Out-Law Analysis | 09 Nov 2016 | 12:14 pm | 2 min. read
The law sets out the legislative framework for the process, including the duties and responsibilities of the authority. But the most important fact here is not the form or the powers of the authority, but the very fact it is being established in the first place: governments generally do not set up tax authorities unless they plan to collect taxes.
There has been talk of introducing both VAT and corporate tax across the Gulf Cooperation Council countries for a number of years. More recently a VAT framework document has been under discussion to establish the basic common principles to be applied in each of the different countries, with a proposed start date of 1 January 2018. However, this week's announcement is the first concrete sign that the UAE government is determined to go ahead with the plans.
The new authority will be responsible for tax at a federal level, defined in the new law as meaning "taxes imposed by virtue of a federal law". That gives little away, but it is likely to include both VAT and, over time, a corporate income tax.
It has always been difficult for the UAE to introduce a universal corporate income tax, or at least one universal to all foreign-owned businesses, because it lacked the necessary administrative infrastructure. Initially, the focus of the new authority is likely to be on the introduction of VAT, but it does make a move towards corporate tax more straightforward in future.
In the meantime companies should prepare for the introduction of VAT. One question that has to be considered is who will pay the VAT, or rather who will suffer the cost of its introduction. Long term contracts straddling the start date, such as major infrastructure projects, could be particularly problematic.
Similarly, outsourcing agreements in the financial services sector where there is the risk of substantial disallowed VAT could also be adversely affected. Contracts must take this into account to avoid future problems.
The majority of existing long term contracts will include tax mitigation clauses, but these were generally developed to cover the risk of withholding or other similar taxes being introduced. VAT can work in a fundamentally different way to simple withholding taxes, so companies must not assume that VAT will be covered automatically by the existing clauses. Also, VAT is applied to gross income flows, not to net income, so it is capable of wiping out even the fattest of profit margins.
Any company operating in the UAE should take this week's announcement as a warning. It is time to check over existing contracts for risks, and to develop a robust and fully considered VAT mitigation clause to be included in all contracts used in the GCC.
Ian Anderson is a tax expert with Pinsent Masons, the law firm behind Out-Law.com.