Corporate tax to support the economy of the United Arab Emirates

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The newly introduced corporate tax will strengthen the UAE’s economy as the country attracts well-meaning companies and corporate giants, said Nimish Goel, Country Partner at WTS Dhruva Consultants.

On January 31, 2022, the United Arab Emirates announced its intention to introduce a corporate tax at an overall rate of 9% for net taxable income above MAD 375,000. In addition, a different rate will be proposed for very large companies covered by the provisions of Pillar 2 of the OECD. This tax rate could be 15 percent.

The national corporate tax regime will come into effect for fiscal years beginning on or after June 1, 2023. The proposed tax rate is competitive and comparable to global low-tax centers.

With the introduction of VAT in 2018, country-by-country reporting and ESR in 2019, the introduction of corporation tax was written on the wall.

Goel said: “In my view, the introduction of corporate tax was imminent after the announcements of OECD Pillars 1 and 2 to which the UAE is a signatory. With a global minimum tax proposed under Pillar 2, the lack of corporate tax in the country would have resulted in the UAE losing its share of tax, which would have been collected by other countries anyway. This would have led the UAE to finance the other country, instead of financing foreign companies based in the UAE. Furthermore, for the UAE to remain a dominant force in attracting foreign capital, it was essential to remove the image of the country as a tax haven and to put in place measures that make the UAE a real attraction for global investments. .

He added: “The introduction of corporation tax is a fairly progressive step. The provisions proposed to be introduced are favorable to investors and should accelerate the growth of the economy. The proposed overall rate of 9% is competitive and the lowest among GCC countries. »

Goel said: “Besides that corporate tax generates more revenue for the treasury, corporate tax is important for countries to encourage investment and growth. We have seen in the past that the introduction of a new tax leads to inflation in the short term but, in the long term, ensures the stability of the economy. Additionally, a robust corporate tax system encourages transparency and inspires investor confidence, which in turn stimulates economic growth. As someone once said, “taxes are what we pay for a civilized society”.

He said the headline tax rate has been kept at 9%, which is the lowest among GCC countries. Additionally, a zero percent tax rate for small businesses and start-ups is a welcome move. Additionally, compliance requirements have been kept simple with concepts such as no withholding tax, no withholding tax and tax consolidation, ensuring that the compliance burden for businesses is minimized.

He explained: “As any new tax law comes into effect, businesses would feel the burden, but with proper planning well in advance of its introduction, we expect the process to be less onerous. Businesses have 14 to 20 months to prepare and learn from past experience with VAT. The earlier they start, the smoother the transition will be. »

Speaking about the impact of corporate tax on large family businesses in the country, Goel mentioned that they should assess the impact of the new law on their organizational structures.

He said: “Large corporate groups with cross-border operations should review their corporate structures, identify offshore entities and map business-to-business transactions from a transfer pricing perspective, identify for-profit entities and losses and review their funding. & asset holding structures. Groups engaged in acquisitions should analyze purchase price allocations, review future financial projections, and analyze how the payment of corporation tax could potentially affect them.

The possibility of charging management time and costs with other group entities should also be explored, as this may have been overlooked and ignored so far. Similarly, the remuneration in relation to the capital employed or the rent for the rental of real estate by the owners of the enterprises should be assessed. Business groups that have multiple entities, both on the mainland and in free zones, should consider different tax rates and the possibility of restructuring their supply chain.

This is also the time when large groups must start thinking seriously about setting up a full-fledged tax function to manage their local and international tax compliance.

Responding to a question about the role of corporation tax in managing budget deficits, he said: “Traditionally, to reduce the budget deficit, governments have sold government securities or borrowed abroad. The introduction of a new tax will help reduce the country’s budget deficit. A robust tax system combined with measures to reduce tax evasion would help increase government revenues. It would also give the government the ability to reduce any grants or fees that increase the deficit. »

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