Corporate tax and VAT in the UAE

We ask global expert Nilesh Ashar, Partner, Head of Tax, KPMG in the UAE…

How will the introduction of corporate tax and VAT affect the UAE’s competitiveness?

The UAE’s strong economy, growing market, efficient government, free zones and its move towards becoming a smart city are aspects that draw investors to the country and will continue to remain high on the list of deciding factors for in-bound investments. Despite these, the government should implement incentives such as tax breaks for investors and entrepreneurs looking to set up their business in the UAE. The government could also consider keeping the UAE’s free zones tax free as an added incentive; however, practical implementation should be taken into consideration.

Tax is not the only key factor for attracting in-bound investments. However, it could be argued implementing taxes in the UAE may urge investors to look at other developing markets such as Asia and Africa; however, we must bear in mind that these countries already have indirect tax, corporate tax and income tax systems in place.

What are the pros and cons of introducing corporate tax and VAT in the UAE?

The introduction of any new taxation system is a major change and individuals and organisations, as well as the government itself, are going to take some time to adapt to any new system. It is important to provide proper guidance and support to all the UAE businesses to acquaint themselves with the requirements. Further motivation in the form of a reasonable adjustment period, trainings and revenue threshold exemptions has to be provided to businesses in order to facilitate transitioning to new tax system and preserve the business attractiveness of the UAE.

Any revenue collected through corporate tax and VAT will support the government to sustain the UAE’s development pace and fuel the economic growth agenda in the long run.

What do you foresee as some short to medium term implications of VAT and corporate tax implementation in the UAE?

Businesses may find the initial transition to a tax system cumbersome as it’s a big status quo change for them. In the short term, businesses will have to make changes to their operating models in order to manage the cost of taxes which will impact their profit margins, or adapt the model to pass on the burden of taxes onto the consumer. Firms will have to internally asses their systems and skill/capabilities to deal with the tax changes. In the medium term, the implementation of VAT will help increase government revenue and therefore help further their infrastructure and economic development goals.

How will this impact business in the UAE – particularly SMEs?

As mentioned earlier, this move will certainly increase the cost of doing business and the cost of compliance for SMEs in the UAE. The incremental cost and requirements associated with taxes needs to be carefully budgeted/factored in the business models. Apart from that, all the above mentioned implications will be applicable to SMEs as well. However, it needs to be seen whether SMEs are indirectly excluded because of a higher threshold value for registration for VAT purposes.

Taxes could potentially impact all businesses in the UAE, either directly or indirectly. Businesses should carefully review their processes to understand the impact of taxes and to determine what needs to be done to be fully compliant with any new laws. Although we have few details of the intended tax laws, the UAE’s Ministry of Finance recently clarified a number of issues through its website, including confirmation that there would be an 18 month adjustment period for VAT implementation and 12 months adjustment period for corporate tax implementation by the businesses.

It’s very difficult to suggest anyone should make radical changes in response to an unpublished law. However, companies may undertake few actions to be ready for the changes, E.g. Continue monitoring tax developments and updates, assess the financial impact of corporate tax at and VAT, internally review financial systems to assess overall tax readiness and map possible changes to accounting systems, map intra-group transactions and dependencies, prepare revised financial statements for prior year comparison when taxes are eventually introduced, revisit contract clauses dealing with price and taxes (change in law clause, taxes inclusive/exclusive), quantum of tax to be passed on gross or on net basis, and assess your organisation’s tax awareness, especially in the finance function.

How can businesses assess internal awareness and compliance prior to the introduction of corporate tax and VAT?

Clear communication is essential to ensure effective compliance, every single employee should be aware of how the business model has to change in order to incorporate taxes. Budgets need to be carefully planned in advance to reduce and/or manage the financial impact of taxes. Further, businesses should conduct a careful review of the processes and assess tax resource capability to understand the impact of the tax as well as to determine what should be done to prepare to be fully compliant.

How is the introduction of VAT likely to impact consumers, their spending and Dubai’s retail sector?

The UAE government could implement VAT at a lower rate (suggestions from IMF – below five per cent). If the rate is relatively low, it should not impact consumer prices to such an extent that it would discourage purchases, however consumers will feel a one-off marginal inflation impact. Businesses may consider to absorb the VAT wholly or partly initially to ease the burden on the consumer and to avoid consumers (individuals and businesses) from looking for a bargain elsewhere.

Given the fall in oil prices, will the introduction of corporate tax and VAT help diversify the economy?

The decision to implement tax is certainly going to help diversify sources of revenue for the government. The volatility of oil prices in recent months has led the UAE government to look at other steadier sources of revenue, which include VAT and corporate tax. Most nations have adopted a tax system in order to boost their revenue, which ultimately is invested into the growth of the economy. The decision to implement taxes will eventually help the UAE move towards becoming more developed, however the government should ensure that there are sufficient education programmes for businesses in order to ease the transition.