CORPORATE TAX IN UAE – AN INTRODUCTION

CORPORATE TAX IN UAE – AN INTRODUCTION 
On 9th December 2022, UAE has released the much-awaited Federal Decree Law No. 47 of 2022 on the taxation of corporations and Other Businesses. The Corporate Tax Law will be effective from 1 June 2023 with a headline rate of 9%. This is the first time a direct tax being implemented in UAE. Unlike Value Added Tax and Excise Tax, Corporate Tax will directly impact the profitability of a business. The new corporate tax regime includes features that represent best practices in international taxation. Here we provide a brief about Corporate Tax and the rationale behind the introduction of Corporate Tax by UAE.

What is Corporate Tax
Corporate Tax is a direct tax levied on net income or profit of corporations and other businesses. The corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally accepted accounting standards. Although the net income is the base, the tax authority has further clarified the exceptions and adjustments which needs to be applied in order to arrive to the taxable income. This means accounting profits (net income) and the tax profits (net income after adjustments) will be different.

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Rationale for introducing Corporate Tax

1. Accelerate development of the economy

Corporate Tax is a great source of revenue for a country. The increase in revenue helps government to reduce the budget deficit. It further helps the government to serve the country with enhanced public services such as healthcare, security, transportation and education etc. These services are important for the economy and the general well-being of citizens.

Countries use corporate tax to safeguard their local industries from foreign companies. For example, a country may impose high rates of corporate tax on foreign companies as compared to local companies. Similarly, the local companies particularly the free zones benefits tax incentives. The free zones or economic zones are a vital part of UAE industry and encourages great amount of foreign direct investments and to grow thereby, which ultimately contributes to the economic growth of a country.

2. Meeting International Standards

With the introduction of Corporate tax, The UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices. The regime will pave the way for the UAE to address the challenges arising from the digitization of the global economy and the other remaining Base Erosion and Profit Shifting (BEPS) concerns and execute its support for the introduction of a global minimum tax rate by applying a different corporate tax rate to large multinationals that meet specific criteria set with reference to the above initiative.

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Corporate Tax regime in UAE has been designed based on the best international practices and would be amongst the most competitive in the world.

3. It boosts financial transparency and accountability

The companies in UAE would need to now prepare adequate, standalone financial statements for each entity for tax compliance. Expenses need to be demonstrated that have been incurred wholly and exclusively for the purpose of business. Hence, the entities will be mandated for a thorough control of the accounting functions and keep accounting records with utmost clarity.

Previously the financial statements and their audits were mostly a procedural requirement for most of the entities to renew License and other few regulatorily requirements like compliance of bank facilities. However, with the introduction of Corporate Tax, the regulatory requirements over the audit of financial statements will get even more strict and because the calculation of the adjusted taxable profit will be based on the audited figures.

4. It rebalances the economy

It is believed that a plenty of idle money are kept by large corporations aside from their businesses. The transfer of a fair share in the form of tax to government helps the country to prosper and regulate the local economy as the government is mandated to put the money straight to work. However, Corporate Tax ensure that there is a fair distribution of tax burden on all businesses.

UAE has introduced the Corporate Tax with a fixed rate of 9%. A flat tax system may motivate small sized businesses to do more business, to earn more and to invest in UAE, resulting in more economic boost.

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