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.
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
How to compute taxable profits in the UAE
Under the direct method of calculating taxable profits, we can calculate the taxable profits directly by deducting the cost of goods sold, tax allowable expenses and other allowable deductions from the gross income of the corporations
Our previous article focused on the differences between accounting and taxable profits. We established that permanent differences and temporary differences lead to differences in accounting profits and taxable profits. We concluded that permanent differences are incurred in one period and do not impact the subsequent period. In comparison, temporary differences are incurred in one period and affect the following period.
In this article, we will learn how to compute taxable profits. There are two approaches to calculate taxable profits, and I am naming them as (i) Direct method and (ii) Indirect method.
Under the direct method of calculating taxable profits, we can calculate the taxable profits directly by deducting the cost of goods sold, tax allowable expenses and other allowable deductions from the gross income of the corporations. Taxable income, if any would be added to arrive at the taxable profits. So, we can say that:
“Taxable Profits = Gross Income – Cost of goods sold – Tax allowable expenses and deductions + Other taxable income.”
This is a straightforward method of calculating taxable profits, and it would be very effective if the corporations were not preparing the financials regularly.
In the indirect method, taxable profit can be calculated by making accounting profits as a base, adding back all disallowable expenses, deducting tax allowable expenses, adding taxable other income, and deducting non-taxable other income. For example, the equation would be as under:
Add: Disallowable expensesXXXX
Less: Tax allowable expensesXXXX
Add: Other taxable incomeXXXX
Less: Other nontaxable income XXXX
Taxable ProfitsXXXX
Companies and tax authorities prefer to use the indirect method to calculate taxable income. This is a very effective and reliable method to compute the corporate tax where corporations are preparing the financials regularly, and these financial statements are audited by external auditors. In addition, it’s quick to calculate taxable profit as accounting profits is taken from the audited financials, and the break of other numbers is available in the notes to the financial statements.
In both of the above methods, tax allowable expenses and income are based on the principles and rules defined in the corporate tax law and related regulations.
Example: ABC company has an annual income of Dh 30 million, and its cost of goods sold is Dh18 million. The company’s operative expenses are Dh7 million which includes: Accounting depreciation of Dh0.05 million while tax depreciation is Dh0.07 million; Provision for doubtful debts of Dh0.1 million while actual debts of Dh1.2 million has been written off; Bank charges Dh0.05 million, Audit fee Dh0.10 million, Utilities Dh0.05 million; Penalties Dh0.15 million, and Other expenses Dh6.5 million. The company sold a machine, and the gain was Dh0.15 million. ABC earned a dividend income of Dh0.5 million. ABC Interest expense is Dh1 million, while the actual interest payment is 1.75 million.
Solution: The diagram shows that the accounting profit before tax is Dh4.65 million while taxable profit is Dh2.28 million under both methods. Therefore, tax payable would be Dh0.21 million [Dh2.28*9 per cent].
While calculating the taxable profits, tax depreciation and bad debts written off have been allowed for tax purposes instead of accounting depreciation and provision of doubtful debts, which are not allowed for tax purposes. Penalties have not been allowed for tax purposes as an expense. Interest expense has been disallowed, while interest payment has been allowed for tax purposes. Dividend income and capital gain (gain on sale of fixed assets) are not subject to tax, so it has not been considered taxable income.
Dividend income, gain on fixed-assets sales, and penalties have created permanent differences. This means these will impact the current period, and it will not have any impact in the subsequent period. Depreciation, bad debts provision and interest have created temporary differences, and it would be offset in the following period. Both administrations have accepted bank charges, audit fees, utilities and other expenses as allowable expenses.
The above understanding is based on the global practices and press releases issued by the Ministry of UAE on corporate tax. Once introduced by the UAE government, the law and related regulations would set a clear basis for corporate tax computation.
Source:https://www.khaleejtimes.com/finance/how-to-compute-taxable-profits-in-the-uae
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.
Source:https://www.khaleejtimes.com/business/key-impacts-of-corporate-tax-on-uae-businesses