With the UAE being a relatively tax-free environment, many Small and Medium-sized Enterprises (SME’s) often neglect accounting for potential tax-related issues when planning to expand overseas, says a KPMG official. “They are so used to doing business without having to file tax returns that they don’t think about [the fact that other countries charge tax],” the head of tax at KPMG for the Middle East and South Asia, says adding this can prove a massive challenge for firms, unless they research and plan ahead.
To avoid such situations, it is crucial for SME’s to understand the regulatory environment of the market they are planning to enter, feasibility studies, conduct tax due diligence and be prepared for tax compliance once a presence has been established. There is a wide range of taxes that an overseas operator could be subjected to.
“The obvious one is the corporate tax on business profits which you generate oversees together with a number of withholding taxes that are applicable on payments made overseas.
One could be subjected to withholding tax on dividends that one receives from any operation overseas or be charged taxes on royalties, on management fees, etc.”
Another form of tax can come when a taxable presence of employees over the minimum period of time of non-tax liability. For example, most countries would say that, if one overstay six months in a year, then one become a resident of that country hence liable to personal tax. So, one may have to deal with personal taxes and possibly customs duties as well.”
An overview of the tax environment and how SME’s can try to reduce taxes taking into account, all agreements and treaties between countries is elaborated on below.
The Corporate Tax rates in the GCC region are like in Saudi Arabia fixed at 20%, but Qatar will tax foreign businesses at 10%, Kuwait at 15% and Oman at 12%. Outside of the region, the tax rates can be high; typically, the average corporate tax rates tend to be 30%. It is vital to know how taxable profits are computed, because of certain types of expenses can be considered non-deductible when working out profits in that or that other country. As a result, the effective tax rate can be much higher than the stated one.
How do the tax requirements vary for onshore and free zone-based businesses?
With respect to customs duty, when a mainland business imports goods to, let’s say, Dubai, then, it is subject to approximately 5% customs duty. However, if one imports goods into a free zone, there might not be customs duty applicable, as long as these are used within the free zone and / or re-exported outside of the Gulf region. If, on the other hand, the goods are meant for, say Saudi Arabia, then, when the goods leave the UAE free zone, the business would have to pay customs duty, because it is as it were consumed within the GCC and as such, Customs duty applies.
What other factors should SME’s consider when preparing for taxes?
Once the effective tax rate is understood, one should see if there are any mechanisms to try and reduce those taxes or if one can do business without some of the restrictions that could be imposed in the foreign country – such as through a free-trade agreement.
Restrictions do not mean that one does not have to pay taxes, but one can operate freely. For example, in some cases, one can import goods into the country without paying customs duty or operate without foreign ownership restrictions. One should also find out if there are any investor protection agreements and double tax avoidance treaties. There can be situations where the UAE not having the best double tax treaty with a particular country, companies try to see if there is another country located elsewhere – in Europe, for example – that has such a treaty. However, many countries are trying to challenge such structures if they find that the only purpose of creating that entity is to reduce tax or to take advantage of the double tax treaty.
Are the requirements different for serviced-based versus trading businesses?
There could be different issues depending on the nature of one’s business. One could possibly carry out a trading operation without creating a taxable presence in the country, because one is only providing or exporting goods. One could operate through a distributor that would be taxable in his own right, but the UAE business does not have to pay tax as long as it just exports goods to the distributor. However, if the customer requires services in his country, one has to have people or a mechanism on the spot so as to provide on-ground support services.
How can SME’s deal with tax compliance?
Once an investment decision is taken, one need to plan one’s taxes. More than often, there are specific requirements. For example, for corporate taxes, one has to file returns on an annual basis, therefore there is need to be aware of deadlines, tax returns details, supporting schedules and whether or not one will be subjected to a tax audit by the foreign jurisdiction. In some countries, where rules being favourable to SME businesses – turnover not exceeding a certain threshold – making one’s compliance obligations somewhat reduced; for example, instead of a monthly filing, only a quarterly filing would be required.