Corporate tax is coming to the UAE. In this article, we look at some of the practical steps that businesses need to be considering in preparation for the new tax.
When the UAE announced it would introduce corporate tax, the reaction from most of the business community was one of surprise. But whilst there had been little warning of the announcement, this was probably an inevitable and logical next step in the UAE’s journey of transformation that has already included the introduction of VAT, Excise tax, Economic Substance Regulations and Country by Country Reporting.
The reasons behind the UAE’s decision to make this transformation are a complex mixture of the desire to modernise and reinvigorate the country’s economy, the need to generate additional tax revenues, and the influence of international organisations, such as the OECD, that are striving to change the global tax environment. The announcement of the BEPS Pillar 2.0 framework, with its proposal of a 15% global minimum tax will also have been a major influence.
Although the introduction of VAT, Excise tax, Economic Substance and Country by Country Reporting were all important stages in the UAE’s evolution, the introduction of Corporate Tax (CT) marks a very significant step change. CT is the bedrock of the international taxation system and by introducing CT, the UAE aligns itself with the global tax community. By making the move now, with competitive rates (see below) and honoring earlier commitments by free zones, the UAE is reaffirming its attractiveness for foreign investment and positioning itself as a leading global hub for investment and business.
In this article, we will look at what UAE based businesses will need to do in preparation for the introduction of CT. However, before considering the work that needs to be done, it is worth setting out some of the main features of the tax, from what has been published so far:
- CT will apply with effect from financial years starting on or after 1 June 2023. The due date for filing the return and payment of tax has not been set but it has been confirmed that there will be only one return (with one payment), rather than having a provisional and final return.
- The CT rate will be 9%. However, there will be a different rate for large multinationals that meet certain criteria from the OECD’s Pillar Two proposals. These proposals suggest a minimum global rate of 15% so it seems likely that the rate will be at least that level.
- The tax will be levied on all businesses with adjusted accounting profits exceeding AED 375,000. There may be further relaxations related to Small, Medium and Micro Enterprises. are
- Profit for CT purposes will be based on the profit declared in financial statements prepared to internationally accepted accounting standards.
- CT will not apply to the extraction of natural resources, which will continue to be taxed at an Emirate level.
- Loss carry forward will be allowed
- Groups can be treated as a single taxable person, and losses can be offset among group members.
- Many Free Zones offer tax incentives such as promises of exemption from taxes for up to 50 years. The government has stated that these incentives will be honoured provided the entities concerned comply with regulations and do not conduct business with the mainland.
- Dividends and capital gains from specified shareholdings will be exempt
- There will be no withholding tax at domestic or international levels
- A unilateral foreign tax credit will be available to set off domestic CT liabilities against foreign income
- Transfer Pricing rules and documentation requirements will apply as per the OECD guidelines
- The CT law has not yet been published, but we would expect publication later this year, possibly in the summer.
What should businesses do to prepare for CT?
From the information already issued by the Ministry of Finance, coupled with knowledge of CT systems in other jurisdictions, there are some good indications of the areas that taxpayers need to consider before the tax is finally implemented. Therefore, taxpayers should be starting to examine how their business will be affected and considering what changes or upgrades will be required.
In many ways, the process that needs to be followed is the same as for any major change in law or regulation:
- Assess the impact on financial results, accounting records, processes, IT, and people
- Decide what enhancements, changes and additional resources will be required
- Implement the changes.
Of course, each taxpayer will have slightly different needs and priorities, and the process needs to be tailored to the specific needs of the business. However, very broadly, some of the main areas that will need to be considered are discussed below.
A review of the entity structure
The information published so far suggests potentially different treatment for different types of entity and special reliefs for groups. Therefore, groups should undertake a review to map the various entities against the expected treatments, noting any risks or opportunities. For example, if there are Free Zone entities, are they the beneficiaries of any tax incentives? If so, is there any concern regarding the MOF’s reference to not ‘complying with regulations’ or ‘conducting business with the mainland’. At present, we do not have any firm indication of what these terms mean, but this will be very important for many businesses, and it is essential to identify which entities might be affected, and to evaluate legal structures and delivery models. The review of entities might also map financial year ends, the current audit status of the entities (entities will need an audit to internationally accepted standards), foreign entities, potential losses, related party transactions and potentially exempt transactions.
In carrying out this review, issues such as data and documentation gaps on related party transactions might be identified.
Accounting systems and processes
The capability of the IT system to support the CT computation will need to be reviewed. There are several reporting solutions available that help with CT compliance, provide dashboards and workflow features. It is likely that more will come to market, specifically designed for the requirements of UAE CT. Taxpayers will need to consider how they intend to manage the compliance process and whether IT enhancements are required. Until we have the final detail of the law, it might be too early for some businesses to make any decisions in this regard, but it’s an important point to put on the agenda of priorities.
It is likely that many businesses will need to make changes to some accounting processes and policies to ensure that an accurate CT calculation is possible. For example, it is likely that some expenses will not be allowable (similar to the VAT input tax blocks on personal expenditure and car expenses). Therefore, changes might need to be made to ensure that non-allowable expenses are properly identified and recorded. Again, the fine-tuning on this cannot be done until we have the final law, but it’s easy to see how changes might need to be made and how there might be data and documentation gaps.
People
There will be an impact on the finance team, and some peoples’ jobs and responsibilities will change. Can the existing team handle CT? Is additional training required? These issues need to be considered well in advance.
Modelling the financial impact
Projections can be prepared to indicate the potential tax burden on the group, taking into account factors such as projected profits, potentially available losses, group reliefs and foreign tax credits. This will be useful for financial planning and will also help the finance team to focus on where data gaps or systems weaknesses might lie.
Talk to the auditors.
CT is a tax that is driven by financial statements, and it is clear from the information that has been released so far that businesses will need to be audited in accordance with accepted standards. Certain aspects of CT, for example, disclosures in respect of tax, will fall within the scope of the external auditor, and the audit will therefore be a key part of the CT process. In due course, CT and the CT timetable will take their places in the annual audit planning agenda.
One of the decisions businesses will need to take is whether to engage their current auditor to assist with the CT computation and the submission of the CT return. Many businesses will take this route, but some businesses may decide to appoint a separate firm for CT compliance for independence reasons.
Some businesses will want to carry out much of the CT compliance work itself, but it’s worth noting that in some jurisdictions, it is a requirement for the CT return to be signed off by a suitably qualified accountant. We do not know yet whether that will be a requirement in the UAE.
Another important aspect that needs clarity is that most businesses carry out audits as per IFRS auditing standards applicable to SMEs. However, with the implementation of CT, it will be important to understand whether the diluted version of auditing will be allowed, or whether full-blown IFRS auditing standards will be required.
Review the group’s TP policies
To date, transfer pricing has not been an issue for most businesses in the UAE. However, the Ministry of Finance has made it clear in its CT announcements so far that after CT is introduced, the TP rules and documentation requirements, as set out in the OECD’s guidelines, will be applied.
Essentially, Transfer Pricing seeks to ensure that transactions between related parties are conducted on an ‘arm’s length’ basis – so that the pricing is similar to an identical transaction between unrelated parties. To support this, international groups should have a Transfer Pricing policy and, under the OECD guidelines, should maintain certain records that record financial information about the group and how TP policy is applied. Central to this are records known as the Master File and Local File, for which the OECD provides a set format.
We do not know precisely, how the UAE will apply the rules, what entities and transactions will be affected, and what compliance obligations will be imposed. It seems likely that affected businesses will be required to maintain Master Files and Local Files. It is also possible that there may be an annual filing obligation similar to the Saudi requirement. Under the Saudi rules, affected businesses must submit an annual declaration that confirms the group has a Transfer Pricing policy and that all related party transactions have been made in accordance with the TP policy. The declaration must be accompanied by an affidavit signed by a qualified accountant.
Multinational Groups with UAE entities should review group TP policies and update them as appropriate.
Final thoughts
It feels as if there is a long way to go before the first CT returns are submitted but time passes quickly and there is a lot to be done. It’s never too early to start thinking about how businesses need to adapt to the changes, and although some decisions will need to wait until the law has been released and thoroughly digested, there is definitely some high-level work that can be done in all of the areas mentioned above. The most important thing is to start the process and to start changing the mindset of the business.
If you would like further information or would like to discuss how BDO can assist with your preparations for the introduction of CT, including assistance with impact assessments, technical support, and compliance, please contact our tax team. We provide a full range of tax advisory and compliance services, and we can also provide assistance with any accounting and audit support that might be required in readiness for CT.