How corporate tax differs from VAT in the UAE

From what constitutes revenue to counting the cost when supporting documentation is lost, the two taxes vary in certain aspects

The Abu Dhabi skyline. Companies in the UAE should be careful about getting their books in order for corporate tax. Victor Besa / The National
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Regular readers of this column will have noted how I often use value added tax, or VAT, as a relative reference tool when explaining the impact of corporate tax.

Today, let’s look at where they tug in different directions for the same thing.

First up, revenue.

A UAE company, be it an onshore or offshore entity, buys a digital asset in the UK. It then sells that digital asset to a customer in Canada.

That digital asset is not a service – it’s a good. Remember, under tax law, it can only be one or the other.

Why is it a good? It has intrinsic value. Its title is transferable. It can be clearly identified, and an owner can exercise their right to it legally.

As the digital asset was created in the UK, unless it was formally exported, customs declared and paid, it remains there. Most likely, perpetually.

However, from a UAE VAT perspective, it does not qualify as a vatable supply. The sale of the good does not occur in the UAE. If all this business did was sell these UK-sourced digital assets, it could not even register for VAT on reaching the threshold turnover of Dh187,500 ($51,055).

From a corporate tax perspective, it’s all very different. The entity’s turnover is just that, regardless of where it occurs. That the purchase and sale occur outside the UAE is irrelevant. It is qualifying revenue for corporate tax.

Whether or not it would constitute revenue that would be taxable at 9 per cent or 0 per cent is a different discussion and would require much more information.

Please note that we continue to await nearly two dozen cabinet decisions, which include one or more on transfer pricing. This will be particularly essential reading for any international trading entity.

It is interesting that there are solutions being peddled today in the marketplace, when there is so much law yet to be released. This, before we even consider the interpretations of what has been released, much of it partial and subject to clarification.

Why is what constitutes revenue important? At some time in your corporate future, you will have an audit. One of VAT. Another one for corporate tax.

While they will be similar in nature, they are looking for and at different things. This is where understanding how your finance department functions becomes very important.

Your core working accountants come in two forms. Those, for example, who numerically count the quantity of items in stock are the financial accountants. Secondly, there are the accountants who tell you that those numbers are practically incorrect and, more importantly, why. These are the management accountants.

It is the latter, with their specific experience in providing information in several forms to data-hungry stakeholders, who will bear the burden of delivering auditors' requests.

Here is a real-world example. A financial institution, as part of its KYC – know your customer – process, asks for financials, profit and loss, and VAT returns. It’s not easy trying to explain why your revenue for both disagrees.

The UAE's corporate tax law explained: Business Extra

The UAE's corporate tax law explained: Business Extra

Next, we’ll look at counting the cost when supporting documentation is lost. I’ve worked in entities here in the UAE that have suffered document loss. A fire can be particularly devastating, given how susceptible paper is.

With VAT, you no longer have proof to support your claim of input or charged tax. That is 5 per cent on the net value of the invoice lost. With corporate tax, unable to justify the allowable expense, you lose the full amount.

In case you were wondering, you do not get to deduct from the same supplier invoice twice. Your corporate tax calculation will ignore VAT.

It is worth noting that Saudi Arabia’s move to e-invoicing, something that is likely to migrate to neighbouring countries on satisfying their requirements for proof of concept, will solve many issues business owners do not know they even have, such as audits by government-mandated bodies.

One final observation: it is currently possible to pay your VAT liability at money exchanges, so we should assume the same will be possible for corporate tax.

This is useful for those settling smaller amounts. What appears to have changed is that the named person on the trade licence must now be present, with identification.

A copy of your trade licence, VAT or corporate tax certificate and your Emirates ID are required.

In addition, you must possess the payment reference number report created on the Federal Tax Authority portal. It is one page and contains all the information required to complete the process.

In my experience, this method of settlement is very efficient and inexpensive. Do note that such payments are made in cash.

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

Updated: July 17, 2023, 4:00 AM