Comparing the Implementation of VAT and Corporate Tax in the UAE: Key Differences and Implications for Businesses

The introduction of corporate tax in the UAE, effective from the financial years starting on or after 1 June 2023, marks a significant milestone in the country's fiscal landscape. With the introduction of VAT in 2018, businesses and tax professionals anticipated future changes to be primarily related to rate adjustments, similar to the changes that had been observed in other GCC countries. However, the implementation of corporate tax, a mere five years after VAT, brings about a new and dynamic chapter for the country.

This article aims to highlight some of the key differences between the implementation phases of VAT and corporate tax in the UAE.

First Tax (VAT) vs. Second Tax (CT)

VAT was the first general business tax to be implemented in the UAE, revolutionizing the entire business landscape. While there were pre-existing taxes on oil & gas and banks, they did not impact the entire business community.

Businesses faced two fundamental challenges during the implementation of VAT. Firstly, they had to understand what VAT entailed and how it would impact their operations. Secondly, businesses had to undergo a behavioural change, as the concept of taxation was entirely new to many people in the UAE.

During the implementation of corporate tax, the challenge of behavioural change is significantly reduced, as businesses are already accustomed to the idea of taxation. They have experienced first-hand the importance of maintaining accurate accounting records and complying with regulations. Businesses are now more transparent in their operations and better equipped to anticipate the risks and challenges associated with the new tax regime.

Short vs. Long Duration

VAT implementation was announced towards the end of 2016, with the legislation being released only in October/November 2017. This left businesses with a mere one-month window to familiarize themselves with the legislation and implement the necessary changes. The short duration posed significant challenges during the VAT implementation phase.

In contrast, the implementation of corporate tax has followed a very different timeline. The announcement was made well in advance, and the primary law was released by December 2022. With corporate tax becoming effective from financial years starting on or after 1 June 2023, businesses, particularly those with calendar year-ends, have more time to study the law and ensure compliance.

Scope of Impact

VAT had a broad impact on businesses across many sectors, affecting both goods and services. It required businesses to assess their operations, determine VAT applicability, and make necessary adjustments to pricing, invoicing, and accounting systems. In contrast, the scope of impact for corporate tax is more specific and targeted, primarily affecting companies' profits, and financial statements.

Administrative Burden

VAT implementation placed a significant administrative burden on businesses, particularly in the initial stages. It required businesses to allocate resources for VAT returns, training staff, and implementing new accounting and reporting systems. Additionally, ongoing compliance, such as timely VAT return filing and payment, added to the administrative workload. By comparison, corporate tax, although requiring careful tax planning and reporting, may not entail the same level of ongoing administrative burden as VAT. With no advance or interim payment to the FTA, and with only a single annual filing, nine months after the end of the financial year, there is a lesser day-to-day administrative burden from corporate tax.

Conclusion

The implementation of VAT and corporate tax in the UAE are transformative milestones in the country's taxation landscape. VAT brought widespread changes to business operations, requiring businesses to navigate new compliance obligations and undergo a behavioural shift towards tax compliance. Corporate tax builds upon the foundations established by VAT and leverages businesses' improved understanding of taxation. With a longer implementation timeline, businesses have more time to study and adapt to corporate tax regulations.

Navigating the evolving tax environment in the UAE requires businesses to stay informed and plan diligently and carefully for both the VAT and corporate tax requirements. Each tax has its own challenges,and these challenges must be met robustly in order to achieve maximum tax efficiency and compliance.

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