14 Feb
UAE corporate tax: Free zone businesses wait on ‘qualifying income’
Free zone firms with mainland operations need learning on loss offsetting and more
Dubai: Free zone-based businesses in the UAE have some serious thinking to do – whether they should sign up to pay 9 per cent corporate tax (CT) or not. Because if they do sign up for the 9 per cent annual tax payout, then these businesses will have greater flexibility on how they handle losses sustained by their companies operating on the mainland.
“If a free zone enterprise elects to pay corporate tax at 9 per cent and does not claim tax exemption, they can claim tax losses of their mainland subsidiary by forming a group or by way of transfer of losses, subject to conditions,” said Manoj Agarwal, founding Partner and CEO at AJMS Tax.
Under the UAE CT rules, a free zone-based business is taxed at 0 per cent. But vast numbers of those businesses with their regional HQs in UAE free zones also have extensive interests on the mainland. Free zone businesses thus have to decide fast whether they should sign up to be taxed at 9 per cent – and claim some of the benefits from doing so – especially when it comes to handling losses sustained in a financial year.
As per Article 37 of UAE CT Law, losses prior to the effective date of the law on a particular entity will not be allowed to be adjusted. As an example, a business with the tax year starting from January 2024 will not be able to offset losses prior to December 31, 2023. Further, losses are allowed to be offset only up to 75% of taxable income of that relevant tax period in which these losses are being offset.
Here’s what the rule says:
> In case the ‘free zone person’ satisfies required conditions and becomes a ‘qualifying free zone person’ (QFZP), then the income derived by QFZP is termed as ‘qualifying income’ and this is taxed at 0 per cent.
> If the 0 per cent tax rate is applied, then a free zone enterprise and a mainland company cannot transfer tax losses.
Forming a group
There is still a way that a free zone enterprise with a mainland company can claim on tax losses. If the free zone entity elects to pay CT at 9 per cent and does not claim tax exemption, they can claim tax losses of their mainland subsidiary. This is done through forming a ‘group’ or by way of transfer of losses, subject to conditions.
“Typically, losses are allowed to carry forward for a certain period or are allowed to adjust with certain conditions, whereas UAE CT seems to be more liberal than other matured tax jurisdictions,” said Agarwal.
“Here losses are allowed to adjust up to 75 per cent of taxable income with certain conditions, such as holding equity/continuing same business activities. Globally, generally these conditions are not there, as the business entities are treated as separate legal entities for tax purpose.”
“Plus, changing the business activities or continuing the same shareholding may create additional burden of probe on the businesses.”
Awaiting more clarity on CT rules
“When it comes to tax treatment applicable to free zone entities, the CT law makes multiple references to future UAE Cabinet decisions,” said Nasheeda, founder of Nishe Accounting & Consulting. “This renders it difficult at present for free zone businesses to determine their tax status and responsibilities.
“In my view, the need for clarity on this topic is quite understandable as the UAE CT rules have to conform to the tax benefits promised by free zones, which form an important part of the UAE economy. And maintain fairness between mainland and free zone businesses while keeping the tax rules simple and loophole-free.
“All of this evidently requires some deft managing.”
Where there is a 75% or more common ownership, the law allows offsetting taxable profit in one entity with tax loss in another entity. If the common ownership is 95 per cent or more with a parent-subsidiary structure, the law allows tax grouping of the entities such that only one combined tax return needs be filed for all the entities in the tax group.”
Signing up with FTA
Corporate tax-linked registrations have opened for UAE’s larger business groups, listed entities and those that have their financial year starting June. For now, only businesses that have been invited to sign up need to do so, but the net will widen soon enough as the timeline draws near to June 1, 2023, when the UAE corporate tax regime goes live.
“We applaud the Federal Tax Authority (FTA) for the successful launch of pre-registration on its EmaraTax platform,” said Hussain Sajwani, Chairman of Dubai-headquartered Damac. “With this measure, digital tax services in the UAE will be easily accessible and corporations in the country will be able to efficiently report their corporate taxes.”
The FTA has been conducting a series of workshops and seminars to filter its message through to businesses, and making it as less onerous as possible to register. What is keenly awaited is the FTA opening up the CT registration processes for more businesses.
As tax consultants and businesses owners say, signing up for VAT can help understand the process – but no one should make the mistake of thinking the requirements for both are the same.
SMEs, take note
Small businesses that rack up an annual income of Dh375,000 and lower will be charged 0 per cent corporate tax. But UAE SMEs can also tap other benefits from the new tax regime.
“There is the concept of small business relief. Using this, small businesses that have a revenue below a certain threshold (which is yet to be notified) may be subject to simplified compliance obligations,” said Dr. Nabeel Ahmed, Partner at DVS Management Consultancy. “And (these will) be treated as having no taxable income during the relevant tax period.
To claim small business relief, an ‘election’ must be made to the FTA. Simply put, SMEs must choose to avail this relief.
“As to who can claim this small business relief, any UAE resident juridical person or individual with revenues below the threshold defined by the minister and who meets any other conditions that may be set, can claim small business relief.”
The most keenly awaited updates on corporate tax
There are Cabinet decisions and executive regulations that businesses are awaiting with anticipation. Here are some of the topics that will be defined by further executive actions, as told by Dr. Nabeel Ahmed.
What will be the threshold for small business relief?
For companies established in free Zznes, the publication of the Cabinet decision detailing the concept of what amounts as ‘qualifying income’ would be crucial to clearly understand how the new CT will impact UAE business activities.
What categories of income derived by non-resident persons will be subject to withholding tax?
Any other expenditure that would amount to entertainment expenditure and be allowed deduction to the taxable income. And any other non-deductible expenditure other than the ones mentioned.
What is the test to determine the connection between the ‘state’ and non-resident person to determine taxable income?
UAE corporate tax and free zones
How the UAE corporate tax will define a ‘qualifying free zone person’ has become a topic of intense discussion from the moment the concept was mooted, because free zones specifically mention the absence of tax as a key incentive offered to companies wanting to register with them.
“By far, the most anticipated update by businesses is the list of designated free zones for corporate tax,” said Nimish Goel, Partner at WTS Dhruva Consultants. “Then there is the list of qualifying income for free zone person that’s taxable at 0 per cent.
“Given the number of entities in UAE free zones, this number is critical.”
In case the free zone person satisfies the required conditions and becomes a ‘qualifying free zone person’, then the income derived is termed as ‘qualifying income’.
The qualifying income is taxed at 0 per cent.
If the 0 per cent tax rate is applied, then a free zone enterprise and a mainland company cannot transfer tax losses.
Clause 1 of Article 38 states as one of the conditions on transfer tax losses that ‘neither is an exempt person nor qualifying free zone person’. A tax group can only be formed if neither the parent nor subsidiary is an exempt person.
If a free zone enterprise elects to pay corporate tax at 9 per cent and does not claim tax exemption, they can claim tax losses of their mainland subsidiary by forming a group or through transfer of losses.
Source:https://gulfnews.com/special-reports/uae-corporate-tax-free-zone-businesses-wait-on-qualifying-income-1.93802442
27 Nov
How European VAT decisions could impact UAE businesses
Written agreement concerning the supply of goods or services, between two VAT-registered persons, could be regarded as a tax invoice for recovering input credit
The European Court of Justice (ECJ) is amongst the leading judicial authorities whose decisions are accepted as authoritative precedents by the tax authorities across the globe. In this week’s tax conversation, let us discuss important ECJ decisions to get global tax insights. I must caution that one has to examine the context and facts of each case to determine if the ECJ’s jurisprudence will also be applicable in the GCC region.
1. A written contract in place of a tax invoice
In Raiffeisn Leasing case, the ECJ held that a written agreement concerning the supply of goods or services, between two VAT-registered persons, could be regarded as a tax invoice for recovering input credit. The contract should contain all the information necessary for the tax authorities to determine that the material conditions for the right to recover VAT credit have been satisfied.
2. Transaction between head office and branch in different countries
In FCE bank case, the ECJ held that transactions between head office and its branches situated in different countries are not to be regarded as a supply for VAT purposes because the head office and its branches form a single legal entity.
However, in subsequent decisions, the ECJ held that if the head office or the branch are a part of a VAT group, the transactions should be recognised as a taxable supply. For VAT purposes, a VAT group should be recognised as a separate taxable person which supersedes the individuality of the group members.
As UAE is an attractive investment and economic destination for multinational companies, the tax compliance of branch operations must be ensured.
3. Place of supply for educational services
In Srf konsulterna AB case, a company based in Sweden provided accounting and management courses in the form of seminars for a price. For the seminars held outside Sweden, the issue arose whether VAT is payable in Sweden or in the country where the seminars were physically held.
Services in respect of admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events is generally the place where those events actually take place. The ECJ held that the ‘services in respect of admission to events’ include a service in the form of a five-day course on accountancy and management.
With the increase in online courses/events being supplied by suppliers based outside UAE to the people based in the UAE, the ECJ decision could have significant implications on the overseas service providers.
4. Issue of shares by a company
Should the issue of shares by a company be treated as an exempt supply? If yes, the companies would not be able to recover input tax credit on the costs relating to the IPO, share issue, listing and other related costs.
With the ever increasing IPOs activities in the UAE, the aforesaid question gains significant importance.
However, in subsequent decisions, the ECJ held that if the head office or the branch are a part of a VAT group, the transactions should be recognised as a taxable supply. For VAT purposes, a VAT group should be recognised as a separate taxable person which supersedes the individuality of the group members.
As UAE is an attractive investment and economic destination for multinational companies, the tax compliance of branch operations must be ensured.
5. Place of supply of an actor’s services
Though not a decision by ECJ, a UK Tribunal decision holds a special importance. My work experience in the United Kingdom started with the review of this tribunal’s decision on the European taxation.
In Saffron Burrows case, the UK Tribunal examined the place of supply of services by film actors and the VAT implications thereon. The Tribunal held that that the acting services should be treated as supplied in the country where performed, and not at the place of residence of the actor.
Accordingly, if a movie actor based in India or USA performs an acting assignment in the UAE, the actor may be required to pay UAE VAT on his/her acting fee.
Concluding remarks
Taxation is far more intriguing and complex than otherwise perceived in general. It is important that the business owners and their finance teams should ensure that their tax positions are well tested and supported by judicial precedents.
Source:https://www.khaleejtimes.com/business/how-european-vat-decisions-could-impact-uae-businesses
06 Nov
UAE VAT law: Next 5 important changes business owners should know
A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios
Last week, we discussed the top eight changes in the VAT laws that business owners should know about. Year 2023 will see many more changes in the tax laws and the tax procedures. Considering the significant impact on businesses, we discuss the next five important changes in depth.
14-day time limit for tax credit notes and loss of input credit
A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios e.g. discounts, sales return, sales cancellation etc. The supplier needs to issue a tax credit note to the buyer/recipient and the buyer/recipient is obliged to reverse the proportionate input tax credit recovered on the original invoice.
Effective January 1, 2023, the supplier could claim back the output tax only if the tax credit note is issued within 14 days from the date when the prescribed scenario took place. Once the 14 days period is lapsed, VAT could become a cost in the value chain. The seller would lose the right to claim back excess output tax paid. The buyer would anyway be able to recover only such input credit as is proportionate to the net amount paid to the supplier.
Globally, the VAT laws often allow to issue credit notes without any VAT adjustment if the seller and buyer are not engaged in any exempt supplies.
2. Issuing tax invoices even if VAT is not charged
Since 2018, any person who receives an amount as VAT pursuant to any document issued by him was rightly obliged to pay the amount to the FTA even if it is not due. The provision has been updated to include that any person issuing a tax invoice in respect of an amount, must pay such amount to the FTA.
Due to ERP restrictions or accounting controls, companies often title their invoices as ‘tax invoices’ even if no VAT is charged on one or more items therein. The updated provision creates an ambiguity on the tax liability in such cases. A clarification from the FTA would help the business community.
3. Invoices for the import of goods
Last week, it was highlighted that the taxpayers will need to receive and retain invoices for any import of service on which reverse charge is applicable. The obligation to receive and retain invoices and import documents will equally apply for the import of goods.
It appears that some taxpayers do not verify the correctness of the import VAT payable under reverse charge that automatically appears in their VAT returns and recovers input credit of the complete amount without verification. The FTA wants a taxpayer to ensure that the credit is recovered only for the verified imports undertaken by the taxpayer.
4. Mandatory voluntary disclosure even if no additional tax payable
The tax procedures are also being amended effective 01/03/2023. Taxpayers would be required to submit a voluntary disclosure to correct an error or omission even if such error or omission does not result in any change in net tax due reported in the original VAT return.
This amendment could cover situations where a taxpayer omitted to report zero-rated supplies, exempt supplies or import of goods/services under reverse charge. Once a voluntary disclosure is submitted, penalties could also apply for the errors in the original VAT returns.
5. Reduction in the maximum amount of administrative penalties
Since 2018, the maximum amount of administrative penalties, e.g. for delay in payment of tax, was restricted to 300% of the tax amount. Effective 01/03/2023, the maximum amount of administrative penalties would be restricted to 200% of the tax amount. However, the minimum threshold of Dh500 for penalties would be removed thereby allowing the FTA to impose penalties less than Dh500 as well.
Concluding Remarks
We alerted in an earlier column about the 4Rs principles for effective tax management: (i) Ready to comply; (ii) React for advice; (iii) Reveal to optimise; and (iv) revolutionise to maximise. Business owners should take note of the upcoming VAT changes and proactively take corrective actions.
Source:https://www.khaleejtimes.com/business/uae-vat-next-5-important-changes-you-should-know
05 Sep
What is the cost-plus method to assess the transfer price
The cost-plus method is a very traditional method and easy to understand. Generally, this method is applicable where it involves the transfer of semi-finished products to the related party, where joint facility agreements have been concluded, or where the controlled transaction is the provision of services
There are three traditional transaction methods to ascertain the transfer price, two of which we have already discussed in detail. The cost-plus method is the third one that we have covered in this article.
As the name suggests, the transfer price under the cost-plus method is the cost plus a comparable markup based on the functions performed and risk involved, and the same has been defined in the transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development (OECD) as follows:
“A transfer pricing method using the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus markup is added to this cost, to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions. What is arrived at after adding the cost plus mark up to the above costs may be regarded as an arm’s length price of the original controlled transaction”.
Under this method, the actual cost involved in the controlled transaction is calculated. The cost can be direct and indirect costs related to the transaction. Direct cost is the cost that is incurred specifically for producing a product or rendering service, such as the cost of raw materials, and this cost can be directly traced to the related product and service. While indirect cost is a common cost like the costs of a repair department that services equipment used to produce different products, and this cost is allocated to the respective product and service by applying various methods like high low method.
An appropriate markup is added to the above-calculated cost based on the functions performed, risk involved, and market conditions involved. A comparable markup should be added to the comparable cost basis. Like, if one supplier conducts business with the leased assets, its cost base would be different from the supplier who conducts its business through the owned assets, and this factor should be considered while adding the mark up.
The cost plus markup of the supplier in the controlled transaction should be compared with the cost plus markup of the same supplier in the uncontrolled transactions (internal comparable). This means the cost plus markup earned by the supplier from the related party should be compared with the cost plus markup earned from any unrelated party. If there are any differences, an adjustment should be made.
In addition, the cost plus markup that would have been earned in comparable transactions by an independent enterprise may serve as a guide (external comparable). External comparable is the cost plus markup that have been or would have been earned by the external supplier who is in the same business-like an internal supplier and selling the same goods and services under the same terms and conditions to any third party.
While comparing with cost plus markup of the uncontrolled transaction, if there are no differences, then the existing cost plus mark up should be considered an arm’s length price. However, if the material differences have been identified, then a reasonable adjustment should be made to eliminate the material effects of such differences. So, we can say that “transfer price under the cost-plus method = external/Internal comparable + adjustment (if any)”.
We should not ignore the level and type of expenses – operating expenses and non-operating expenses. If there are higher expenses due to more assets and risk involved, then an adjustment should be made. If more expenses are due to additional functions that bring efficiency, then compensation should be given. If due to the inefficiencies, there are higher expenses like supervisory, general, administrative expenses etc., then no adjustment should be made to the margin.
While calculating the cost, we should not ignore the accounting consistency. If the accounting treatment in a controlled transaction is different from the accounting treatment in an uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs is used in each case to ensure consistency.
The cost-plus method is a very traditional method and easy to understand. Generally, this method is applicable where it involves the transfer of semi-finished products to the related party, where joint facility agreements have been concluded, or where the controlled transaction is the provision of services.
The biggest challenge in this method is to get the mark up from the other party, which is not easily available. Moreover, keeping in view the functions performed and the risk involved, the adjustment on account of transactional differences would not be an easy job.
Source:https://www.khaleejtimes.com/finance/what-is-the-cost-plus-method-to-assess-the-transfer-price
