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Are businesses prepared for Corporate Tax in the UAE?

Businesses will be required to review the ownership structure, check on impact of forming a Tax Group and review of their activities in free zone and mainland.

Businesses in the UAE are at the doorstep of Corporate Tax. Only one year to go for the effective date, that is June 1, 2023. The MoF released a Public Consultation Document (PCD) to collect and appraise the responses of stakeholders. On review of PCD, businesses required clarity on certain aspects like, implications on MNEs, services rendered by free zone persons, purchase/sale transactions between group companies in the free zones and mainland, etc., for which the representation has been submitted by professionals and business communities in the UAE.

Since there is only one year left for applicability of the CT provisions, the businesses should start to evaluate the potential implications of CT by conducting internal assessment of their ownership structure, business activity, transactions with free zone persons, applicability of Transfer Pricing (TP) etc.

Businesses in the UAE need to take actions before the effective date and they can be categorised into three main segments:

Accounting and audits:

Apart from maintenance of audited financial statements as per internationally accepted accounting standards, businesses will have to review transaction with / payments made to related / connected party, (eg. group company, directors, partners, etc.) as the same must be as arms’s length and wholly and exclusively for the purpose of business. Also, entrainment expenditure and interest expenditure will have to be looked into, as limitation has been set for its allowability. In general, expenditure will be allowed only if it is incurred for the purpose of earning taxable income. Any expenditure which is incurred for the purpose of earning exempt income or which is not for the purpose of business would be disallowed. Thus, updating Financials would become critical as the same set of financials will be carried forward (without restatement) when the CT becomes effective.

Organisation and resources:

Businesses will be required to review the ownership structure, check on impact of forming a Tax Group and review of their activities in free zone and mainland. Restructuring may be required when the activities of free zone are connected partially to mainland and partially overseas. Also, business will have to review if they have adequate resources (skilled staff, accounting software, MIS systems, etc.) to ensure compliance with the CT regulations. Whether any change in the accounting or reporting process would be required and the risk of non-compliance due to lack of process should be evaluated.

Implications on international Business:

With the introduction of CT in UAE, credit on taxes paid in the foreign jurisdiction would allowed. Also, PCD clarifies that there would not be any withholding taxes at present, however, the possibility of levy withholding taxes in the future has been indicated. This is due to the UAE’s commitment to execute provisions of OECD Pillar Two. Entities (MNEs) which are likely to be subject to Pillar Two may also keep a close eye on the developments in this regard, as it may change its tax liability in the UAE.

To understand the nitty-gritties and nuances of the recently released PCD, Emirates Chartered Accountants Group (ECAG) released the ‘CT HANDBOOK’ during the event conducted by ICAI Dubai Chapter, on UAE CT. — business@khaleejtimes.com