Key impacts of corporate tax on UAE businesses
Corporate tax 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
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.
Corporate tax: A sign of a credible economy
Every business registered in the UAE, either on the mainland or in the free zone, would be liable to register for CT purposes
The Ministry of Finance of the UAE has made an announcement on January 31, 2022, for the implementation of federal corporate tax (CT) effective from the financial years starting on or after June 1, 2023, to cement its position as a world-leading hub for businesses and investments. The introduction of CT would be helpful to meet international standards to bring transparency and prevent harmful tax practices.
CT is already in place in four Gulf Cooperation Council countries, and the UAE is the fifth country that has joined the club. At the moment, there is no CT in Bahrain.
CT is a proportional direct tax (flat-rate tax) that applies to the adjusted taxable profits of the corporations. In some jurisdictions, this is called company tax or business tax. CT is different from the personal income tax which applies to the income of the individuals. CT is different from the value-added tax (VAT) as well which is an indirect consumption tax. CT is not a replacement for VAT, but both taxes would be in place at the same time.
Every business registered in the UAE (except companies involved in the extraction of natural resources), either on the mainland or in the free zone, would be liable to register for CT purposes, and they would be responsible to submit their annual CT return and pay the CT payment accordingly. The group companies, which are under common control and/or common ownership, would be able to get single CT registration, and they would be liable to submit a single return on an annual basis. This would be quite helpful for the group companies as the tax losses of group entities would be adjusted against the taxable profits of other entities of the same group which would reduce the tax base and ultimately, lead to lesser tax on their taxable profits.
To support small businesses and startups, zero per cent CT would be applicable on taxable income of up to Dh375,000, and any taxable income exceeding Dh 375,000 would be subject to tax at a flat rate of nine per cent. A different rate would be announced for the multinational entities that meet the criteria of pillar II companies according to the Organisation for Economic Cooperation and Development (‘OECD’) guidelines, which requires establishing a minimum level of taxation on multinational companies doing business around the world.
CT would not be applicable on the individuals’ income from salaries, real estate, investment in shares or other personal income not related to the UAE trade or business. However, if the individuals have taken the business licence and conducting commercial activity even as a freelancer, they would be liable to register, and their taxable income would be subject to tax based on the aforesaid criteria.
Foreign investors who do not carry on the business in the UAE, would not be subject to corporate tax. Advances would not be subject to CT, and the companies would be able to carry forward their losses up to a certain period, and the Laws and related Regulations would provide more detail about this. Withholding tax would not be applicable on the local and cross border transactions which would be helpful for the UAE to maintain its position as a global hub for businesses. There would not be CT on the capital gain (gain on the sales of the capital assets) and dividend received by the UAE businesses from their foreign investments.
There are more than 40 free zones in the UAE, and each free zone has its own framework. Based on these frameworks, the income of the businesses is not subject to corporate tax for a specific period. According to the press release, free zone businesses that meet all necessary requirements would continue to benefit from the corporate tax incentives. The companies which engage in the extraction of natural resources would be exempt from the CT but on these companies, respective Emirates Law would be applicable.
CT would apply to the adjusted taxable profits. Businesses would be required to prepare the financials as per applicable International Financial Reporting Standards (IFRS), and these financials would require adjustments to arrive at the taxable profits. The mapping of accounting numbers into tax numbers is always a challenging exercise since the basis of preparation of financial statements as per IFRS are different from the requirement of tax authorities. Like IFRS follows an accrual basis while tax authorities usually follow a cash basis. CT Law and related Regulations would provide a detailed understanding of the adjustments and exemptions available to arrive at the taxable profits.
Businesses would be required to have proper impact assessment and they would be required to tweak their processes for the proper incorporation of CT in the organization. Companies need to train their staff and calculate the impact on their working capital. Profit shifting through non-arm’s length pricing would have an impact on the tax base which would affect the tax amount, so transfer pricing rules would be required to be implemented properly. Compliance and operating costs of the businesses would go up, but it would bring more transparency and credibility to their results.
Star Tech: Why Dubai has become a magnet for entrepreneurs
Majed Al Suwaidi, Managing Director, Dubai Media City explains to Khaleej Times about what makes the Emirate a one-stop destination for startups and entrepreneurs.
Majed Al Suwaidi, Managing Director of Dubai Media City, shares deep insights into the Emirate’s ease of doing business that’s striking a big chord with global innovators and entrepreneurs. in5, an enabling platform for entrepreneurs and startups, also falls under his remit.
Edited excerpts from an exclusive interview:
How conducive is the current landscape in Dubai for startups and entrepreneurs?
The landscape in Dubai is truly ripe for entrepreneurs to realise their ambitions. Dubai has become a magnet for entrepreneurs, thanks to our leadership’s vision and more than two decades of enabling ecosystems boasting world-class infrastructure, a business-friendly environment to fuel success and a culture that embraces innovation.
There are several government-backed initiatives enriching the opportunities available for startups and small and medium enterprises (SMEs).
The Ministry of Economy’s Entrepreneurial Nation has set a goal to nurture 20 unicorns by 2031, alongside a number of incentives for new businesses, while the 10-year Golden Visa and GoFreelance packages further entice independent individuals from around the world to choose Dubai as a place to live, work and invest in the emirate.
Business incubators like in5 further enhance prospects for aspiring entrepreneurs and creatives in technology, media and design by providing valuable launching pads or inventive ideas and business models.
We offer expert advisory and mentorship, access to investment opportunities, networking events and workshops that insert our startups within some of the city’s most active business districts as well as creative facilities with industry-standard equipment. By continuing to invest in our offerings, infrastructure and platform to meet the market’s evolving needs, we hope to boost business growth and reaffirm Dubai’s economic competitiveness on a global scale.
What is a unicorn?
To be considered a unicorn, a business needs to reach an investor valuation of $1 (Dh3.67) billion or more. It’s quite an ambitious goal, but it’s not impossible. Dubai’s robust technology ecosystem and world-class infrastructure play a vital role in helping nurture unicorn companies, such as Careem, which was acquired by Uber in 2019 for $3.1 (Dh11.39) billion. Soon after, Dubai-based Emerging Markets Property Group (EMPG) and OLX Group merged their Middle East and North Africa (MENA) and South Asia operations, Bayut and Dubizzle, resulting in a business valued at Dh3.6 billion.
In 2019, Cisco acquired Voicera, which had initially acquired in5-based startup Wrappup in 2018. Wrappup specialises in using Artificial Intelligence (AI) technologies to transcribe and convert audio recordings into notes. The startup was founded during a hackathon competition organised by in5 in 2015, and in the short span of four years, attracted the interest of the Silicon Valley giant.
Dubai has supported a number of start-ups. How are they faring?
We’re proud to support a number of very promising startups in our community that are leaving quite an impression on their industries. Last year, our startups successfully secured over Dh1.4 billion in funding, and that number is rapidly rising as we attract more and more investments. Agri-tech startup, Desert Control, is listed on Euronext Growth Oslo, a multilateral trading facility operated by the Oslo Stock Exchange, while in5 alum Derq has partnered with driverless technology pioneer Motional to pilot autonomous vehicles with smart infrastructure in Las Vegas. There is much action and promise brewing in our incubator, demonstrating the region’s entrepreneurial spirit.
What are essential traits that put you on track to becoming a unicorn?
Unicorns are traditionally tech-savvy startups that disrupt their market, rewriting how people interact with a certain kind of product or service. Careem is an example which is close to home — the company changed the nature of private transport in the region by bringing cabs directly to a consumer’s doorstep at any time and location, while being upfront about costs.
While that might be a lofty founding ambition, you can work towards this by being dedicatedly consumer driven. Identify a specific problem people within your target market face and work towards creating an effective solution for it. Take inspiration from your own experiences and inconveniences and research whether a satisfying product or service exists in the market that addresses it. Unicorns are efficient, focusing iterations on being cost-effective and including only the most essential components in early stages to seek feedback from consumers.
There is no one-size-fits-all solution, but these are key traits that help put startups on the right track.
What frequent mistakes do startups make in early stages?
It’s necessary for startups to lay strong foundations from the beginning. One of the things that make or break a business is the right set of stakeholders, including employees, strategic partners, and investors. Finances are understandably tight, especially in the early stages of setting up, but creating a strong team is an essential cost for long-term growth. Of course, it’s important to find people with the necessary skill set and expertise, but it’s equally as important to choose members whose drive and values match yours. Bring everyone on the same page so you can collaborate effectively to achieve growth in the long-term.
Another is to create a product or service without identifying what problem or challenge it helps solve. Conduct first-hand research of your audience and the challenges they face so you can develop solutions based on actual needs. Don’t forget to heed the feedback you receive and adjust your business model and user experience accordingly, even before launching. Follow up future iterations with the same feedback and improvement loop to ensure a desirable product
Finally, and perhaps most importantly, is being realistic about your goals and strategies. Be ambitious, be driven and aspire to succeed, but that comes with setting achievable goals for your business and remaining steadfastly dedicated to achieving sustainable growth and attracting investors. Fuel your passion to succeed and remain persistent – you might face setbacks in the journey but remain resilient. If after numerous iterations the feedback is still low, pivot and keep moving forward.
Incubators like ours play a pivotal role in helping young entrepreneurs and start-ups avoid the common pitfalls. We are committed to providing our members regular and up-to-date advisory in line with international best practices, as well as regional know-how, so they can make educated decisions for their future.
What must startups keep in mind as they prepare to scale their business?
Networking is essential for any business, whether you are an established organisation or just getting started. A large, strong network will aid you in finding potential investors, business partners and board members as well as industry leaders and C-Suite figures who can guide you and facilitate valuable opportunities for collaboration.
Businesses part of our incubator have the benefit of in5’s annual calendar of networking events and expert-led discussions to forge these critical relationships. We not only offer startups hundreds of hours of advisory and mentorship with a steering committee of representatives from some of the leading organisations in the world, but also nurture a community of future-minded businesses that can rely on each other for support at different stages of their journey. Plus, startups are located within larger business ecosystems such as Dubai Internet City, Dubai Design District and Dubai Production City, offering them unrivalled access to some of the biggest players in tech, design and media.
Another essential relationship is with your early customers and consumers. Heed their feedback, collate the data you gather from their experiences and adjust your product — their loyalty and endorsement can go a long way. Data is essential, especially in technology. Identify ways you can securely collect data from your users and let that guide how you pitch to investors, devise your marketing and traction plans, and move forward into proceeding growth phases.
What are the major impacts of VAT
In this article, KT has assessed the impact of VAT on businesses, individuals, government and overall economy
Since VAT is a consumption and multistage tax, so it has an impact on each player of the supply chain and individuals, who are buying the goods and services for consumption purposes. It has an effect on the economy and it is a major source of revenue for the government. In this article, we have assessed the impact of VAT on businesses, individuals, government and overall economy.
(a) Impact of VAT on businesses
There are some common impacts of VAT on each business and some specific impacts, based on the categories of supplies.
(i) Common Impacts of VAT on Businesses
Whenever VAT is being introduced in any country, every business is required to have an impact assessment to assess the impact of VAT. Based on the impact assessment, they will be able to know, on which areas of business VAT will have an impact and what are they required to do to implement it properly. Like based on the impact assessment, they will be able to adopt the proper tax position of their supplies. Businesses will be able to know eligibility of VAT registration, impact on their working capital and system, required changes in the processes, compliance requirement etc.
Based on the impact assessment, businesses are required to implement the VAT properly which requires changes in the system, tweaking existing processes, training to the employees, communication with the suppliers and customers etc.
Once the VAT is up and running, businesses are required to submit the VAT Return, and while submitting the VAT returns, businesses cannot claim input tax on some purchases/expenses like expenses for throwing parties, expenses related to Car which can carry less than 10 people and is available for personal use, expenses related to the dependents of the employees where companies have no legal obligations, non-business expenses etc. All such blocked input tax will become cost of the businesses.
Businesses requires work force to comply VAT so it will lead to increase in administration and hiring cost. Sometime, companies are required to hire consultants which will lead to increase the consultancy charges.
(ii) Specific impact of VAT on businesses
So far as specific impact of VAT is concerned on businesses based on the categories of supplies, the industries that are dealing with standard rated supplies, VAT will impact the purchasing power of their customers and it will have a negative effect on the demand of their supplies. VAT registered companies which have longer payment terms with the customers and shorter payment terms with the suppliers, VAT will have adverse impact on their working capital, and vice versa.
Businesses which are dealing with the exempt supplies, like local passenger’s transport, banks and financial institutions offering margin-based services, suppliers of bare land etc will not be able to claim related input tax and such input tax will become their cost which will lead to increase in the operating cost of the business. Most probably, such businesses will pass on this cost to their customers by increasing the prices of their supplies to achieve their targeted margins so it will have a negative impact on the purchasing power of their customers which will affect demand of their supplies.
Businesses that are dealing with zero rated and out of scope supplies, VAT will not have any major impacts on them except the common impacts as mentioned above.
(b) Impact of VAT on individuals
Individuals who are buying standard rated goods and services for consumption purposes, they would be liable to pay five per cent VAT, and Individuals who are buying VAT exempt goods and services, most probably, they would be liable to pay higher prices. Such purchases will have a negative impact on their purchasing power. However, if they are buying zero rated or out of scope supplies, they wouldn’t be liable to pay any VAT and/or increased price which will not have impact on them.
(c) Impact of VAT on the government
Globally, taxes are the major source of revenue for the Governments and Governments across the globe spend these taxes for the welfare of the public. In the same way, VAT has become a source of income for the Government of United Arab Emirates (UAE) and UAE Government spends this income for the welfare of the public by developing world-class infrastructure, hospital, roads, medical facilities etc.
Moreover, VAT has reduced reliance on the oil-generated money and led to diversified sources of income for the Government which is a sign of healthy and matured economy.
(d) Impact of VAT on the economy
I am always saying, this is not only introduction of VAT, but the documentation of the whole economy. Government will be able to know the sales and purchases of each registered supplier in the supply chain, which would be helpful for the Government to take decisions.
Moreover, standard rated and exempt supplies of goods and services will make supplies more expensive and it will push the inflation rate up based on average supply of standard rated goods and services in the market.