With corporate tax, UAE businesses still have time to correct erroneous transaction entries

Taxation is fairly new for UAE business owners. The Value Added Tax (VAT), which came into effect on 1 January 2018, is the first tax regime to affect businesses across the UAE.

With regards to the upcoming corporate tax, it is natural for business owners to compare corporate tax to VAT. They don’t want to repeat the mistakes they made with VAT implementation. Business owners must understand that CT is different from VAT.

Given the nature of VAT, it is important to prepare before 1 January 2018. Any errors or delays will result in financial loss and penalties. Corporation tax itself will not immediately affect any ongoing business operations (from 1 June 2023). Businesses need to be mindful of the differences when preparing their corporate taxes to avoid rushing things.

VAT is a transaction-based tax that can usually be charged to customers. Since the opportunity to charge VAT to customers is time-limited, it is important to properly determine the nature of each transaction before completing it.

CT is known as a “direct tax” and is a tax on business income. Taxable income will be drawn from the financial books. Regardless of whether a transaction is taxable under the VAT Act, it remains in the financial books of the entity as business income/expenses.

VAT needs to be paid on a regular basis, either monthly/quarterly. Any errors and/or delays will result in financial costs and fines. Getting tax compliance right in real time becomes imperative.

On the other hand, CT needs to be paid within 9 months after the financial year end. For the fiscal year from January 1 to December 31, 2024, returns and taxes only need to be due by September 30, 2025. Even if one or more transactions are incorrectly recorded during the year, businesses will have 21-9 months to audit and review accounting entries and make corrective adjustments to perform tax calculations.

After such review and corrections, the final CT tax return can be prepared without penalty.

Transfer pricing also creates unnecessary confusion among businesses. Transfer pricing analysis is usually performed at the end of the financial year. The aggregate value of the relevant transactions during the financial year should generally be at arm’s length.

Therefore, transfer pricing adjustments can be made in the books at the end of the year. Alternatively, if the relevant transaction is not at arm’s length, the taxable income may be adjusted appropriately to calculate the net tax. Transfer pricing regulations do not provide for penalties if transactions are not at arm’s length, as long as taxable income is properly adjusted.

Even domestic transfer pricing, such as salaries paid to owners/directors, does not require that the salary amount has to be kept at a distance from day one. It only needs to ensure that the total wages paid to “connected persons” during the financial year are fair.

On the other hand, VAT law requires that the valuation of an intercompany transaction (if applicable) should be correct at the time of the transaction.

For VAT, the nature of the business expense needs to be properly identified while recovering the input credit itself. Any corrections thereafter may result in penalties if any ineligible input credits (such as hospitality) are recovered.

For CT, the nature of expenses such as hospitality expenses can be reviewed at any time during the year or up to nine months thereafter, i.e. before tax calculations are prepared. Any accounting corrections in the accounting books should not result in penalties.

Certain tax structures, business model optimization, free zone operations and analysis will definitely require an early transition to CT. However, anti-abuse rules are already in place and enforceable.

Any transaction and/or arrangement, where there is no legitimate business reason and aimed at obtaining tax advantages, may be neglected by the tax authorities to calculate the correct taxable profit under the anti-abuse rules. In such cases, penalties may also apply. Business owners should make sure to get accurate guidance on anti-abuse rules.

Anxiety about the looming corporate tax is understandable. Finance professionals and business owners must have a thorough understanding of the tax system and take proactive steps to make it happen. However, experience with VAT implementation should not convince business owners that CT is the same as VAT.