Could there be an emirate-based variation in application of corporate tax in UAE?

If you take a look at any gazetted law, the formal communication of enacted UAE legislation, the first page(s) refer to previous statutes that have been reviewed. This is part of efforts to ensure the systematic and continued development of regulated frameworks, which both achieve the objective of the legislation and strive to avoid the creation of anomalies. Corporate tax may be a federal initiative, but clarity is awaited on whether there is a possibility of an emirate-based variation in the law. It exists for VAT — insurance and hotel charges being two categories under which differentiation occurs. In some emirates, the municipality fees for hotels guests are charged directly and in others, indirectly. Hence, although it is the same tax, the treatment is different. The corporate tax decree law allows expenses to be offset against qualifying revenue. These must be wholly and necessarily required to conduct the normal activity of the business. This phrasing should be familiar to anyone who is registered for VAT. In Abu Dhabi, it is a legal requirement to provide medical insurance for an employee and up to three dependents. In Dubai, the equivalent rule applies only to the employee. While it would seem obvious that you can offset the costs of insuring your employee against corporate tax, what about their dependents? There are two outcomes. In scenario one, if the business cost of an Abu Dhabi employee mandates the expenditure of additional sums for their support, then surely it must be an allowable expense? This would treat an employee’s designated family members like their housing or travel allowance. Scenario two involves a decision that dependents are not allowable as a deduction against corporate tax. As we are talking personnel costs, let us delve a little deeper into remuneration packages. To ensure that business owners do not manipulate salaries, there will be some form of mark-to-market process, so owner salaries are not increased to include a long trail of zeros. There is no reason why a business owner cannot be their own employee. Are there likely to be specific directives around provisions for performance commissions or bonuses? Will these types of rewards, when benefitting equity owners, be carved out? What might the threshold of ownership be before it applies? In the case of listed entities, would board directors' share options be one of the deciding factors? What happens where these shares are gradually awarded on a rolling basis, but not fully vested? A choice could be given to convert such options into payable notes or even cash them in. The Ministry of Labour, which registers all employment, has the breakdown of each employee's financial package. Potential rewards such as commissions and bonuses are not currently hard numbers in the information captured. Core salary information might potentially allow an automatic banding by industry. Each trade licence is assigned to specific activities. This could allow the setting of permissible upper salary limits. It is unlikely that corporate tax rules will refuse to accept any deduction against qualifying revenue that is not captured. Additionally, I am not suggesting that higher salaries cannot be paid, simply that their deductibility could be capped. However, commission-based work still needs to be addressed. The cost of sales in the real estate industry is largely made up of this number. At 5.5 per cent of the economy, it is a material component. Here we arrive at another key juncture. There is often a delay between the earning of commissions and bonuses, and their payment. At what time will deductions for corporate tax be allowed to be made? Accountants, like me, call this timing difference the cash versus accrual basis. It could be read that this might be an entity’s choice. The decree law, under Article 20.5, permits “an application to change its method of accounting from a cash basis to [an] accrual basis”. Unfortunately, I cannot say that this is definitive as it is not clear to me that the converse is true. The accrual basis, by virtue of recognising the entirety of an event, whether or not all elements have happened, has the benefit of capturing the truest expression of a financial outcome. For example, at the very end of my accounting year, I sell a building for which I will receive commission, the sale is recognised in my accounts as revenue. The commission is payable two months later, in the following accounting year. Using accruals, I recognise the sale and commission in the same accounting year. This sensible approach separates the event from its cash flows. Even as we await the details, at its launch, we taxpayers have been promised a corporate tax legal framework that will have simplicity and global best practice at its core. David Daly is a partner at the Gulf Tax Accounting Group in the UAE