UAE tax comparison will help developing a better comprehension between corporate tax and VAT (Value Added Tax). With the tax landscape in the UAE constantly evolving, particularly with the introduction of VAT laws in 2018 and the recent announcement of corporate tax in 2023, businesses now must have a lucid understanding of the different types of tax they may be required to pay. This article will discuss how corporate tax and VAT differ, how they will affect businesses in the UAE, and how they will overall affect the tax system in the UAE.

What is Corporate Tax?

Corporate tax is a tax on the profits of companies or businesses. Virtually, it is a tax on the income of corporations, after deducting qualified business expenses. The introduction of corporate tax in the UAE represents a major departure for the country, which had long prided itself on the absence of a corporate income tax (barring some sectors such as oil, gas and foreign banks) in place.

The UAE  in November 2022 announced the implementation of corporate tax in 2023, corporate tax with a standard corporate tax rate of 9% on profit exceeding AED 375,000 and exempting businesses earning less than that. We have seen the introduction of these provisions over the years, starting with the introduction of federal tax in 2018, which aligned the UAE with international tax practices, contributing to the diversification of the UAE economy while allowing it to remain competitive in the international arena. Here you will see corporate tax vs VAT in terms of their implications for businesses.

What is VAT?

VAT is an indirect tax that applies to the sale of goods and services at every stage of production or distribution. It is a consumption tax, with the final consumer paying the tax but the businesses responsible for collecting and remitting VAT to the government. Value-added tax (VAT) is usually imposed as a percentage of the sale price, which, in the case of the UAE, was implemented at a 5% rate in 2018.

In other words, the tax difference between VAT and corporate tax is that the VAT is collected by the end consumer while the corporate tax is a burden of the company based on the profit. VAT, therefore, goes directly to the price mechanism of goods and services while the corporate tax is the final cost on the company’s balance sheet after stopping all expense and operational costs.

Understanding the Difference Between Corporate Tax vs VAT

Tax Base

• Corporate Tax: Corporate tax is a tax on a company’s profits. That means companies pay taxes on profits after deducting the costs to employees, utilities and operations, among other allowable expenses.
• VAT: In contrast, VAT is a consumption tax that is charged on the value added to final goods or services at each stage of production and distribution. Businesses charge VAT on sales to customers but can reclaim VAT on their purchases, which means the tax is passed onto the consumer at the point of sale.

Taxpayer

• Corporate Tax: Here, the taxpayer is the company. It is required to file a tax return and remit the taxes on its income.
• VAT: The taxpayer is the business selling goods or services. But ultimately, the consumer pays for the tax as ultimate purchasers.

Tax Rate

• Corporate Tax: The corporate tax rate is 9% on UAE profits above AED 375,000, while profits below this threshold are exempt.
• VAT: The current VAT imposed in UAE is 5%, which is a lower rate compared to other countries; thus, it is more business-friendly.

Scope of Application

• Corporate Tax: Corporate tax will be applicable to companies and businesses based in the UAE that have reached certain thresholds. It covers all sectors, although some sectors may benefit from exemptions or special rules.
• VAT: VAT is levied at the VAT consumption stage, meaning that it is charged on the sale of the majority of products and services, however, there are exempt and zero-rated products and services, including education, health care and default financial services.

Payment Structure

• Corporate Tax: Corporate tax is paid annually, typically in line with a company’s fiscal year, and businesses must file tax returns discussing their profits.
• VAT: VAT is usually cleared quarterly or monthly as per the turnover of the company. They submit VAT returns and pay VAT payed to the government in a set period.

VAT Implications in the UAE

In 2018, the UAE implemented Value Added Tax (VAT), which represented a significant change for companies doing business in the country. The annual turnover threshold above which companies had to register for VAT is AED 375,000, but many small enterprises also registered voluntarily to get VAT back on their purchases.

For companies, this means ensuring compliance with the applicable VAT laws in the region, such as issuing valid tax invoices, keeping relevant records, submitting periodic VAT returns. It may lead to penalties and fines if the VAT does not comply.

Moreover, VAT affects business operations, especially in pricing and cash flow management. As VAT is charged by businesses from the consumers and also paid by businesses on their purchases, it has to be managed against the credits and debits effectively, to smoothen the process as well as the business.

UAE’s Taxation System in Relation to Corporate Tax and VAT

The United Arab Emirates (UAE) tax regime has seen major developments in recent years with the introduction of value-added tax (VAT) and soon the corporate tax. These form part of a broader push to diversify, the economy, limit dependence on oil income and align with global tax norms.

The UAE tax system often remains simpler than most jurisdictions. Now in effect, corporate tax makes the UAE tax landscape more complex than ever, and businesses will have to adapt to new rules. Whilst corporate tax and VAT have long been a thing in many countries, the UAE is only just beginning to feel the full force of these taxes.

For businesses, it is essential to understand the corporate tax vs VAT and the interaction between the two in navigating the UAE tax system. Corporate tax is likely to impact more prominent businesses or those generating massive profits, whereas VAT impacts practically every company selling goods or services, despite size.

Conclusion

It’s important to appreciate that corporate tax and VAT are quite different beasts, although both also play a key role in the United Arab Emirates’ tax landscape. Corporate tax is paid on company profits and therefore directly affects business income, and a VAT tax is a consumption tax paid by consumers but is levied on businesses at every point of production. With UAE addressing a move to a diversified economy, it is essential for businesses to know the differences between corporate tax vs VAT to navigate through the legislation that would accompany the new tax system.

This is the including step to the tax system of UAE which was previous commenced in 2018 in the form of VAT and in 2023 also company tax. Discovering ways to work with these taxes  dealing with the multiple obligations they trigger but at the same time acquiring adequate contextual knowledge about the tax landscape will be part of the journey for organisations. As tax policies in the UAE are yet to be completely harmonised, practitioners in the region will have to keep themselves updated on the state of play of the latest developments in order to secure long-term success for businesses within the Emirates.