WHAT IS CORPORATE TAX?
A category of tax which is imposed on businesses by a country’s financial authority on the taxable revenue for a particular year is known as Corporate Tax. To determine the corporate tax, businesses generally have to minus various costs such as cost of goods sold, marketing and administrative expenses, depreciation costs and other kind of expenses incurred during the research from the final revenue of the year.
The rates for corporate tax are decided by the country’s financial ministry and they differ considerably in each country. Some countries have notably low corporate tax rates which make them a tax heaven for various businesses. The corporate tax rate when once decided in any country is generally lower than the statutory rate which is the amount the business pays the tax against, before any deductions – such as the government subsidies and other tax applicable expenses. UAE has recently announced a corporate tax regime in the country being one of the countries with a relatively low corporate tax rate.
WHEN DID UAE INTRODUCE CORPORATE TAX AND WHY?
The Ministry of Finance along with the Federal Tax Authority (FTA) of United Arab Emirates has announced on 31st January, 2022 that starting from June 1st, 2023, a Corporate Tax (CT) will be applied on the revenues of businesses operating in UAE for each financial year. Currently the businesses in UAE are free from any kind of corporate tax. Such kind of tax ruling will be incurred to compute corporate tax at each Emirate level. Currently, oil and gas industries and international banks in the UAE are taxed on Emirate level.
UAE aspires to speed up the achievement of its goals towards economic development and transformation, which is why it has introduced the Corporate Tax regime. As per the official statement of Federal Tax Authority, by doing so, UAE aims to: “cement the UAE’s position as a leading jurisdiction for business and investment” by establishing “a competitive Corporate Tax regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties.”
WHAT IS THE RATE DECIDED FOR CORPORATE TAX IN UAE?
A business’s annual taxable income will be assessed for the Corporate Tax in the following ways:
- For taxable income up to AED 375,000 the rate is going to be 0%;
- 9% rate for a taxable income over AED 375,000 is going to be taxed;
- In light of the Consultation Document’s emphasis on the UAE’s commitment to implementing the BEPS 2.0 measures, we anticipate that the rate will be fixed with regard to the rate ultimately decided by the OECD. A different tax rate (yet to be specified) will be applied to large multinationals that meet particular requirements set with reference to Pillar II of the OECD BEPS.
WHAT ARE THE EXEMPTIONS REGARDING THE CORPORATE TAX REGIME IN UAE?
The following entities will either automatically receive an exemption from Corporate Tax regime or may apply for one (the exact mechanism is still being worked out):
- Businesses involved in the extraction and exploitation of natural resources in the UAE that are taxed at the Emirate level (e.g. upstream oil and gas companies)
- The departments, authorities, and other public institutions of the federal UAE Government and the Emirate Governments.
- Organizations in the UAE that are fully owned by the government and that are mentioned in a cabinet decision and that carry out a mandated or sovereign activity.
- Charities and other public benefit groups that have been approved by the competent authority and are listed in a Cabinet Decision that was produced at the Ministry of Finance’s request
- Authorities over public and regulated private retirement pension funds and social security agencies.
HOW CAN BUSINESSES IN UAE PLAN AND PREPARE FOR THE UPCOMING CORPORATE TAX REGIME IN UAE?
The federal corporate tax is a tax on earnings and is distinct from the costs of doing business in the UAE, which include the cost of permits, visas, health insurance, and other such running charges, even though the law has not yet taken effect. Corporate tax rates will range from 0% to 9% in the UAE and will be determined by the net taxable income of the business.
Here are 5 steps through which businesses can prepare themselves for the upcoming Corporate Tax Regime in UAE:
STEP 1 – ACCEPT THE CHANGE
Accepting and accepting the impending shift is the first step in getting ready for the introduction of the federal corporate tax. Businesses operating in the UAE will do so in a tax governed jurisdiction starting on June 1, 2023, so they should make sure they have a thorough understanding of the situation. Change your perspective and treat taxes and transfer pricing as strategic issues rather than merely regulatory requirements.
STEP 2 – COMMUNICATE WITHIN COMPANY ENSURING THE CHANGES
Making ensuring communication is constant, productive, and consistent at all levels of your organization’s structure is the second step. Although the law has not yet been published, conclusions can be inferred from the announcement, and the FAQs that go along with it follow commonly recognized tax principles.
STEP 3 – ASSESS THE IMPACT
The third step entails determining the impact of taxes from the bottom up rather than from the top down. Applying the tax rate to net profit with the goal of estimating the tax impact is a natural impulse. However, there is a chance to accurately measure the genuine impact across all company levels, from transactions to entire business units, identify inefficiencies, and create tax justifications with the aim of improving how you run your business.
STEP 4 – IDENTIFY AND IMPLEMENT THE IMPACT OF CHANGE
The improvements you have identified need to be managed as the next step is to put them into practise. An organization can only successfully pivot and accept new tax and compliance standards through enhanced awareness and education. Although these changes start in the boardroom, they will have an impact on the entire organization.
FINAL STEP – ENSURING COMPLIANCE
Making sure your data and documentation satisfy the standards for compliance is the last step. Prior to today, what was regarded as ideal or best practices will be required and a fundamental aspect of compliance and governance. It’s time to find inconsistencies in internal and external reporting, concentrating on the caliber of data and the methods used to gather and protect it.
The work you perform now will pay off later, removing a potential roadblock to full compliance once the new federal company tax law is implemented, whether you carry out this examination internally or seek the counsel of a tax specialist. At CORPORATE TAX UAE have a well-versed team of tax and legal experts who can make this assessment for you an easy task. You can contact now for your company’s Corporate Tax planning and preparation services in UAE.