Summary Report: Do you know how to navigate the upcoming Corporate Tax regime?

For numerous decades, Dubai and UAE have been luring foreign businesses to establish their presence in the region. Along with excellent infrastructure, lifestyle and security, the country provides various incentives. However, the absence of corporate and personal taxes has been a key factor in attracting businesses. Over the past few years, the UAE has been making a concerted effort to adhere to global standards and best practices.

Hear from guest experts: Siddharth Kohli, Corporate Tax Expert, Founder & CEO, Indigenesis Consulting and Abdul Moiz Khan, CEO & Managing partner, Fursa Consulting. Moderator Deepak Ahuja, Managing Partner, Venture Catalysts

How are the companies reacting to it? Is there an acceptance issue? What kind of behaviors have you seen from the companies that you deal with?

Since the beginning of 2015, the financial world has adhered to international standards. The corporate industry has realigned itself to conform with these norms to maintain stability and fiscal responsibility. This foundation has been thoughtfully crafted and is crucial for every company to survive.

The inevitability of progress is evident. The UAE must continue to evolve not only for the benefit of its companies but also as a nation. This entails enhancing and demonstrating the country’s regulatory standards and corporate governance to match those of other global leaders.

In terms of the preparedness of the companies for this journey. Where do you think they are, even though they have been given almost a year and a half to work on this?

In January 2022, upon the release of the public consultation document, there was no existence of the General Anti-Abusive Rules (GAA) in the respective jurisdiction. Contrarily, these regulations are known as General Anti-Avoidance Rules in other global regions.

Companies have the liberty to reorganize their operations as they desire under a set of regulations known as general anti-abuse rules. Without any hindrance, they can shift their business locations from the mainland to free zones or offshore areas. Companies who were fast enough to adapt to the new law announcement between January to December 2022, shifted from the mainland to free zone. They are in a much better off position but must prepare for the upcoming upheaval.

The opening balance sheet is crucial and demands your attention if you want to make a strong start. Accounting is not given the due importance it deserves in the UAE, which is why it’s essential to ensure your balance sheet is in order. It is crucially vital to ensure that your initial balance sheet complies with accounting standards for corporate tax purposes. Moreover, there are several additional measures that we should undertake, such as preparing your transfer pricing documentation, which could be discussed in-depth. In summary, the level of preparedness at present seems to be insufficient. It would be advantageous for companies and entrepreneurs to promptly adopt this.

The massive deduction of 9% from the PNL cannot be underestimated. Are owners prepared for this? How will this impact affect the companies and the nation, and what measures are being taken to tackle it? Your thoughts on this matter?

It comes as no shock that companies have been undergoing substantial changes in their corporate structures over the past few years. Efforts have been made to reposition their existing frameworks to ensure success.

They have been working in terms of the operating models that they have to bring in the right kind of efficiencies in terms of enhancing their skill sets, which in a way will help in reducing the cost. They have been working extremely hard to make it more robust in terms of their finance and tax regime structures. There has been a level of recognition regarding the significance of adhering to globally recognized standards when it comes to financial reporting.

The government’s recent actions have sparked changes, including the acceptance of transfer pricing and recognizing the significance of implementing proper legal frameworks within companies.

Given the current developments, I reckon the 9% isn’t causing too much harm as the corporate ecosystem within the organization is poised to undergo significant enhancements and stricter regulations.

Do we have a clear understanding that this tax applies solely to companies located on the mainland? Is there a misconception regarding this matter?

When the public consultative document was released in January 2022, it contained provisions that were quite severe. Specifically, the document threatened to revoke the status of any free zone entity that engaged in transactions with a mainland entity.

The enforcement of the law introduced a classification of income as either qualifying or non-qualifying, while the status of tax exemption remains unchanged. This implies that conducting business between two free zones or exporting outside of the United Arab Emirates will still allow for tax-free income.

Should a free zone entity engage in business transactions and generate income with a mainland entity, a 9% tax will be imposed on that revenue. However, transfer pricing is a crucial factor that must be considered by free zone entities.

It’s inaccurate to claim that corporations are free from corporate taxes, even if they don’t have transactions with the mainland. If a foreign entity is affiliated with them or if they have group companies, transfer pricing and master files like CBCR must be kept. A local file is also a fundamental aspect. Adhering to the legislation of various countries in the UAE, transfer pricing holds utmost significance when dealing with corporate taxes.

Do you think consolidating multiple business entities under a single group and filing it is advantageous or are there benefits to keeping them separate? Your thoughts on this matter?

An essential detail to note is regarding Article 40 of the law, which pertains to tax groups and grouping. Enterprises have the option to establish tax groups within the UAE, in which holding companies can own their 100% subsidiaries. The requirement for this is straightforward.

If your ownership in a company stands at a minimum of 95%, you can establish a tax cluster within the said organization. This move brings immense benefits as it eradicates the need to comply with each separate entity. Instead, the cluster operates as a single entity with a unified registration system. Additionally, tax losses can be endured and carried forward throughout the entire group, acting as a single entity despite being multiple entities. Due to the increase in compliance expenses and the possibility of only one registration, it is crucial for businesses to analyse if there are several entities to organize or reform in a way that allows them to create a tax group.

Although there may be numerous sizable entities, which I strongly suspect, there exists no limitation for including exclusively one entity within the tax group. Creating a tax group with only two or three entities is feasible, while disregarding any additional entities in your possession. You are not required to create a tax group including all the entities in your group.

The corporate tax regime provides advantages within its taxation system. The transfer pricing provisions are exempted from this regime and are crucial within a tax group. This exemption is due to transactions negating each other, when one entity buys, the other entity earns revenue.

Regardless of the price I pay, it is of no consequence as the cost for me is considered as profit for someone else. Hence, transfer pricing does not factor in when dealing with companies belonging to the same group.

The United Arab Emirates has established tax treaties with all major trading hubs. Therefore, the implementation of corporate tax would provide the benefit of either tax credits or foreign tax credit. This means that double taxation concerns have already been addressed.

Although corporate tax is 9%, which is not the highest among other cities, it still puts pressure on the bottom line. Do you think this will deter businesses from finding our city attractive, or does this not matter since taxes are considerably higher worldwide?

When examining the worldwide range of corporate tax laws, the UAE remains the most affordable option. On average, the rate hovers around 23-24%, with some countries exceeding 30%. This results in a mere 9% in outflow. In fact, with corporate tax coming in, there is now a transparency. There are clearly laid out guidelines now.

Do you anticipate the levying of taxes on dividend payments?

Considering current rules, dividends seem to have been omitted from corporate tax for now. But it is time will come. Though not for foreign dividends due to taxation in different countries, with the concern being to avoid double taxation.

What about deductions?

Contrary to widespread belief, interest expenses cannot be fully deducted. The deduction is limited to only 30% of the net EBITDA, which includes earnings before interest tax, depreciation, and amortization. It is worth noting that entertainment expenses, which constitute a significant part of our spending in the UAE, are also included in the calculation.

A maximum allowance of 50% can be deducted for entertainment expenses, along with several other expenses that are eligible for deduction. It’s important to note that donations, bribery, and other illegal activities are not permitted. However, there is a comprehensive list of expenses that are eligible for deduction.

Can you expand on transfer pricing?

Regarding transfer pricing, it is a crucial consideration for services within a business, particularly from a founder’s vantage point. Let us delve into it. There are five prescribed methods, and the most prevalent is the comparable uncontrolled price method. This approach examines how two entities would interact if they weren’t related.

Various software options exist in the market, with Bloomberg being the most renowned. Subscription to these software programs is essential for businesses. The software enables the identification of specific transactions and a subsequent comparison of these transactions to industry standards.

Do investment companies face comparable taxes on their investment income from securities sales or venture investments as they do on their own business?

Under the law, investment-only companies are entitled to a participation exemption. This exemption allows any company with a 5% or greater stake in another company to enjoy tax-free income derived from that stake. The exemption is tailored to foreign investment companies.

As a company, owning 5% or more in ten companies will grant tax exemption on capital gains, dividends, and interest. However, holding ownership of one, two, 3%, or 4% purely as an investment will still require payment of taxes on the earned income.  The revenue generated by the loans in terms of the interest income.

Participation in the company requires a 5% stake, and unrelated companies are subject to standard taxation. Interest from said involvement is classified as regular taxable income, and as such must be paid as per usual. Simply put, it’s just another form of revenue.

In relation to the discussion on depreciation allowance, have the companies been informed about their capital items and depreciable assets? Is that information specifically stated somewhere? Have your clients bifurcated into depreciable? Do they do they even have a fixed asset register?

Very few. As time progresses and more sophisticated financial ideas are introduced, these concepts become increasingly important. It is safe to say that these concepts will continue to play a prominent role in the future of finance.

Accounting has not been given the attention it deserves in the United Arab Emirates, but it is important for all of us to establish a fixed assets register. This is because depreciation will be a significant expense that can be deducted from your taxable income, and having capital assets labelled can help with this.

Is it possible to obtain a clear explanation regarding the varying rates of depreciation across various companies with respect to distinct assets?

The law does not currently define the rate of depreciation. However, in accordance with global legal practices, it is expected to be determined. It is likely that a straight-line method will be employed, whereby the asset’s useful life is assessed and depreciated equally over a ten year period.

Machinery also requires consideration. Let us say you purchase a machine with a predicted useful lifespan of ten years. You can depreciate it over the course of ten years using a straight line approach. Some large machines may have additional benefits.

The absence of any mention of tax depreciation is evident in the law. In jurisdictions with corporate tax, depreciation rates are usually separate. It is possible that the depreciation on financial statements may be considered a deductible for tax purposes.

Other regions have a set value system with predetermined rates for calculating depreciation. However, the UAE tax law does not follow this method. Unless there is a clarification by the Minister or the Cabinet, the best reference is that the useful life of the asset needs to be evaluated carefully from the start.

When it comes to utilized assets, their leftover usefulness would be weighed against the opening balance sheet’s carrying value. This calculation can then determine the depreciation that can be spread evenly over the remaining lifespan of the asset. As a result, a fixed amount of depreciation can be deducted every year.

Apart from trying to streamline with the international best practices, this will also generate a new revenue channel. Do you see things improving in the business ecosystem and how this will benefit the community?

The government’s reserves will benefit from this additional 9% that will be deposited in them, which will help fuel economic expansion and infrastructure development. And, you know, to develop and simplify as much as possible to international norms has been the government’s vision over the last three or four years. You may observe significant changes during the previous two or three years, particularly the revamping of the entire labour law and the elimination of a UAE citizen’s ownership of a business on Monday to Friday. I believe this is a powerful message to the rest of the globe that UAE is embracing one unified platform, which will develop and encourage the finest of the globe to participate.

The 9% weight for 15%, which is pillar two, and this is consistent with what they’ve committed to the OECD. Yet it sends a message to the rest of the world that it can no longer be referred to as a tax haven.

Is income tax on individuals also on the horizon?

Some believe it is coming but it is a couple of decades away. Others don’t think there will be income tax. Numerous other topics are associated with income tax in the developed world, such as individual liberty, voting rights, passports, and security. Security, as well as medical and retirement benefits, are offered. As a result, those factors must be related.