Corporate Tax and VAT are two key taxes in the UAE, but they apply differently. Corporate Tax is levied on business profits, while VAT is charged on the sale of goods and services. Understanding the difference is crucial for compliance and effective financial management.
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:
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 AED 5, it will charge its customers AED 120 for bread + 5% VAT of AED 6. The bakery then remits AED 11 to the tax authority (AED 6 collected - AED 5 already paid).
Some key points about VAT:
Corporate Tax and Value Added Tax (VAT) are two distinct types of taxation in the UAE, differing in their scope, application, and compliance requirements.
Below is a detailed comparison:
| Basis of Comparison | Corporate Tax | VAT |
|---|---|---|
| Tax Base | Taxable income or net profits | Value added at each stage of the 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 are usually quarterly/monthly |
| Accounting | Financial statements based on GAAP | Separate VAT accounting |
| Compliance costs | Lower - tax returns and books | Higher - registration, invoicing, refunds, etc. |
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.
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.
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.
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.
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 procedures 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.