As the dust settles following the announcement by the UAE’s Ministry of Finance that a federal corporate tax will be introduced, the onus is on businesses in the UAE to ensure they are tax ready before June 1, 2023. This is not the first time the country has changed the tax landscape.
On January 1, 2018, the UAE introduced a 5 percent value added tax as a general consumption tax imposed on the taxable supply of goods and services at each step of the supply chain. This meant the UAE’s consumers, for the first time, saw an increase in the cost of taxable goods and services they purchased in the UAE. The million-dollar question UAE businesses now face is how the introduction of a federal corporate tax will impact their plans and operations.
While the law is not yet in effect, here is what we know so far: The federal corporate tax is a tax on profits and is separate from the cost of doing business in the UAE, which includes the cost of licences, visas, health insurance and such other operating costs. Businesses in the UAE will be subject to applied rates of 0 to 15 percent corporate tax, which will be calculated based on their net taxable income.
In practice, this will mean local businesses will pay 9 percent corporate tax, and multinational enterprises will be subject to 15 percent, triggered by their consolidated revenues. Only entities directly engaged in the extraction of natural resources, such as oil, will be out of scope. For businesses involved in all other commercial activities, it’s time to get ready for the new tax world.
The first step in preparing for the implementation of the federal corporate tax is acceptance and embracing the imminent change. From June 1, 2023, businesses operating within the UAE will do so in a tax administered jurisdiction and should ensure they have a comprehensive understanding of the real picture. Change your mindset and make tax and transfer pricing strategic rather than mere compliance matters.
This may start with talent mapping, identifying gaps within your team’s expertise and addressing them with upskilling, training or outsourcing, especially in the first year. Start to look at the potential impact on your business operations, the financial health of your business and expansion plans. Once you outline the real issues, you can start to address them.
The second step is to ensure communication across every level of your organisation hierarchy is consistent, constant and productive. While the law has not been published yet, inferences can be drawn from the announcement, and the accompanying FAQs align with generally acceptable tax principles.
International tax developments in the recent past, globally and within the UAE, pave the way for the intended scope, coverage and inclusiveness of the UAE’s corporate tax. Hence your business’s approach towards this development and your plans to navigate through the financial, operational, contractual and legal impact of new taxes should be communicated and comprehended at the owner or board level, all the way through to other stakeholders and key personnel leading critical operations.
The third step is taking a bottom-up rather than a top-down approach to assessing the impact of tax. It is a natural instinct to apply the tax rate to net profit with an intent to guage the tax impact. However, there is an opportunity to sophisticatedly assess the true impact across every level of the business, from transactions to entire business units, carve out inefficiencies and develop tax rationale with an objective to improve the way you operate today and be prepared for tax application tomorrow.
Corporate tax awareness and education among UAE companies
Improving the tax health of your UAE operations could be sought through a range of critical success factors, such as maintaining the status-quo for low risk areas (low probability), versus fine tuning those areas with minimal tax intervention (if any), versus high impact areas being subjected to complete overhaul. Having a progressive step plan, unfolding the tax impact areas and headlining the focal points for successful implementation will help UAE businesses carve out their new tax profile and governance framework.
The next step is implementing the changes you have identified, and these changes need to be managed. Only through increased awareness and education can an organisation successfully pivot and embrace new tax and compliance requirements. While these changes begin in the boardroom, the ripple effects will be felt throughout an entire organisation, so it will be crucial to have ‘change champions’ and influencers who help your business navigate the ups and downs of the necessary adjustments.
The final step is ensuring the quality of your data and documentation meets the threshold for compliance. What was considered ideal or best practice before will now be expected and a basic matter of compliance and governance. It’s time to identify gaps in internal and external reporting, focusing on the quality of data, and how it is collected and safeguarded. Whether you conduct this assessment internally or seek out the advice of a specialist, the work you do now will pay dividends later, removing a potential barrier to full compliance once the new federal corporate tax law is introduced.
The bottom line is that unless your business is out of scope, the introduction of a federal corporate tax will impact your business, whether that means an actual tax payment or ensuring compliance for tax return filing and/or transfer pricing documentation. Historically, the introduction of a federal corporate tax in other countries has had a net positive impact on their macro-economic outlay, and businesses located in the UAE should take heart and see this as an opportunity.
Non-compliance will result in financial penalties, and the worst-case scenario is noncomprehensible for now. However, following the new law once it is introduced will enable UAE businesses to commit and contribute to the UAE’s growth and alignment with G20’s efforts to battle tax avoidance. Businesses who see corporate tax as not only a cost or compliance-driven development, but as a strategic development that will benefit business operations, will be better positioned to improve internal processes and successfully meet the challenges of the UAE’s new tax world head-on.
Anuj R. Kapoor, Partner – International Tax, Grant Thornton UAE
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