Income Tax in UAE: Challenges Ahead for Corporates

Since the announcement of 9% tax on corporate profits above AED 3,75,000 has been announced by the UAE government, the companies are looking outward to decode the implications. While the fine print is still awaited, let us look at what it means in simple terms.

1.???Legal Entity Accounting Challenge:

While VAT introduced at the GCC level was at the group level, income tax is expected to come at the entity level. The challenge that companies will now face is on account of inter-company transactions within the group. It is yet to be clear whether withholding taxes will apply, but the companies going forward will have to be careful in carrying out inter-group transactions to come straight on the entity by entity reporting.

?2.???Deferred Taxation:

Most countries have detailed provisions for deferred taxes and accounting treatment is globally well prescribed for the same. However, for the companies in the UAE, they will have to decipher the law in detail to understand the implication of deferred business tax planning at the group level as well as the entity level.

3.???Foreign Exchange Accounting & Analysis:

With income tax coming into the picture foreign exchange accounting and analysis will also come to the forefront for accurate financial reporting. Most countries having the trajectory of introducing progressive taxation along with deductions, exemptions and benefits also pave the way for current account convertibility in the future. If such an event materializes, it would considerably increase the efforts of accountants to close the books.

4.???Foreign Exchange Risk Management:

If tax authorities would like to be granular in an economy that relies heavily on export-import trade and tourism, foreign exchange enterprise risk management becomes a major area of concern. With income tax departments across the globe focusing on protecting the revenue, foreign exchange can pose quite a challenge to justify with its movements and fluctuations.

5.???Tax Consideration in Mergers & Acquisitions:

Investments in natural assets, power, oil & gas, and other sources have been a common trend in UAE. A lot of corporate actions and asset-changing hands are also very frequent. With business tax planning now coming into the picture, such transactions will not only attract tax but will also be under the scrutiny of tax authorities. The major issue will be on accounting of realized and unrealized gain on converting JV to the subsidiary or vice versa.

Conclusion: The dark clouds of tax have eroded the clear skies for the corporates at this point. For the consultants and accountants, it creates newer opportunities to make hay, while the sun of tax adaptation shines.?