22 Oct
UAE Corporate Tax: Business owners should be careful drawing salaries – and bonuses
UAE Corporate Tax: Business owners should be careful drawing salaries – and bonuses
Under UAE corporate tax, owners’ salary remains a contentious – and confusing – issue.
Multiple schools of thought and recommendations exist to justify the salaries drawn by the owners – be it accounting as a salary in the financial statements, or drawing a directorship fee with a significant bonus provided.
While individuals’ salaries remain excluded from corporate tax, business owners should not simply pay themselves a ‘salary’ or ‘directorship fee’ without factoring in the tax regulations.
‘Connected person’ not only includes the owners, but also the directors of the company
Identifying connected persons
To increase the deductible expenses – and reduce the taxable income – of their companies, the owners are inclined to show them drawing a salary for themselves or family members. Sufficient safeguards exist in the form of transfer pricing benchmarking and anti-abuse rules.
The transfer pricing actually covers ‘a payment or benefit provided’ by a company to its ‘connected persons’. The expression ‘payment/benefit’ is much wider in scope compared to goods/services transactions with connected persons.
It therefore becomes imperative to identify all connected persons and the payments/benefits provided to all such persons for tax regulations.
Corporate tax compliance may apply on individual directors – whether owner or independent – if the aggregate directorship fee exceeds Dh1 million
Is directorship services a business?
Whether directorship fee is paid to an owner, family member or an independent director, individual taxation of such directors could emerge as an additional compliance. Subject to certain exclusions such as wages, an individual deriving an annual turnover exceeding Dh1 million from a business or business activity in the UAE need to register for corporate tax.
Directorship fee is generally not considered as wages/salaries. Business includes vocational, professional and service activities.
As such directorship functions were earlier considered as a supply of service and now excluded from VAT only by way of a special exception – the director functions may still be treated as a business in common parlance. As private companies also engage in the business of providing directorship services, the activity per se performed by an individual could well be treated as a business.
Corporate tax compliance may apply on individual directors – whether owner or independent – if the aggregate directorship fee exceeds Dh1 million.
Transfer pricing – documentation vs compliance
A company is not required to maintain transfer pricing documentation for various transaction categories. One such is transaction with a natural person, to the extent that the parties are ‘acting as if they were independent of each other’.
It means the transaction is in the ordinary course of their business and the parties are not exclusively transacting with each other. Independent directors of a company are likely to act independent of each other and result in reduced transfer pricing documentation.
However, documentation is distinct from ensuring that the transactions are at arm’s length. A directorship fee to owner-directors as well as independent directors should be benchmarked at arm’s length.
Safe harbour
I often come across astounding tax planning suggestions such as paying a significant bonus to the owner-director. Could bonus be paid to owner-directors for functioning as a member of a board of directors? Probably not.
Considering the entrepreneurial growth in the UAE and the prominence of family businesses, the administrative and financial costs of benchmarking the payments to owners could be significant and prone to future litigation.
The owners have no practical way to validate the advice received by them from various quarters. It would be immensely helpful for business owners if a safe harbour – a maximum percentage of revenue – could be specified up to which owners could draw as salaries and/or directorship fee from their businesses.
14 Feb
UAE corporate tax: Free zone businesses wait on ‘qualifying income’
Free zone firms with mainland operations need learning on loss offsetting and more
Dubai: Free zone-based businesses in the UAE have some serious thinking to do – whether they should sign up to pay 9 per cent corporate tax (CT) or not. Because if they do sign up for the 9 per cent annual tax payout, then these businesses will have greater flexibility on how they handle losses sustained by their companies operating on the mainland.
“If a free zone enterprise elects to pay corporate tax at 9 per cent and does not claim tax exemption, they can claim tax losses of their mainland subsidiary by forming a group or by way of transfer of losses, subject to conditions,” said Manoj Agarwal, founding Partner and CEO at AJMS Tax.
Under the UAE CT rules, a free zone-based business is taxed at 0 per cent. But vast numbers of those businesses with their regional HQs in UAE free zones also have extensive interests on the mainland. Free zone businesses thus have to decide fast whether they should sign up to be taxed at 9 per cent – and claim some of the benefits from doing so – especially when it comes to handling losses sustained in a financial year.
As per Article 37 of UAE CT Law, losses prior to the effective date of the law on a particular entity will not be allowed to be adjusted. As an example, a business with the tax year starting from January 2024 will not be able to offset losses prior to December 31, 2023. Further, losses are allowed to be offset only up to 75% of taxable income of that relevant tax period in which these losses are being offset.
Here’s what the rule says:
> In case the ‘free zone person’ satisfies required conditions and becomes a ‘qualifying free zone person’ (QFZP), then the income derived by QFZP is termed as ‘qualifying income’ and this is taxed at 0 per cent.
> If the 0 per cent tax rate is applied, then a free zone enterprise and a mainland company cannot transfer tax losses.
Forming a group
There is still a way that a free zone enterprise with a mainland company can claim on tax losses. If the free zone entity elects to pay CT at 9 per cent and does not claim tax exemption, they can claim tax losses of their mainland subsidiary. This is done through forming a ‘group’ or by way of transfer of losses, subject to conditions.
“Typically, losses are allowed to carry forward for a certain period or are allowed to adjust with certain conditions, whereas UAE CT seems to be more liberal than other matured tax jurisdictions,” said Agarwal.
“Here losses are allowed to adjust up to 75 per cent of taxable income with certain conditions, such as holding equity/continuing same business activities. Globally, generally these conditions are not there, as the business entities are treated as separate legal entities for tax purpose.”
“Plus, changing the business activities or continuing the same shareholding may create additional burden of probe on the businesses.”
Awaiting more clarity on CT rules
“When it comes to tax treatment applicable to free zone entities, the CT law makes multiple references to future UAE Cabinet decisions,” said Nasheeda, founder of Nishe Accounting & Consulting. “This renders it difficult at present for free zone businesses to determine their tax status and responsibilities.
“In my view, the need for clarity on this topic is quite understandable as the UAE CT rules have to conform to the tax benefits promised by free zones, which form an important part of the UAE economy. And maintain fairness between mainland and free zone businesses while keeping the tax rules simple and loophole-free.
“All of this evidently requires some deft managing.”
Where there is a 75% or more common ownership, the law allows offsetting taxable profit in one entity with tax loss in another entity. If the common ownership is 95 per cent or more with a parent-subsidiary structure, the law allows tax grouping of the entities such that only one combined tax return needs be filed for all the entities in the tax group.”
Signing up with FTA
Corporate tax-linked registrations have opened for UAE’s larger business groups, listed entities and those that have their financial year starting June. For now, only businesses that have been invited to sign up need to do so, but the net will widen soon enough as the timeline draws near to June 1, 2023, when the UAE corporate tax regime goes live.
“We applaud the Federal Tax Authority (FTA) for the successful launch of pre-registration on its EmaraTax platform,” said Hussain Sajwani, Chairman of Dubai-headquartered Damac. “With this measure, digital tax services in the UAE will be easily accessible and corporations in the country will be able to efficiently report their corporate taxes.”
The FTA has been conducting a series of workshops and seminars to filter its message through to businesses, and making it as less onerous as possible to register. What is keenly awaited is the FTA opening up the CT registration processes for more businesses.
As tax consultants and businesses owners say, signing up for VAT can help understand the process – but no one should make the mistake of thinking the requirements for both are the same.
SMEs, take note
Small businesses that rack up an annual income of Dh375,000 and lower will be charged 0 per cent corporate tax. But UAE SMEs can also tap other benefits from the new tax regime.
“There is the concept of small business relief. Using this, small businesses that have a revenue below a certain threshold (which is yet to be notified) may be subject to simplified compliance obligations,” said Dr. Nabeel Ahmed, Partner at DVS Management Consultancy. “And (these will) be treated as having no taxable income during the relevant tax period.
To claim small business relief, an ‘election’ must be made to the FTA. Simply put, SMEs must choose to avail this relief.
“As to who can claim this small business relief, any UAE resident juridical person or individual with revenues below the threshold defined by the minister and who meets any other conditions that may be set, can claim small business relief.”
The most keenly awaited updates on corporate tax
There are Cabinet decisions and executive regulations that businesses are awaiting with anticipation. Here are some of the topics that will be defined by further executive actions, as told by Dr. Nabeel Ahmed.
What will be the threshold for small business relief?
For companies established in free Zznes, the publication of the Cabinet decision detailing the concept of what amounts as ‘qualifying income’ would be crucial to clearly understand how the new CT will impact UAE business activities.
What categories of income derived by non-resident persons will be subject to withholding tax?
Any other expenditure that would amount to entertainment expenditure and be allowed deduction to the taxable income. And any other non-deductible expenditure other than the ones mentioned.
What is the test to determine the connection between the ‘state’ and non-resident person to determine taxable income?
UAE corporate tax and free zones
How the UAE corporate tax will define a ‘qualifying free zone person’ has become a topic of intense discussion from the moment the concept was mooted, because free zones specifically mention the absence of tax as a key incentive offered to companies wanting to register with them.
“By far, the most anticipated update by businesses is the list of designated free zones for corporate tax,” said Nimish Goel, Partner at WTS Dhruva Consultants. “Then there is the list of qualifying income for free zone person that’s taxable at 0 per cent.
“Given the number of entities in UAE free zones, this number is critical.”
In case the free zone person satisfies the required conditions and becomes a ‘qualifying free zone person’, then the income derived is termed as ‘qualifying income’.
The qualifying income is taxed at 0 per cent.
If the 0 per cent tax rate is applied, then a free zone enterprise and a mainland company cannot transfer tax losses.
Clause 1 of Article 38 states as one of the conditions on transfer tax losses that ‘neither is an exempt person nor qualifying free zone person’. A tax group can only be formed if neither the parent nor subsidiary is an exempt person.
If a free zone enterprise elects to pay corporate tax at 9 per cent and does not claim tax exemption, they can claim tax losses of their mainland subsidiary by forming a group or through transfer of losses.
Source:https://gulfnews.com/special-reports/uae-corporate-tax-free-zone-businesses-wait-on-qualifying-income-1.93802442
06 Nov
UAE VAT law: Next 5 important changes business owners should know
A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios
Last week, we discussed the top eight changes in the VAT laws that business owners should know about. Year 2023 will see many more changes in the tax laws and the tax procedures. Considering the significant impact on businesses, we discuss the next five important changes in depth.
14-day time limit for tax credit notes and loss of input credit
A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios e.g. discounts, sales return, sales cancellation etc. The supplier needs to issue a tax credit note to the buyer/recipient and the buyer/recipient is obliged to reverse the proportionate input tax credit recovered on the original invoice.
Effective January 1, 2023, the supplier could claim back the output tax only if the tax credit note is issued within 14 days from the date when the prescribed scenario took place. Once the 14 days period is lapsed, VAT could become a cost in the value chain. The seller would lose the right to claim back excess output tax paid. The buyer would anyway be able to recover only such input credit as is proportionate to the net amount paid to the supplier.
Globally, the VAT laws often allow to issue credit notes without any VAT adjustment if the seller and buyer are not engaged in any exempt supplies.
2. Issuing tax invoices even if VAT is not charged
Since 2018, any person who receives an amount as VAT pursuant to any document issued by him was rightly obliged to pay the amount to the FTA even if it is not due. The provision has been updated to include that any person issuing a tax invoice in respect of an amount, must pay such amount to the FTA.
Due to ERP restrictions or accounting controls, companies often title their invoices as ‘tax invoices’ even if no VAT is charged on one or more items therein. The updated provision creates an ambiguity on the tax liability in such cases. A clarification from the FTA would help the business community.
3. Invoices for the import of goods
Last week, it was highlighted that the taxpayers will need to receive and retain invoices for any import of service on which reverse charge is applicable. The obligation to receive and retain invoices and import documents will equally apply for the import of goods.
It appears that some taxpayers do not verify the correctness of the import VAT payable under reverse charge that automatically appears in their VAT returns and recovers input credit of the complete amount without verification. The FTA wants a taxpayer to ensure that the credit is recovered only for the verified imports undertaken by the taxpayer.
4. Mandatory voluntary disclosure even if no additional tax payable
The tax procedures are also being amended effective 01/03/2023. Taxpayers would be required to submit a voluntary disclosure to correct an error or omission even if such error or omission does not result in any change in net tax due reported in the original VAT return.
This amendment could cover situations where a taxpayer omitted to report zero-rated supplies, exempt supplies or import of goods/services under reverse charge. Once a voluntary disclosure is submitted, penalties could also apply for the errors in the original VAT returns.
5. Reduction in the maximum amount of administrative penalties
Since 2018, the maximum amount of administrative penalties, e.g. for delay in payment of tax, was restricted to 300% of the tax amount. Effective 01/03/2023, the maximum amount of administrative penalties would be restricted to 200% of the tax amount. However, the minimum threshold of Dh500 for penalties would be removed thereby allowing the FTA to impose penalties less than Dh500 as well.
Concluding Remarks
We alerted in an earlier column about the 4Rs principles for effective tax management: (i) Ready to comply; (ii) React for advice; (iii) Reveal to optimise; and (iv) revolutionise to maximise. Business owners should take note of the upcoming VAT changes and proactively take corrective actions.
Source:https://www.khaleejtimes.com/business/uae-vat-next-5-important-changes-you-should-know
21 Aug
New Indian income tax rule: PAN card now mandatory for certain cash deposits, withdrawals
Dubai: After the Indian government amended cash limit rules earlier this year, it also made PAN or Aadhaar number mandatory for certain cash deposits and withdrawals. But does this apply to NRIs?
India’s Central Board of Direct Taxes (CBDT) issued a notification that cash deposits and withdrawals in a financial year of over Rs2 million (Dh93,041) when opening of current account or cash credit account with a bank, requires all Indians to furnish PAN or Aadhaar.
(A Permanent Account Number or PAN card, issued by the Indian Income Tax Department, and an Aadhar, a government-issued 12 digit identification number, are two ID documents assigned to each Indian citizen who either resides or looks to reside in India, while transacting amounts in Indian rupees.)
What does the statement mean and what has changed?
As per the notification, ‘every person, at the time of entering into a transaction [must] quote his permanent account number (PAN) or Aadhaar number and every person, who receives such documents, shall ensure that the said number has been duly quoted and authenticated’.
What this means is that prior to this government alert, your bank was already required to ensure that such transactions have PAN. But now your bank will be required to keep the PAN in the bank’s records and inform the same to the Income tax department regarding such financial transactions.
Earlier, as per income tax norms, PAN was mandatorily required in case of cash deposit exceeding Rs50,000 (Dh2,325) in a single day, but no annual aggregate limit for cash deposits was given before. While there was no limit for cash withdrawal, which has been prescribed now.
What if one does not furnish or have PAN? Are there fines?
The notification specifies how ‘every person’ making a cash deposit and withdrawal aggregating to Rs2 million (Dh93,041) or more in the financial year in one or more bank accounts are to reveal their PAN.
If not, he or she would not be able to perform such transactions. Paying or receiving cash above the limits set is also punishable by a steep penalty of up to 100 per cent of the amount paid or received.
Individuals who do not have a PAN need to apply for a PAN at least seven days before entering any transaction of above Rs50,000 (Dh2,325) a day or above Rs2 million (Dh93,041) a financial year.
Why did the changes come into effect? Are there more changes?
The Income Tax department, along with other central government departments, has been updating and amending rules to reduce the risk of financial fraud, illicit money transactions and other money crimes over the past few years, and tax experts suggest this move in line with this.
“The government also monitors receiving cash worth more than Rs200,000 (Dh9,303) to restrict the use of cash in high-value transactions. So, a person cannot accept more than Rs200,000 (Dh9,303) in cash, not even from close family,” said an independent tax consultant Brijesh Meti based in India.
Since the rules are applicable since May 26, experts also opine how authorities may need to clarify whether the transactions are undertaken prior to May 26, shall be considered for computing the aggregate value of Rs2 million (Dh93,041) for this financial year or not.
Does this apply to Non-Resident Indian (NRI) transactions?
While PAN may be required, this rule doesn’t apply to NRIs when it comes to having Aadhar, clarified Dixit Jain, Managing Director at The Tax Experts DMCC.
“It is not mandatory for NRIs, as NRIs are not mandatorily required to have an Aadhar card, even though they can easily apply for one when they come to India,” Dixit Jain added. “However, PAN may be required.”
In other words, more than this rule change impacting NRIs who would have already added PAN details to their bank accounts, as initially required by banks, it is aimed at getting banks to keep the PAN on record, and not seek PAN with each transaction, and officially declare any withdrawals over Rs2 million.
“India’s income tax laws prohibit cash transactions above Rs200,000 (Dh9,303), which is also the limit when accepting donations from a single person on a single occasion,” Meti added. “Those who accept hard cash over this amount violating this clause may face a penalty equivalent to the amount received.”
“In a property transaction, the maximum hard cash allowed is also Rs20,000 (about Dh1,000). The limit remains the same even if a property seller accepts an advance.”
Source:https://gulfnews.com/your-money/taxation/new-indian-income-tax-rule-pan-card-now-mandatory-for-certain-cash-deposits-withdrawals-1.1660917543823
