Corporate tax, also known as company tax, is a direct tax levied by governments on the net profits/income of a registered company or corporation. It is calculated as a percentage of the company's taxable profits in a given financial year.
The taxable profits are determined by deducting all allowable business expenses from the company's total revenue/income for that period. Common allowable expenses include wages, rent, utilities, and cost of goods sold, to mention a few.
Some key points about corporate tax:
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- Paid directly by the company to the tax authority
- Rate varies between jurisdictions e.g. standard UAE rate is 9%
- Applies to both domestic and foreign companies operating in a country
- Tax returns must be filed annually along with audited financial statements
What is VAT?
Value Added Tax (VAT) is an indirect tax charged on the supply of most goods and services. It is calculated as a percentage of the value added at each stage of production and distribution.
VAT is ultimately borne by the end consumer but collected and remitted to the tax authority by businesses at each stage of the supply chain. For example, if a bakery buys flour from a mill for AED 100 + 5% VAT of AED5, it will charge its customers AED120 for bread + 5% VAT of AED6. The bakery then remits AED11 to the tax authority (AED6 collected - AED5 already paid).
Some key points about VAT:
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- Collected by businesses from customers and remitted to the tax authority
- Standard UAE rate is 5%
- Charged at each stage from raw materials to final sale
- Businesses can reclaim VAT paid on business purchases/expenses
- Applies to taxable supplies of goods and services in a country
Differences between Corporate Tax and VAT
The main differences between corporate tax and VAT lie in how they are calculated and applied:
Corporate Tax: This tax is based on a company's profits, paid directly by the business.
VAT (Value Added Tax): is charged on the sale of goods and services, ultimately paid by consumers.
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Tax Base
Corporate tax is levied on the taxable income or net profits of a company after deducting all allowable expenses from gross revenue. On the other hand, VAT is calculated as a percentage of the value added at each stage of the supply chain i.e. the difference between the selling price and the cost of goods or services supplied.
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Taxpayers
Corporate tax is paid by companies and businesses based in the UAE or deriving income from sources in the UAE. VAT, however, is collected from all registered businesses supplying taxable goods and services whether resident in the UAE or not.
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Rates
The corporate tax rate is fixed at 9% for taxable income exceeding AED 375,000 on resident companies. The VAT rate is fixed at 5% on supply of goods and services except for select zero-rated sectors.
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Tax Collection
Corporate tax is paid by companies on a self-assessment basis through filing of annual tax returns. On the other hand, VAT collected by businesses from customers is remitted to the tax authorities on a periodic basis usually quarterly or monthly depending on business turnover.
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Accounting
For corporate tax, companies prepare financial statements and compute income or profits based on the International Financial Reporting Standards (IFRS). VAT accounting involves separately tracking taxable and exempt supplies to accurately calculate input and output VAT.
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Compliance Costs
Corporate tax compliance mainly involves preparing and filing tax returns along with maintaining books of accounts and relevant documentation. VAT compliance is more extensive, requiring businesses to register, issue tax invoices, file periodic returns, keep extensive records of all transactions and handle VAT refunds etc.
Overview of Key Differences between Corporate Tax and VAT
| Basis of Comparison | Corporate Tax | VAT |
|---|---|---|
| Tax Base | Taxable income or net profits | Value added at each stage of supply chain |
| Taxpayers | Companies and businesses | All registered businesses |
| Rate | Fixed at 9% for income >AED 375k | Fixed at 5% except for zero-rated sectors |
| Collection | Self-assessment through annual returns | Periodic returns usually quarterly/monthly |
| Accounting | Financial statements based on GAAP | Separate VAT accounting |
| Compliance costs | Lower - tax returns and books | Higher - registration, invoicing, refunds etc. |
FAQs (Frequently Asked Question)
Q1. Is VAT always higher than the corporate tax rate?
A1. No, corporate tax rates are typically higher than VAT rates. For example, the standard UAE corporate tax rate is 9% while the VAT rate is 5%. However, rates can vary between jurisdictions.
Q2. Who has to pay corporate tax - the company or customers?
A2. Corporate tax is paid directly by companies out of their post-tax profits. It is not charged to or collected from customers. VAT on the other hand is ultimately borne by end consumers but collected and remitted by businesses.
Q3. What expenses can companies deduct for corporate tax purposes?
A3. Companies can generally deduct all ordinary and necessary business expenses incurred wholly and exclusively in generating taxable income. Common deductible expenses include wages, rent, utilities, cost of goods sold, depreciation, repairs and maintenance, advertising etc.
Q4. Is VAT charged on all company purchases?
A4. No, VAT is only charged on the taxable supply of goods and services in a country. Companies can reclaim any VAT paid on purchases/expenses related to their taxable business activities. Purchases of capital assets like machinery may be eligible for immediate expensing of VAT.
Conclusion
In summary, corporate tax and VAT are two different types of taxes imposed for revenue generation in the UAE. While corporate tax is a direct tax on company profits, VAT is an indirect tax levied as a percentage of value added at each stage of supply. Their computation, applicable rates and compliance procedure are distinct though both help strengthen government finances. It is advisable for businesses to seek the guidance of professional tax consultants in the UAE to properly understand and comply with these taxation systems.
