UAE corporate tax: Supporting documents a must for deductions against taxable profits

We have a duty to maintain our own records

UAE corporate tax. Nick Donaldson

Some of my articles have their origin in questions asked by you, the readers. I might not always have an answer to hand, but it is remarkable the greater issues raised from such queries.

When VAT was being launched, I recall being asked if receipts should be kept to reclaim input VAT. Acting figuratively, the person pulled a retail outlet receipt from their pocket and waved it about.

It was almost blank. Most retail receipts are produced from thermal printers. That is ash on your piece of paper, not ink.

Affected by temperature, it falls off and ultimately you find yourself having filed folders with nothing legible. Have a look inside your 2018 files, the first live year for VAT.

Yes, I answered, you need to keep receipts.

However, what dawned on me was the requirement to have paper originals to support any input VAT claims.

What were the implications for retail outlets legally bound to provide receipts?

What were the implications for customer relationships should a purchaser be penalised years later for not having supporting documents?

We not only have a duty of care to maintain our own records, we also have a responsibility to our customers to ensure that we do not cause unintentional financial harm through penalties.

For avoidance of doubt, for corporate tax, you will be required to produce supporting documents for any deductions against taxable profits.

The corporate tax landscape for services is being fiercely debated and the outcome of the recent public engagement is eagerly awaited.

Yes, it was free zone-focused, but if you ignore designated zones – those that are physically secured – it was really a conversation about services.

Given that, let us look at something else, allowing for legal clarity, that we generally feel more certain about. Goods, in particular, bonded goods.

We know that goods traded in and out of named designated zones, that do not break bond, will constitute qualifying revenue.

An entity in that position should not muddy the waters by becoming an importer of record and selling some goods onshore, whether to an onshore or freezone entity.

Yes, there is a de minimis level of allowable trade, but three to five years down the line you do not want to be having a debate about whether elements of what you considered qualifying revenue are not so.

If you have or want to trade outside designated zones, set up an entity to do just that. It might cost money, but your time is also valuable and limited.

Have you ever heard of high-seas trading? You may be unfamiliar with the term, but you are unconsciously aware of what it is.

A UAE entity buys goods from another country. It then sells them to a buyer in a third country. The goods never touch the Emirates in any form, either in a designated zone or onshore.

Does the above constitute qualifying income for the purposes of corporate tax?

Ministerial Decision No 139 of 2023 regarding qualifying activities and excluded activities addresses this.

It states “distribution of goods or materials in or from a designated zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale”.

The key words are “in” and “from”. High-sea sales are neither.

The rest of the clause speaks of substance, a word that began its effect on UAE businesses in 2019 under ESR (economic substance regulations) requirements.

With corporate tax, we now have the principle of permanent establishment.

Consider it like this. If you want to take advantage of the benefits of the UAE, the least you can do is have presence – substance if you like – within the country.

No one is going to take your word that are complying. Your entity is going to need to satisfy the relevant authorities that you are.

There is a final jagged edge you may need to contend with once you understand how corporate tax affects your goods operation.

There is the likelihood that you may need to restructure.

Entities with January to December financial years have under four months to complete this process, ensuring that they comply with transition rules. These are detailed in Ministry of Finance Decision No 120 of 2023.

If entities are sitting in different trade licensing issuing authorities, then the time to achieve that solution just sailed further out.

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