end. This only extenuates the pressure on their capacity, even allowing for nine months to file and settle any amounts due.

Recent articles have highlighted the difficulties the profession is having in attracting sufficient entrants and the obvious knock-on this is likely to have on the quality of trainees.

The Ministry of Finance has been consistent in its messaging. Its objective is to ensure that corporate tax will not contain surprises. It will reflect best international practice. It will seek to reduce uncertainties. It will strive to make interaction with the process as seamless and painless as possible.

It's time for companies to step up and work together to ensure compliance.

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

Updated: May 24, 2023, 6:50 AM