Nearing zero hour: Preparing for a perfect tax take off
Businesses in UAE have a few months to prepare for Corporate Tax (CT) in UAE. There is a great deal to be done by every business, small and large businesses alike, to achieve day one readiness for tax efficiency and compliance. Here are a few critical points that business leaders need to consider right now.
By releasing the Corporate Tax regime consultation paper on 31 January 2022, the UAE Ministry of Finance has given ample time to prepare for the much-awaited Corporate Tax to be effective from June 2023. The consultation paper not only publishes the important mechanisms but also throws light on the policy adoption from global best practices tax persons in UAE can look into and form a baseline. Companies need to prepare wisely for the paradigm shift in the tax environment so that the bottom line can benefit from the incentives of the tax framework. With the current global uncertainties and strict margins, preparation can extend firm support.
We have analysed the major focus areas businesses must look at from structural, operational, administrative and long-term value creation standpoints. Companies can use this as guidance and take a leap as we take off.
Taxes start from accounting profit. Financial reporting on focus
The tax regime says the taxes will commence from accounting profit. The accounting profit needs to be arrived at using the International Financial Reporting Standards, IFRS. First-time adoption of IFRS can impact carry-forward balances materially, so it is important to thoroughly review the financial reporting practices adopted and align them with the requirements of IFRS.
Businesses in Free Zone and exports can benefit from 0% taxes. How to structure transactions?
The companies operating from the mainland are given tax incentives in the form of 0% tax. Many UAE companies have customers located in Free zones and outside the country. Systematic planning can benefit you by separating transactions, so taxes are paid on profits earned on mainland business. However, additional establishment costs should justify the benefits.
A thorough review of revenues and cost streams for long-term impact
Tax is a charge on profits. And profits are the net result of revenue and cost. It is up to the business to plan for the impact of taxes in the long run. For example, should you modernise the plant or after a few years? What are the depreciation advantages? Planning adds a lot of value.
Arms-Length Pricing (ALP) principle and the Transfer Pricing (TP)
New challenges can arise in the tax environment due to the possibility of controlling prices in transactions between connected persons. The onus on proving that the transactions are fairly valued is on the taxable persons, so planning and preparations become relevant. Transfer Pricing will be one of the most challenging areas under Corporate Tax.
The relationship of different parties, including key management personnel and the transactions, can continuously be under the lens. Therefore, planning and defining the role of every related party and connected persons becomes crucial.
The relationship of different parties, including key management personnel and the transactions, can continuously be under the lens. Therefore, planning and defining the role of every related party and connected persons becomes crucial.
Bring visibility and legality of (remote) employee cost
In the recent past, especially in the background of the pandemic, many roles have become remote-friendly resulting in employers finding cost reductions by locating employees in low-cost remote locations. In addition, many employers have given the opportunity for employees to work from anywhere to keep the job attractive. However, the visibility and legality of the cost may become a concern for the tax authority to prevent revenue loss. Furthermore, labour contracts and employment arrangements should be one area of focus, especially with remote staff and related parties. Therefore, employers need to consider the challenge and prepare accordingly.
Investments by the company and long-term objectives
Under the new regime, taxable persons can make investments in and outside the country with associated conditions, so the dividend and capital gains are exempt from taxes. One must carefully reconsider the investments and the long-term strategy in the changing environment. A well-devised plan can be a game changer.
Profits can benefit from losses
Companies probably make losses, especially in the first few years of the business. But how can it take advantage of losses over future profits? New and loss-making companies should include this as part of the long-term plan. What are the associated conditions, and how does the business plan fall within the framework? A careful review of projections is a must at any scale.
Getting ready internally for tax responsibility
With the new tax development, the job role of the tax manager is gaining focus. How are you meeting the demand? Allocating the responsibility to the existing team and building capability for the team is one of the options. Companies can take external support to handhold during the transition. Where the operations are not quite large, a retainer model could work to fill the expertise demand. But business leaders should foresee this challenge now and should plan accordingly.
Standalone books: The tax groups can differ from VAT Groups
Many businesses that formed tax groups under VAT have consolidated bookkeeping. Even though the corporate tax law regime discusses tax groups, the concept could differ under the new regime. Hence maintaining separate accounting books may be a legal or business requirement. In addition, arriving at opening balances for standalone entities takes time. Therefore, it may add to the workload of the accounting function affecting current operations.
Review long-term contracts pricing, terms and margins
One of the most important things every business should do now is to review long-term contracts. Senior level thought process is required to assess margin adequacy in the changing environment. In addition, modifications to agreements demand a lot of preparation.
New pricing strategies for cut in bottom-line
It is high time companies need to adopt new pricing strategies and apply them along with the market trends to keep the margin objectives. Higher management may need to initiate a brainstorming discussion to compensate for the bottom-line impact due to income tax. One needs to foresee the price revisions in the market to cope with revised norms. Price revision should be done with a careful watch on the competitors to prevent slips in the transition. The management needs to place every step carefully at the right time.
Switching from an untaxed environment to a tax environment possesses challenges and opportunities. Awareness and preparation are crucial for turning challenges into opportunities.
Switching from an untaxed environment to a tax environment possesses challenges and opportunities. Awareness and preparation are crucial for turning challenges into opportunities.
