The United Arab Emirates (UAE) has reached a significant milestone in its fiscal landscape with the introduction of corporate tax, which became effective from the financial years starting on or after 1 June 2023. While the implementation of Value Added Tax (VAT) in 2018 was expected to bring about future changes primarily related to rate adjustments, the introduction of corporate tax just five years later marks a new and dynamic chapter for the country.
In this article, we aim to highlight the key differences between the implementation phases of VAT and corporate tax in the UAE, shedding light on various aspects that businesses need to consider.
Comparison between the Initial Value Added Tax (VAT) and the Subsequent Corporate Tax (CT):
VAT was the first general business tax to be implemented in the UAE, fundamentally transforming the entire business landscape. Although there were pre-existing taxes on oil & gas and banks, they did not affect the broader business community.
During the VAT implementation, businesses faced two significant challenges. Firstly, they had to understand the implications of VAT and how it would impact their day-to-day operations. Secondly, businesses had to adapt to a behavioral change as the concept of taxation was entirely new for many individuals in the UAE.
With the implementation of corporate tax, the challenge of behavioral change is significantly reduced, as businesses are already familiar with the idea of taxation. They have gained firsthand experience in maintaining accurate accounting records and complying with regulations. As a result, businesses now operate with greater transparency and are better equipped to anticipate and manage the risks and challenges associated with the new tax regime.
Short vs. Long Duration:
The announcement of VAT implementation came towards the end of 2016, with legislation being released only in October/November 2017. This left businesses with a mere one-month window to familiarize themselves with the legislation and implement the necessary changes, posing significant challenges during the VAT implementation phase.
In contrast, the implementation of corporate tax follows a different timeline. The announcement was made well in advance, and the primary law was released by December 2022. With corporate tax becoming effective from financial years starting on or after 1 June 2023, businesses, especially those with calendar year-ends, have more time to study the law and ensure compliance.
Scope of Impact:
VAT had a broad impact on businesses across multiple sectors, affecting both goods and services. It necessitated businesses to assess their operations, determine VAT applicability, and make necessary adjustments to pricing, invoicing, and accounting systems. On the other hand, the scope of impact for corporate tax is more specific and targeted, primarily focusing on companies’ profits and financial statements.
VAT implementation placed a substantial administrative burden on businesses, particularly during the initial stages. It required businesses to allocate resources for VAT returns, train staff, and implement new accounting and reporting systems. Ongoing compliance, such as timely VAT return filing and payment, added to the administrative workload. In comparison, corporate tax, although demanding careful tax planning and reporting, may not entail the same level of ongoing administrative burden as VAT. With no advance or interim payment to the tax authority and only a single annual filing, nine months after the financial year’s end, businesses face a lesser day-to-day administrative burden from corporate tax.
The implementation of VAT and corporate tax in the UAE signifies transformative milestones in the country’s taxation landscape. VAT brought significant changes to business operations, requiring businesses to navigate new compliance obligations and undergo a behavioral shift toward tax compliance. Corporate tax builds upon the foundations established by VAT and leverages businesses’ improved understanding of taxation. With a longer implementation timeline, businesses have more time to study and adapt to corporate tax regulations.
Navigating the evolving tax environment in the UAE demands that businesses stay informed and diligently plan for both VAT and corporate tax requirements. Each tax presents its unique challenges, and it is crucial to address them robustly to achieve maximum tax efficiency and compliance.