Key impacts of corporate tax on UAE businesses

We all know that corporate tax (CT) would be effective from the financial years starting on or after June 01, 2023. All stakeholders have almost one and half years, but CT has become the talk of the town, and everyone is discussing and trying to figure out the impacts of CT on the businesses, individuals, government, and overall economy. In this article, we have assessed and analysed the impacts of CT on the key stakeholders.

Every registered business would be liable to register for CT and annually, they would be required to pay nine per cent of their adjusted taxable profits over and above the exemption threshold of Dh 375,000 so, CT would be the short-term liability of the businesses, which would adversely affect their working capital. Businesses would be required to assess the gap in the working capital, and they would bridge the gap. While preparing the budget for the respective period, companies would consider the impact of CT on the business, and they would plan the actions accordingly.

The groups which are operating in the UAE, would have an option to have single CT registration and adjust the losses of the group entities to arrive at the group taxable profits. For sure, the entities which are under common control and/or ownership would plan to go for restructuring like to change the ownership and/or control to opt-out the single CT registration, which would help them to adjust the losses of group entities and it will reduce their tax liability.

Loss-making groups or businesses would be able to carry forward their losses which would be adjusted against the future taxable profits so CT would not be considered a burden on loss-making Units.

Businesses having taxable income of up to Dh375,000 would not be subject to CT, which would incentivise start-ups and new businesses.

Alignment of the tax year with the financial year depends upon the timeline to submit the annual corporate tax return which would be announced in the law and/or the related regulations and the businesses would act accordingly.

The introduction of CT would involve implementation, training and bureaucratic compliance cost which would not be too high as the tax system is very simple in the UAE. This is certain that businesses would focus on tax planning to minimize the impact of CT on their profits which would increase the demand for tax professionals.

It’s highly likely that shareholders would try to maintain their share of profits, and they would pass on the impact of CT to the end-users in the form of increasing sales prices which would make things a little expensive for the end-users and have an adverse impact on their purchasing power. Reduction in the purchasing power would have an impact on the demand for goods and services and its trickle-down effect would be on the production and sales of the businesses which would affect the growth of the economy in the short run.

CT affects the decisions related to Foreign Direct Investment (‘FDI’), and it creates a wedge between the pretax and post-tax returns on FDI. Investors are always keen to know the direct taxes in the country in which they wanted to invest and taxes on the repatriation of profits. Since the rate announced by the government is highly competitive as compared to other countries, and double tax treaties are in place by the UAE government so, the introduction of CT would not have any major impact on FDI. Moreover, Free Zones would keep providing invectives to the businesses for a specific period as per their respective laws, so businesses will keep enjoying the benefits of the tax. Dividend and capital gains would not be subject to CT, so it would create attraction for the investor to invest in the UAE market.

As mentioned above, it’s highly likely that businesses would pass on the impacts of CT to individuals by increasing their prices, which would impact the purchasing power of the consumers. Employees would demand an increase in salaries to maintain their purchasing power. On an overall basis, goods and services would become slightly expensive for the end-users.

Globally, taxes are the major source of revenue for governments. Governments across the globe spend these taxes on the welfare of the public. In the same way, like VAT, CT would become another source of income for the Government of UAE and the UAE Government would spend this income for the welfare of the public by developing world-class infrastructure, hospitals, roads, medical facilities etc.

Moreover, it would reduce reliance on oil-generated money and lead to diversified sources of income for the Government which would be a sign of a healthy and matured economy.

Being its competitiveness, CT would have a nominal impact on the corporate savings and FDI, which would create an adverse impact on the growth of the country in the short run, but in the long run, it would develop the confidence of the investors which would lead to growth.

Keeping in view all the above, in nutshell, we can conclude that CT has been crafted to incentivize investment and keep transparency to meet global standards which would provide a stable society where businesses would contribute and add value for the growth of the economy.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official, but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com