UAE: Corporate tax law to bring further transparency, say analysts and tax experts

New corporate tax law will bring transparency and more sustainable investments within the country as businesses also will now be more prudent in their investment plans

Analysts and tax experts say that there is no need for companies to panic as they still have time at hand to prepare for the corporate tax regime, which will come into effect from June 1, 2023.

The UAE issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses on Friday. This means businesses will be subject to a nine per cent tax with profits exceeding Dh375,000 per annum.

“Companies have sufficient time to evaluate the tax implications and prepare for the corporate tax regime. They should not panic about an immediate implementation. A strategic and thought-through approach will be helpful to optimise the tax implications,” said Pankaj S Jain, managing director, AskPankaj Tax Advisors.

Jain added that companies would need to now prepare adequate, standalone financial statements for each entity for tax compliance. “Expenses need to be demonstrated that have been incurred wholly and exclusively for the purpose of business. The accounting function of the companies will, henceforth, need to be focused and thorough,” he added.

Naveen Sharma, Hon. Cultural Events Director at India Club and former chairman of the Institute of Chartered Accountants of India (ICAI) Dubai chapter, noted that corporate tax, one of the lowest in the world, will help the nation to establish a new source of income that is not reliant on oil and corporate dividends.

“Now it is high time for the companies to evaluate their financials in accordance with the corporate tax law, particularly the groups having multiple entities. The group concept will differ from what we know under VAT law and accordingly, the provisions of transfer pricing will apply. It will require the proper understanding of the intercompany transactions and its impact under the new law,” said Sharma.

“The new corporate tax regime is designed around the international best practices, and it will help UAE in strengthening its position as a global hub for investment and businesses,” said the ICAI past chairman.

Nimish Goel, partner at WTS Dhruva Consultants, termed it a fairly comprehensive legislation which incorporates a fair bit of suggestions invited by the Ministry of Finance on its public consultation document.

“A significant inclusion is the anti-avoidance provision that aims to arrest potential tax abuse. A welcome deviation from the Public consultation document (PCD) is the allowance of carrying forward interest disallowed for a period of 10 years. This should benefit heartily leveraged companies typically in real estate and infrastructure companies,” he said.

Time to scrutinize books

Shailesh Khandelwal, partner – Shailesh Khandelwal and Co., believes that it’s time for businesses to start scrutinizing their existing accounting and bookkeeping systems and make the necessary changes to align their systems with the requirements of the provisions of this law.

“Businesses must also re-look into their existing contracts with their customers and make the necessary changes, if required, to incorporate the burden of corporate tax in their profit margin. Else, they might have to suffer with losses on account of reduction of a profit margin due to corporate tax,” he said.

Vikas Panchal, general manager for Middle East at Tally Solutions, said the government’s decision to maintain a zero per cent threshold for taxable profits up to and including Dh 375,000 recognises the significant role that start-ups and SMEs play in the UAE’s economy.

“Nine per cent standard rate ensures that the UAE’s corporate tax regime is amongst the most competitive in the world. This will further strengthen the country’s position as a global business and financial centre,” added Panchal.

He added that most SMEs have adapted to digital transformation following the introduction of VAT in 2018 and this will ensure a seamless transition to this new tax implementation for them.

Bring transparency

Chirag Agarwal, managing partner at Earningo Accounting and Tax Consultancy, noted that the new tax regime will bring transparency and curb unethical tax practices.

“Eligibility of economic free zones to benefit from the zero tax corporate tax rate is indicating the continuous efforts made by the UAE government to boost the business ecosystem in the region. Notably, arm's length price and transfer pricing documentation are the key conditions for qualifying free zone persons in order to take advantage of the zero per cent tax rate on qualifying income,” he said.

Farhat Ali Khan, managing partner, Century Maxim International, said the new mandate serves as an opportunity for businesses to set in place robust legal frameworks that demonstrate transparency and accountability to both internal and external stakeholders. “By way of taxation, companies can implement appropriate fiscal policies that may directly or indirectly support the UAE’s global targets under the UN Sustainable Development Goals (SDGs).”

Vijay Valecha, chief investment officer, Century Financial, said the new law will make UAE compliant with international rules and also reduce fears that the companies based here have an unfair advantage since they don't pay taxes, enabling them to retain all their earnings.

“Ironically, this will benefit the companies operating here as they will not be viewed with suspicion. Businesses also will now be more prudent as a tax will force them to do more diligence in their investment plans. This will promote more sustainable investments inside the country,” added Valecha.

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