The newly introduced corporate tax will strengthen the UAE’s economy manifold as the country would attract well-meaning businesses and corporate behemoths, said Nimish Goel, country partner at WTS Dhruva Consultants.
On January 31, 2022, the UAE announced plans to introduce corporate tax at a headline rate of 9 per cent for taxable net income greater than Dh375,000. In addition, a different rate will be proposed for very large companies that are covered under the provisions of OECD Pillar2. This rate of tax could be 15 per cent.
The domestic corporate tax regime will be effective for financial years starting on or after June 1, 2023. The proposed tax rate is competitive and is comparable to global low tax hubs.
With the introduction of VAT in 2018, Country-by-Country Reporting, and ESR in 2019, the introduction of corporate tax was written on the wall.
Goel said, “In my opinion, the introduction of corporate tax was imminent after OECD’s Pillar1 and Pillar2 announcements to which UAE is a signatory. With a Global Minimum Tax proposed under Pillar2, the absence of a corporate tax in the country would have led the UAE to lose its share of tax, which anyways would have been collected by other countries. This would have led UAE to finance the other country, instead of financing the foreign companies based in the UAE. Further, for UAE to remain a dominant force in attracting foreign capital, it was critical to remove the country’s image as a tax haven and put in place measures that make UAE a true attraction for global investment.”
He added: “Introduction of corporate tax is quite a progressive step. The provisions proposed to be introduced are investor-friendly and should augment the growth of the economy. The proposed headline rate of 9 per cent is competitive and the lowest amongst the GCC countries.”
Goel said, “Apart from the fact that corporate tax generates more revenue for the exchequer, corporate tax is important for countries to incentivise investments and growth. We have seen in the past that an introduction of a new tax leads to short-term inflation but on a long-term basis provides stability to the economy. Moreover, a robust corporate tax system encourages transparency and instills investor confidence which boosts economic growth. As someone once said, “Taxes are what we pay for civilised society”.
He said that the headline tax rate has been kept at 9 per cent, which is the lowest amongst the GCC countries. Also, a zero per cent tax rate for small businesses and start-ups is a welcome move. Further, the compliance requirements have been kept simple with concepts like no withholding tax, no advance tax, and tax grouping, ensuring that the compliance burden on businesses is minimised.
He explained, “At the time of implementation of any new tax law, businesses would feel the burden but with proper planning well before its introduction, we expect the process to be less onerous. Businesses have 14-20 months to get themselves prepared and learn from past VAT experience, the earlier they start, the smoother its transition would be.”
Talking about the corporate tax impact on large family-owned businesses in the country, Goel mentioned that they would need to assess the new law’s impact on their organisational structures.
He said: “Large business groups having cross border operations would have to re-look at their corporate structures, identify overseas entities and map the inter-company transactions from a transfer pricing perspective, identify profit and loss-making entities, and review their funding & asset holding structures. Groups engaged in acquisitions should analyse the purchase price allocations, look at the future financial projections and analyse how payment of corporate tax could potentially change them.
The possibility of charging management time and costs with other group entities also needs to be explored, as this may have been overlooked and ignored till now. Similarly, remuneration against the capital employed or rent for leasing of real estate by the owners of the businesses would need to be evaluated. Business groups that have multiple entities both, mainland and free zones would need to factor different tax rates and the possibility of restructuring their supply chain.”
This is also the time when large groups need to start thinking seriously about setting up a full-fledged tax function to manage their local and international tax compliances.
Responding to a question about the corporate tax role in dealing with fiscal deficits, he said, “Traditionally, to reduce the fiscal deficit, governments either sell government securities or borrow from overseas. The introduction of a new tax will assist in reducing the fiscal deficit within the country. A robust tax regime coupled with measures to reduce tax evasion would assist in increasing revenues for the government. This would also lead to the government having the flexibility to reduce any subsidies or fees which increase the deficit.”
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