On March 1, 2025, the tide goes out for those very first corporate tax reporting entities. What expenses will they have deducted against taxable revenue?
Under Article 28.1 of the Federal Decree Law No. (47) of 2022, you are allowed to deduct those costs that are wholly and exclusively required in the conduct of your business.
Carved out are those costs that are capital in nature. Think motor vehicles. We will come back to this later.
The information available may appear specific, but in reality, it’s scant in detail leaving us with an increasing amount of questions as you scrutinise the text for definitive clarity.
Let us step back and working from first principles gauge how much we think we know.
Before asking whether something is allowable or not, ask yourself whether it is even business related. Is the dry cleaning of your work suits business or personal?
You might feel that you need to look sartorially elegant in your industry, but it is unlikely during an audit you will be permitted this as a deduction. You can still utilise that suave look after business hours.
On the other hand, the dry cleaning of a specific purpose uniform would likely be allowed. Think court or kitchen dress, wigs and whites. Your rule of thumb for non-capital expenditure is its non-business utilisation.
Common sense should be able to resolve much of what you might be considering. For everything else, I would suggest a conservative approach. As in football, save those penalties.
My reading of the law suggests that the purchase and operating cost of motor vehicles will be deductible. However, it will only apply to business use. Personal use will need to be identified and that value removed.
The question that remains is on what basis this might be done. I can think of two practical approaches, both of which are bureaucratic, but with tax what is not?
Firstly, you could track the mileage for both and then proportion the costs accordingly. Or, you could track the hourly availability of the vehicles and use that as the basis.
The latter might be easier to do as a location tracker could be used to produce a movement map of each vehicle, providing undisputable proof.
A midway article thought for you. If you require your VAT number to be quoted for a supplier invoice to be valid, will you equally require your corporation number to be quoted on the same paper to have an allowable deduction against corporate tax?
In my earlier articles, you will have seen me use VAT as a possible indicator for where the corporate tax treatment of the same categories may be heading.
Entertaining is particularly interesting, so let us lunch on that a bit.
While under VAT you may not reclaim any VAT on entertainment, corporate tax allows you to claim up to 50 per cent.
However, there are three potential scenarios to the exact amount you can claim.
Say lunch with a client comes to Dh525 ($142.9), comprising Dh500 as primary cost and Dh25 of VAT at 5 per cent.
Registered for VAT, the payee may offset Dh250 against taxable profits while the VAT cannot be reclaimed.
What about a non-VAT registered entity? Can they reclaim an extra Dh12.50? After all these entities are outside the VAT regime.
Finally, what about entities with a VAT exception? As this was the entity’s choice, would this conscious decision disallow them the additional Dh12.50?
UAE corporate tax: What you need to know
A few final thoughts. How do you feel your accounting function is going to manage these (often) micro purchases?
In splitting transactions, do you mark each element to identify what becomes part of your tax computation, or apply a general rule to a given cost category and hope that all included elements comply?
This requires a lot of additional thought and some amount of work. And for what? The additional tax savings might be monetarily immaterial.
Consider the potential of an error and from there a penalty. Your issues have compounding effects. First comes the fine for the error. Then the monies must be repaid. At this time, you have overclaimed allowances and underpaid the tax due. Lastly comes the interest charges.
Keep in mind that Federal Tax Authority audits may not begin for a few years. This uncertainty leaves entities potentially exposed and waiting for a tap on the shoulder.
Having conducted many mock VAT audits of entities in the UAE, my work is not to find how many times you dropped the same ball, it is how many different types of balls are awry about your bureaucracy.
Anything over a period of years you have done once, you have done a lot of times.
If you are feeling adrift regarding corporate tax, it is because you are. But at least you know it.
David Daly is a partner at the Gulf Tax Accounting Group in the UAE
