In January 2018, the UAE introduced value-added tax (VAT) at a standard rate of 5% on taxable supplies. After nearly five and a half years, from June 2023, businesses are liable for corporate tax (CT) too, with a 9% standard rate. For businesses, these are two different sets of tax responsibilities. However, sometimes they both interact and share commonalities. Understanding VAT and corporate tax interplay in the UAE is necessary for entities to comply with the laws and also to optimize tax liabilities. In this blog, we aim to deliver a comparison between the two taxation systems and their interaction.
VAT and Corporate Tax Interplay in the UAE
It is a common question: do two systems mean two different liabilities and higher taxation for businesses? The answer is tricky, but we will find it in our next discussion.
VAT is an indirect tax applicable to the sale of goods and services. While corporate tax (CT) is a direct tax applied to a business’s net profit. The end user bears the ultimate VAT liability; therefore, it is an indirect tax. Businesses collect VAT on behalf of the government and pay it back to the government. On the other hand, a business might recover VAT paid in the form of input VAT.
VAT payable = VAT output (payable) – VAT input (receivable)
VAT Registration
The VAT registration can be mandatory as well as voluntary. In cases where a business exceeds the taxable supplies, including the imports of AED 375,000 (mandatory threshold), the registration is mandatory. However, there is also an option for voluntary registration if the taxable supplies and imports exceed AED 187,500 (voluntary threshold).
CT Registration
Per the UAE tax law, all businesses operating in the UAE must register for corporate tax irrespective of the amount of taxable income. However, there are exceptions, such as non-resident persons that derive only state-sourced income without having a permanent establishment in the UAE and natural persons. Natural persons are generally not required to register for CT unless they fall into a certain category. A natural person must register for corporate tax purposes, where:
- He/she is a resident person or a non-resident person with a permanent establishment in the UAE;
- He/she carries on a business or business activity that has a total turnover of over AED 1 million; and
- The turnover is not derived from wages, personal investment, or real estate investment.
Impact on Pricing
A business typically includes VAT in the final price of goods and services. Thus, a low or high VAT can impact the final price of the good or service. On the other hand, corporate tax is chargeable on business income; therefore, it does not directly impact pricing. However, it can influence pricing policy indirectly through cost management and profit margins.
Impact on Business Expenditure
A business incurs VAT on business expenses such as purchases and other expenses. However, a VAT-registered business can claim input VAT in many cases. On the other hand, corporate tax is applicable on the business’s net profit after all expenses allowable as per the tax law. Therefore, the expenses, including irrecoverable value-added tax, may reduce an entity’s net profit and thus the CT liability. The interaction between the two tax systems sometimes runs parallel; therefore, managing both systems efficiently is important for the entity’s overall tax optimization.
Record Keeping
The documentation requirement is almost similar for both VAT and CT. As per UAE laws, every business must maintain accounting records that include payments, receipts, purchases, sales, profits, and expenses. These include the following:
- Balance sheets and income statements.
- Wages and salaries.
- Fixed assets.
- Inventory records and statements.
- Any records as specified in tax law and other legislation.
In addition to the basic documentation mentioned above, an entity might need to keep specific records related to VAT and corporate tax-related responsibilities. For instance, businesses must keep all the relevant records that enable the tax authority to calculate the tax liability on their own. Similarly, records such as all taxable supplies and imports of goods and services must be available for a relevant period. Most of the records will be similar for VAT & CT.
Other Compliance Considerations
Some people may think that both tax systems will result in double taxation. VAT applies to the sales price at every stage of the supply chain; however, it is borne by the end consumer. On the other hand, corporate tax applies to the taxable income. Both taxes may impact a business financially; however, the tax base is different for VAT and CT. Therefore, it is evident that there is no double taxation. In simple words, a similar amount is never taxed twice.
In the case of international transactions, VAT is usually zero-rated on exports; however, a business may claim input tax on purchases (but no VAT is charged on sales abroad). On the other hand, corporate tax depends on the double tax treaties between the transacting countries and tax residency rules.
Conclusion
The blog provided a clear understanding of VAT and corporate tax interplay in the UAE. How do the two taxation systems interact and impact each other? The key here to understand is that VAT is an indirect tax that applies at the stages of the supply chain and is ultimately borne by the consumers. The corporate tax is a direct tax that applies to the taxable income of the business. The criteria for registration for both taxation systems differ. For instance, VAT registration depends on the threshold: AED 375,000 for mandatory registration and AED 187,500 for voluntary registration. CT registration is generally not dependent on any threshold. There are various areas where both VAT and corporate tax interplay; therefore, understanding them is important for tax optimization and compliance.
Creative Zone Tax & Accounting (CZTA)
Understanding the complexities of VAT and corporate tax interplay is not enough for overall tax compliance and tax optimization. There are various practical steps that an entity must take to ensure everything is in line. Our team is well-equipped with the skills and experience required to provide tailor-made solutions depending on specific circumstances. We ensure that your business runs smoothly in a compliant environment. Contact us today.
