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UAE Corporate Tax: Companies must be strict in record keeping; Otherwise, they may receive sanctions

Dubai: UAE companies, especially small and medium-sized ones, will need to keep meticulous records of all their transactions if they do not want to default on their upcoming corporate tax obligations.

Industry sources say the process will be relatively simple for larger entities, but could be much more complicated for others.

One gray area could be the registration of “inter-business service agreements.” “Companies typically do not have any contractual arrangements for such services,” said Rakesh Nair, director of corporate tax at consultancy Crowe UAE. “These agreements would be crucial from a ‘transfer pricing’ perspective.”

In a business environment like the UAE (and the Gulf in general), single shareholder (or group) owned companies are the norm. And it is also common practice for these companies to share services.

With the UAE corporate tax in place, such shared services have come under increased scrutiny.

What companies should ‘register’

According to Nair, it is necessary to keep copies of all invoices that “justify expense claims.” And sufficient evidence should be provided for free zone companies to demonstrate that they have significant economic “substance.”

“Companies should also show supporting calculations for cost-sharing arrangements (if any),” Nair said.

There should also be a bifurcation between expenses incurred by employees and business partners in case of events where both employees and business partners are present.

– Rakesh Nair from Crowe, United Arab Emirates

  1. Records or documents must be maintained annually and must be legible, easily retrievable, etc.
  2. In case there are several entities in a group, the documents/invoices must be in the name of the respective entity.
  3. All related party documentation must be maintained as a priority.
  4. Reports made under ESR (Economic Substances Regulation), free zone regulation and corporate tax must be corroborative, and any differences must be reconciled.

VAT and corporate tax compliance

Given that UAE companies have been operating under the VAT regime since 2018, which also requires extensive financial record keeping, one would have thought that with corporate tax it will be more of the same.

But industry sources point out that there are marked differences.

“VAT essentially comes into effect on above-the-line transactions (i.e. on the revenue side),” said one consultant. “With corporate tax, it’s all about the below-the-line impact, in fact, on expenses and can refer to both cash and non-cash items (depreciation, for example).”

What are the sanctions?

Penalties for defective or inconsistent record keeping may affect:

For example, if the person who runs a business or has a tax obligation for failing to keep the required records will be fined Dh10,000 for each violation. And Dh20,000 in each case of repeated violations within 24 months from the date of the previous violation.

And for not paying the tax to pay? A monthly penalty of 14 percent per year, for each month (or part thereof) on the amount of tax payable not settled from the day following the payment due date and on the same date monthly thereafter.

These are not the only sanctions…

Better catch up on record keeping

“The company must maintain records and do not require certification unless required by law,” Nair said. “For example, if finances must be audited according to law, then they have to be certified by auditors.

“Records and any other tax-related documents can be submitted in English or Arabic. However, tax-related records and documents must be submitted in Arabic to the Federal Tax Authority upon request.

“If the company has resources available, then there is no additional cost for maintaining records. Audit fees (in case of a mandatory audit) would be an additional cost if the financials were not audited in previous years.”

Therefore, UAE businesses, and SMEs in particular, have a lot of work ahead of them on what they need to do to be fully compliant. A good start would be to have a firm grip on all your records…

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