A highly competitive corporate tax rate of 9 per cent – one of the lowest compared to the global average of 23 per cent – will help the UAE not only reaffirm its reputation as a leading global hub for business and investment but also diversify its revenue streams, said experts during a panel discussion at Invest UAE, a seminar organised by Gulf News.
“Any compliance enhances the reputation of the jurisdiction,” said Nirav Shah, Director of corporate tax consultancy Fame Advisory during the discussion titled How corporate tax will boost the UAE’s global competitiveness. “This basic level of compliance at a very attractive rate changes the perception of the country from being a tax haven to a tax-compliant jurisdiction.” He noted that even though there were nuances when it came to free zones, transfer pricing and a few others, the UAE’s tax regime was a simple-to-administer, holistic system that covered all aspects. “Along with its geographical location and overall ease of doing business, this new tax compliance is helping the country attract more international businesses.”
On top of adhering to international best practices, the introduction of corporate tax has opened up a new avenue for revenue for the UAE government. Citing a Marmore MENA Intelligence report, Alia Noor, Associate Partner at Ahmad Alagbari Chartered Accountants, explained that the UAE was expected to generate a revenue of Dh47.7 billion through corporate tax in the first year, which would make up 15 per cent of the gross non-oil-based revenue for the country.
Furthermore, the implementation of corporate tax would enhance competitiveness by ensuring businesses remained compliant with proper bookkeeping and financial statements, said Mostafa Elrefaey, Managing Director of Integrity Accounting Services. “This will help a lot of companies and increase investor trust and transparency across all sectors.” However, most of the companies in the UAE, more than 85 per cent, are SMEs, so it will take some time for all of them to become tax-compliant, he added.
For businesses, moving from a tax-free regime to a tax-compliant one is fraught with challenges. Sahil Mehta, CEO of Shuraa Tax Consultants, delineated top three challenges companies face: “The first one is financial planning and budgeting – at the initial stage, it will be very difficult for companies to budget the corporate tax assessment. The next challenge is the complexity of compliance. The third challenge would be operational adjustments to incorporate financial reporting and compliance requirements into internal processes.”
Instead of looking for ways to avoid corporate tax, businesses should focus on how to become better compliant, said Hozefa Saifuddin, Co-founder and CEO of Brooks Group. “Being more tax-compliant, understanding taxation better, and accepting it as part of your business cost would make your business much better. And people will become more creative and innovative and look for more revenue factors when they have to adjust this cost of compliance into their books of accounts.”
Tax avoidance in the UAE comes with bigger consequences unlike other jurisdictions and businesses need to be mindful of that. “In the UAE, tax avoidance has criminal consequences,” said Shah. “And the onus of compliance is on the taxpayer on a self-assessment basis. If the taxpayer is not going to do the correct assessment, which leads to either tax minimisation or tax avoidance, they potentially can go behind bars.”
All the experts in the panel also emphasised that although there are tax benefits of being in the free zone, the benefits don’t apply across the board. In order to be eligible for the zero per cent taxation, free zone companies need to meet a long checklist of compliances. “First, you need to check if you are in a free zone,” explained Noor. “Second, you need arm’s length transaction, which means all your transactions should be at the market rate. Third, you need to have audited financial accounts. Fourth, and most importantly, you have to meet the de minimis requirement. If you meet the de minimis requirement, then only can you avail the zero per cent taxation.
“If you are unable to meet any of the requirements for zero per cent taxation, like you need to have adequate substance in the free zone, you need to have adequate audited accounts, you need to maintain arm’s length transaction, if you fail to do any of it, then you will be disqualified for the next five years.”
