The introduction of corporate tax in the UAE, which applies for financial years starting on or after 1 June 2023, marks a significant milestone in the country's fiscal landscape (for prior coverage, see the article in the May 2023 issue of Corporate Tax News). With the introduction of VAT in 2018, businesses and tax professionals anticipated that future changes would be primarily related to rate adjustments, similar to revisions in other Gulf Cooperation Council countries (for prior coverage, see the alert on the BDO in the UAE website). However, the introduction of corporate tax in the UAE, a mere five years after VAT, brings about a new and dynamic chapter for the country.
This article highlights some of the key differences between the implementation phases of the VAT and corporate tax systems in the UAE.
First tax (VAT) vs. Second tax (Corporate tax)
VAT was the first general business tax to be introduced in the UAE, revolutionizing the entire business landscape. While the UAE did impose taxes on the oil and gas and banking sectors, these taxes did not impact the business community as a whole.
Businesses faced two fundamental challenges during the implementation of VAT:
- They had to understand what VAT entailed and how it would impact their operations; and
- They had to undergo a behavioural change, as the concept of taxation was entirely new to many in the UAE.
The challenges of the behavioural change were mitigated during the implementation of the corporate tax since businesses were accustomed to the concept of taxation. They had experienced first-hand the importance of maintaining accurate accounting records and complying with regulations. Businesses in the UAE are now more transparent in their operations and better equipped to anticipate the risks and challenges associated with the new tax regime.
Short vs. long duration
VAT implementation was announced near the end of 2016, but the legislation was not released until October/November 2017. With the VAT regime applying as from 1 January 2018, this left businesses with a very short window to familiarise themselves with the legislation and implement the necessary changes. And, as discussed below, the short duration posed significant challenges during the implementation phase.
In contrast, implementation of the corporate tax followed a very different timeline. The announcement was made well in advance, and the primary law was released in December 2022. With corporate tax becoming effective from financial years starting on or after 1 June 2023, businesses, particularly those with calendar year-ends, had more time to review the law and take the necessary steps to be in compliance with the rules.
Scope of impact and administrative burden
VAT had a broad impact on businesses across many sectors, affecting the supply of both goods and services. It required businesses to assess their operations, determine VAT applicability and make the necessary adjustments to pricing, invoicing and accounting systems. In contrast, the scope of impact for corporate tax is more specific and targeted, primarily affecting companies' profits and financial statements.
The introduction of VAT placed a significant administrative burden on businesses, particularly in the initial stages. It required businesses to allocate resources for VAT returns, training staff, and implementing new accounting and reporting systems. Ongoing compliance, such as timely VAT return filing and payment, added to the administrative workload. By comparison, corporate tax, although requiring careful tax planning and reporting, may not entail the same level of ongoing administrative burden as is the case with VAT. With no advance or interim payments to the tax authorities required, and with only a single annual filing nine months after the end of the financial year, the day-to-day administrative burden from corporate tax is less onerous.
Comments
The implementation of VAT and corporate tax in the UAE are transformative milestones in the country's taxation landscape. VAT brought widespread changes to business operations, requiring businesses to navigate new compliance obligations and undergo a behavioural shift towards tax compliance. Corporate tax builds on the foundations established by VAT and leverages businesses' improved understanding of taxation. With a longer implementation timeline, businesses have had more time to review and adapt to the corporate tax regulations.
Navigating the evolving tax environment in the UAE requires businesses to stay informed and plan diligently and carefully for both the VAT and corporate tax. Each tax has its own challenges, which must be addressed to achieve maximum tax efficiency and compliance.
(A version of this article first appeared in GCC FinTax.)
Mufaddal Safdari
BDO in United Arab Emirates
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