UAE corporate tax: Latest guidance discusses double taxation and end-of-service payments

Last month, the Federal Tax Authority released a rather lengthy document to support you – the taxpayer – to come to some level of understanding of the corporate tax legislation currently in the public sphere.

While undoubtedly useful, there was surprise among the tax community with its clearly stated qualifications. Such are the document’s limitations, it is worth examining why this is the case, what the implications may be, and the useful elements within.

Shortly into its 125 pages, in Section 2.6, we are cautioned that the “guidance is not a legally binding document”, it may not be interpreted “as legal or tax advice” and that everything within is open to unannounced change in whatever form is so decided.

So why release such a fluid document, especially when certainty is so important in tax planning? As this forms part of the launch process of corporate tax, it is imperative that all of us taxpayers make our initial changes to compliance operations correctly.

The UAE is a country that operates on a consensual basis.

The sharing of a relevant authority view is part of the national conversation. A statement of where the thinking for that particular body is. Over a month ago, they held a public consultation on free zones.

This was the public's opportunity to contribute to an important evolution in the commercial sphere of the UAE. Did you submit any thoughts, questions or suggestions?

Let's look at some of the useful elements.

When considering corporate tax, it is instructive to see the elements of it that are part of a larger quilt work of other developments in the UAE.

The post-Covid-19 economy is a much-changed place. The UAE has attracted a material amount of highly skilled and well-to-do residents. Such people often find themselves with commercial footprints in at least two jurisdictions.

Which country would be the primary one for a particular source of income? Whose national law would take precedence in defining and thus get first dibs?

Sections 5.3.4 and 5.4.5 of the guidance suggest that the rules contained in the double taxation agreement in place between the country or countries would supersede UAE law.

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  The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

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  Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

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  No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

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  Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

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  The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

Have you reviewed the one for your country? Remember, such agreements do not exist with every nation.

Those of us who have been in the UAE for a decade or more have noted the changes made to end-of-service payments or EOS benefits. While this simplified the existing system, it’s still not a conventional pension regime. That is coming.

Section 5.7.5.2 talks about the corporate tax anomaly that private pension funds create. Income for private individuals who are not trading is supposed to be untaxed. However, since these funds are regulated and exist within juridical entities, they are swept up in the general tax net.

There are two reasons for carving this sphere out. It is in the interest of the UAE to develop a private pension sector. It collates savings that fund managers can use to achieve tax-efficient returns to the individuals contributing.

These monies will often find themselves investing in national or regional projects and businesses. What is more community than supporting the future development of the place you live in?

Secondly, while EOS payments are statutory and enforceable by the labour court, from an accounting perspective these costs are very often not provided for. This is not prudent, meaning that businesses are overstating their profits.

Should a firm need to restructure its labour force due to a, say, difficult trading environment, it not only faces financials with decreased sales and profitability, but with an additional charge for redundancies. These costs should already be accrued.

In a corporate tax world, pension provisions should be tax deductible. Here good behaviour is rewarded, one that supports a fairer financial view of a business.

There are additional compliance rules for private pension funds, which do not appear to include anything you would not see elsewhere.

We understood that the International Financial Reporting Standards would be the ruling accounting standard framework. Section 6.3.1 expands on this, by suggesting a limited allowance of IFRS for SMEs.

Conceptually, their purpose is to reduce the complexity of preparing audited accounts and make the final report more user-friendly. These are likely to be less complex businesses. Again, we see a deliberate effort to support newer and growing businesses.

Finally, the guidance provides examples of how certain rules would be applied using numbers. If you find yourself struggling with these, here’s a tip. Replace the numbers in the examples with small numbers.

Instead of Dh250,000, make it Dh100.

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