How is Corporate Tax Different From Value-Added Tax in UAE

The UAE is also known for its tax and business-friendliness. It is a strategic base and a prime business location for many companies’ operations worldwide. It has its own rules and regulations.

Such business owners should have a full understanding of the legal system, including the taxes that will be applied to the company when operating in the United Arab Emirates. Corporate taxes and Value-added tax are the main taxes that would apply to businesses in this country.

This is even though when the UAE started implementing the 5% VAT in 2018 most people felt that there would be a rate change similar to the GCC regions. However, come June 2023 when the corporate tax is launching, the UAE business environment will face a paradigm shift.

If you are a businessman, you must declare your business’s tax liability in UAE. It may be a VAT or a corporate tax. This article will help readers differentiate between the concept of VAT in the UAE and corporate tax in the UAE. Let’s begin!

What is Value-Added Tax (VAT) in UAE?

The VAT in the UAE is a type of indirect tax that is charged on most goods and services bought by end consumers. The UAE VAT affects cash flow in a logistics firm in Dubai because of the imposition of tax on sales and reimbursement of input tax paid on purchases of products and services.

The value-added tax was passed on 1st January 2018 in the United Arab Emirates. The VAT tax is charged at the rate of 5 percent in the UAE. All companies need to register for the UAE value-added tax (VAT) if the total value of their taxable supplies and imports is above the notified level of AED 375,000*.

The first general business tax that the UAE adopted is the Value Added Tax (VAT). The tax was a complete transformation in the business world. There were pre-established taxes on the oil and gas industry and banks but these taxes were not comprehensive to the entire economy. Nonetheless, the UAE VAT introduction is diversified to the whole corporation industry.

The VAT is not directly applicable to transactions taking place in the free zones of the United Arab Emirates. Well, one would have guessed right: it is! The tax-free regime applies to the trade that takes place within the UAE-free zone and is not subject to UAE VAT. Finally, organizations that have complied with the UAE VAT registration process must submit a VAT return to the FTA at the end of the period. VAT has also become an additional tool that helps the UAE government acquire additional resources to finance various goals that the UAE government can achieve.

The following is the list of exempted sectors from the Value-added tax in UAE:

• Local passenger transport
• Residential property
• Supply of a few financial services

The amount of VAT rate in the UAE is five percent but there is a reverse VAT available for tourists where they can get back 85 percent of the UAE VAT which they paid on the purchased products in UAE. The customers are the individuals or the entities that remit the VAT in UAE and will definitely to a large extent be affected by the UAE VAT

What is Corporate Tax in the UAE?

It is a tax charged on the profits generated by an entity. The general corporate tax rate in UAE is nine percent but companies with lesser profits of Dh375,000 do not have to pay corporate tax. Businesses in the UAE are taxed according to the level of profits realized which does not have a direct effect on the consumer.

It is used after the deduction of any taxable income; it does not factor in cash flow. It is through the net income that the corporation computes for its tax after the deduction of business expenses. The tax targets enterprises in a more significant way and therefore affects their operations and profitability.

Under the new corporate tax regime, the proposed tax rates may be summarized as follows:

• A 0 percent corporate tax rate of the United Arab Emirates (UAE) is charged on taxable income up to AED 3,75,000.

• MNEs fall under the scope of Pillar 2 of the BEPS 2.0 Project. Economist: The ad – 0 framework will be subject to the OECD Base Erosion and Profit-Sharing (BEPS) requirements from the relevant authorities.

• Corporate tax in the United Arab Emirates is 9% of the taxable income of AED 3,75,000* *This is computed for taxable income that exceeds AED 3 75,000.

The UAE corporate tax’s scope includes all business and commercial activities throughout the country, except those mentioned below:

• Income gains from personal efforts, salaries and investment–based interests should not attract Corporate Tax.
• Companies operating under the UAE free zone.
• Extractive industry operators will be subject to taxation under the emirate rules drawn up in the UAE.
• For natural resource extraction industries, the issue would be that they will come within the purview of taxation norms as per the emirate-based taxation regulations.

Apart from these exemptions, the corporate tax has further exemptions:

• The profits earned due to the transactions in the affiliated companies.
• Dividend income earned from foreign holders.
• Benefits related to group re-organization.

Differences between Corporate Tax and VAT

The main differences between corporate tax&VAT lie in how they are calculated and applied::

Corporate tax is targeted at the profits earned by companies while VAT applies to expenditure incurred by the consumers. Companies remit corporate tax directly whilst VAT is a tax paid by the purchaser or consumer.

Tax Base

Corporate tax is an amount paid by a registered business or organization based on the total pre-tax profits earned as reduced by all permitted costs. On the other hand, VAT is calculated as a value added in the process of transmission of goods which can be defined as a difference between the price for the supplied product and the cost of goods or services.

Taxpayers

Corporate tax is a general tax that is charged on companies and businesses operating in the UAE or that earn income from sources within the UAE. VAT on the other hand is chargeable on all registered and taxable supplies of goods and services in the UAE or from overseas.

Rates

The profit of resident companies for which the corporate tax rate for taxable income is 9% if such income is less than AED 375, 000 while for any income higher than the aforementioned sum the tax rate is fixed at 16%. The VAT rate is at 5 percent on the supply of goods and services unless the supply is in the zero-rated sectors.

Tax Collection

Corporate tax is a tax collected from corporate bodies on their own through the completion of annual returns. On the opposite side VAT charged by businesses from consumers is paid to the tax bodies on a prescribed interval usually on a quarterly or monthly basis depending on the level of business transactions.

Accounting

For corporate tax, companies have to formalize financial statements and derive income or profits utilizing the IFRS. VAT recording requires keeping of records of taxable input and exempt supplies to facilitate input-to-output VAT calculation.

Compliance Costs

Accounting for corporate tax is associated with preparing and filing income statements and with maintaining various records and documents. It is therefore very clear that VAT compliance is much broader; in that businesses are required to register, issue tax invoices, prepare and submit regular returns, maintain adequate records on all their transactions, and deal with VAT refunds among other things.

Conclusion

Corporate taxation in the UAE is highly regulated and requires professional support. In these respects, all businesses in the UAE can use the services of BizDaddy to manage their tax compliance and stay away from all potential risks and liabilities that might get in the way of their growth in the business environment of the UAE. BizDaddy bridges the gap for businesses by providing them with personalized tax planning, advisory, and compliance services to help them meet their goals and succeed in the changing UAE environment.