Introduction Of Corporate Tax Rate From 2023

In any Welfare State, it is the prime responsibility of the Government to fulfil the increasing developmental needs of the country and its people by way of public expenditure. India, being a developing economy, has been striving to   fulfil the obligations of a Welfare State with its limited resources; the primary source of revenue being the levy of taxes.

Though the collection of tax is to augment as much revenue as possible to the Government to provide public services, over the years it has been used as an instrument of fiscal policy to stimulate economic growth. Thus, taxes are         collected to fulfil the socio-economic objectives of the Government.

What is a tax?

A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the Government; a payment exacted by legislative authority.

A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority".

In simple words, tax is nothing but money that people have to pay to the Government, which is used to provide public services.

DIRECT AND INDIRECT TAXES

Taxes are broadly classified into direct and indirect taxes.

Direct Taxes: A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or         natural) on whom it is imposed. A direct tax is one that cannot be shifted by  the taxpayer to someone else. A significant direct tax imposed in India is         income tax.

There are limited direct taxes in the UAE.

Indirect Taxes: If the taxpayer is just a conduit and at every stage the tax-        incidence is passed on till it finally reaches the consumer, who really bears the brunt of it, such tax is indirect tax. An indirect tax is one that can be shifted by the taxpayer to someone else.

Its incidence is borne by the consumers who ultimately consume the product or the service, while the immediate liability to pay the tax may fall upon another person such as a manufacturer or provider of service or seller of goods.

In 2015, the International Monetary Fund (‘IMF’) recommended that the GCC countries reform their existing tax systems by introducing VAT to tackle fiscal deficits and increase government revenue

With a view to diversify the government revenue and reducing dependence on hydrocarbons, GCC countries agreed to a common legal framework to                implement excise tax on selective goods that are considered harmful to human health and VAT on the supply and import of goods and services.

Corporate tax is directly imposed on the taxable profits of companies. The      absence of a Federal corporate tax in the UAE is very attractive for businesses operating or seeking to invest in the UAE and the encouragement of foreign   investment into the UAE is an important part of domestic policy.

Clearly there are benefits in introducing a Federal corporate tax as it would enable the UAE to generate additional revenue in line with its diversification strategy and future vision.

Over the past few years, the UAE has taken significant steps to enhance tax      transparency and facilitate the exchange of information for tax purposes by      bringing its domestic tax rules in line with international standards. Many of the changes in the UAE were driven by the Organisation for Economic                      Cooperation and Development’s (OECD), Base Erosion Profit Shifting (BEPS) project.

It seeks to tackle international tax avoidance and address gaps in existing tax rules that allow the profits of multinational companies to be artificially shifted from high tax jurisdictions to low or no tax environments where little or no economic activity takes place. A 15-point BEPS Action Plan was developed by the OECD in partnership with the G20 countries in 2013.

The UAE has implemented the Common Reporting Standard for the automatic exchange amongst tax authorities of financial account information of foreign   tax residents. In this regard, the UAE signed the OECD Convention on Mutual Administrative Assistance in Tax Matters in April 2017 and ratified the same in April 2018.

Also, The UAE signed up to the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in     June 2018 (also known as the “multilateral instrument”) allowing the UAE to modify existing double tax treaties without the need for protracted bilateral negotiation.

In line with these GCC agreements, the UAE introduced its first two taxes at      the Federal level: Excise Tax at the rate of 100 % on energy drinks and tobacco products; and at 50 % on carbonated drinks from 1 October 2017 (expanded to e-smoking devices and liquids at the rate of 100 % and sweetened drinks at the rate of 50 % from 1 December 2019) and VAT at the standard rate of 5% with   effect from 1 January, 2018.

Currently there is no corporate tax in the UAE at the Federal level, but some individual Emirates impose a limited corporate tax on enterprises engaged in exploration and production of oil and gas at rates up to 55 per cent and on    branches of foreign banks operating in the UAE at the rate of 20 per cent.

The introduction of corporate tax in the UAE may become a necessity rather than a “choice”.

The UAE corporate tax rate is amongst the most competitive in the world. The corporate tax in Dubai and across the UAE does not provide taxation on capital gains and dividends which will continue to boost the holding company               structure. The inter-company losses shall be allowed in computing taxable        profits.

The UAE Ministry of Finance will issue more information on the UAE corporate tax 2023 update towards the middle of the year to help businesses get ready   and be fully compliant.

The Ministry of Finance has announced the introduction of a 9% federal          corporate tax in the UAE on business profits with a threshold of AED 375,000. (Effective from 1st June 2023.)

On 8th October 2021, the United Arab Emirates (UAE) agreed to implement     the OECD’s Two-Pillar approach to reform its International Tax Framework and to implement a minimum Corporate Tax rate starting 2023.

Corporate Tax in UAE is a form of direct tax levied on the net income or profit of corporations and other businesses. The UAE Tax Authorities have already   stated that non-compliance will translate to crippling penalties.

Corporate Tax Rates are indicated in the below table:

•   Corporate tax is applicable to free zones and financial free zones.

•   Businesses established in a free zone are required to register and file a Corporate Tax Return.

•   It is applicable to foreign persons.

•   At Reyson UAE, a team of experts can help you in assessing the challenges and opportunities that the introduction of a Corporate Tax will bring by providing Advisory Services and Compliance Services