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Effective after promulgation of the decree on December 9
Photos are for illustrative purposes only.
2022 is an exciting year for taxation in the UAE. At the end of an eventful year, the corporate tax decree has finally been announced. Although the tax will be imposed for your company’s fiscal year beginning on or after January 6, 2023, an important aspect of the law is already in effect.
The “anti-abuse” rules come into effect immediately after the decree is issued, which is December 9, 2022.
What are Anti-Abuse Regulations (AAR)?
The Anti-Abuse Rule (AAR) is designed to combat the abuse of the tax code and prevent taxpayers from predicting tax positions/consequences that are not in accordance with the intent of the law. The AAR is based on global best practice of the Generalized Anti-Avoidance Rules (often referred to as GAAR).
Transactions covered by an AAR may be disregarded by tax authorities when determining taxable profits and/or the taxability of an entity.
While the tax is new to the UAE, the AAR is relatively recent to many countries, especially for UAE businesses.
Pankaj S Jain (left) and Deepak Bansal
Scope of AARs
AAR essentially follows the principle of “substance over form”. AAR applies to transactions or arrangements that (a) have no valid commercial justification/economic reality, and (b) primarily receive corporate tax benefits.
“Corporate tax advantages” include (a) tax avoidance/reduction; (b) creation/increase of tax refunds; (c) deferral of corporate taxes, or (d) avoidance of withholding tax compliance.
The AAR applies not only to commercial transactions, but also to commercial arrangements entered into on or after 9 December 2022. AARs also cover arrangements such as changes in financial year, business operations/entity restructuring, share transfers, mergers/demergers, etc.
determination of abuse
Determining improper use of the tax code is always a subjective test. Tax authorities must consider a variety of factors to determine the economic reality and applicability of AARs to transactions and arrangements.
Factors that determine the applicability of an AAR include the manner in which the transaction/arrangement is entered into or executed, the outcome of the transaction, expected financial results, etc.
In the context of preparing for corporate tax, businesses must bear in mind that the timing of the transaction/arrangement will also be a factor in applying the AAR. For example, if a company now suddenly shifts its operations from the mainland to a free zone, or changes its financial year, timing and intent may be called into question under the AAR. Alternatively, the new arrangement may also be challenged if the owner begins to withdraw wages from his/her company that have never been withdrawn in the past.
It is also necessary to check whether a transaction or arrangement creates rights/obligations that would not normally arise between independent unrelated parties.
The AAR requires that its application be unbiased and reasonable, in accordance with global best practice.
The tax authority may decide that one or more specific corporate tax benefits obtained as a result of the transaction/arrangement should be offset, such as by recalculation of taxable income. The tax authority will have seven years to conduct the audit and apply the AAR. The gap between the tax year and the audit decision automatically results in interest and penalties.
actual impact
AAR has started on December 9, 2022. As businesses prepare for the implementation of corporation tax, a thorough analysis of proposed restructuring is necessary to comply with the AAR. Companies rushing to implement taxes without a thorough analysis can lead them into a spiraling tax and penalty trap.
(The author is working with AskPankaj Tax Advisors. For feedback and questions, you can write to info@AskPankaj.com. The views expressed are those of the author and do not reflect the policy of the newspaper.)
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