The UAE, previously considered as a tax haven, had gradually started introducing taxation in the country. In 2018, UAE first introduced a Value Added Tax for indirectly taxing goods and services as well as the Country-by-Country Reporting (CbCR) regulations in April 2019.
On 31 January 2022, the UAE announced taxing corporations under the corporate tax system. The corporate tax is the tax levied by the government on the net income or profit earned from a corporate entity’s domestic or foreign businesses.
The UAE has introduced the lowest corporate income tax rate within the GCC region at a standard rate of 9%. As per the announcement, the UAE will implement the corporate tax from June of 2023. It has been designed to incorporate best practices globally and minimize the compliance burden on businesses.
The UAE has introduced a federal tax system for all businesses and commercial activities operating within the seven Emirates. Exceptions to the corporate tax system apply for:
- Businesses operating in the extraction of natural resources
- Individuals earning income in their capacity (i.e., salary, investment income) if the income generating activity does not require a commercial license.
- Businesses registered in Free Trade Zones, provided they comply with all the regulatory requirements and do not conduct business with Mainland UAE.
It is to be noted that individuals earning income in their capacity fall under the exceptions. Corporate tax will not apply to an individual's salary and other employment income (both public and private sector). Further, interest and other income earned from bank deposits or saving schemes will not be subject to corporate tax. Therefore, there wouldn't be a direct impact of corporate tax on individuals.
It is however, believed by many that corporate taxes indirectly affect the lives of individuals. So, it is necessary to consider that condition as well.
To quote the US Judge Oliver Wendell Holmes Jr., "Taxes are what we pay for civilized society." The money collected from corporate taxes is used as revenue for a country. It is considered that a business requires a stable society for proper functioning and paying taxes helps in making a stable society. It leads to the development of infrastructure and the economic status of citizens so that they could also become active participants in the economy.
But there is a negative side to this corporate taxing. Higher corporate taxes mean that people indirectly spend money. Shareholders/owners and employees could suffer decreased returns or wages and customers may have to face the brunt of higher pricing.
According to a 2016 study, shareholders/owners pay roughly 40% of state business income taxes, while employees pay 30 to 35%. Even if corporate tax increases do not affect workers directly, they indirectly harm them by cutting in-hand received wages.
In the case of corporations, there must be an understanding that businesses require a stable, functioning society to which it should contribute and that businesses pay far more than corporate tax. The system must be designed to encourage investment and growth. Since it is only a 9% tax that is being levied in the UAE, it wouldn't affect individuals in any indirect manner.
Briefly, there will be no effect on individuals due to corporate tax that was recently introduced in UAE as the law directly says so. An indirect effect on individuals wouldn’t be of concern since the tax slab is not too extreme.
By Elluri Srinitha Reddy
Pic : WAM
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