An effective way to save money once the 9% corporate tax levy comes into effect next year is by accelerating the income

Anselm Mendes, UAE, corporate tax
Anselm Mendes is the Executive Director, Sales and Technology, at the Continental Group
Over the years, the UAE has emerged as a magnet for international businesses and investors looking to expand into newer markets or set up a base. The country recently announced a 9 percent federal tax on corporate earnings – a measure that will come into effect on 1 June 2023. The federal taxation comes as the UAE seeks to align itself with new international standards and build global credibility.

This begs the question: How will this impact the UAE’s competitiveness? Will the nation continue to be looked upon favorably by investors? It is important to shed light on the potential repercussions because the UAE’s “tax-free” status has been a great incentive for businesses thus far.

In fact, according to a report, starting a new business is the top goal for most investors and savers in the UAE. Investors in the UAE also tend to be younger compared to their counterparts in other countries — which reflects the Emirates’ ease of doing business.

How will UAE’s new corporate tax affect businesses in the region?

In light of the recent federal tax introduction, we have rounded up some techniques to help business owners sustain or increase their profits and reduce overall operating expenses.

Write off unpaid/bad debts
A great and effective way to reduce the tax burden and save money is to find and write off certain aged and unpaid accounts that are qualified for the same. This situation arises when a certain amount is owed by a customer, has not been paid in a while, and is expected to stay that way.

It is best to work with an advisor for this as the process may accompany certain complexities. These arise if the customer decides to pay what is owed at a later date. This would involve a reversal on the write-off and the ensuing tax reduction, hence best handled through professional assistance. Overall, writing off unpaid/bad debts can save a company thousands of dirhams in taxes and reduce the corporate tax burden.

Expedite income or delay expenditure
Another effective way to save money once the 9 percent corporate tax levy comes into effect next year is by accelerating the income. This means certain revenues expected next year should be accelerated and claimed this year. It will help the company make use of an overall lower corporate tax rate in 2023. On the other hand, deferring expenditure is another way to enjoy tax relief for the ongoing year (once the corporate tax takes effect).

Implement “lean” principles
Although quite customary under such circumstances, going lean is a tried-and-tested method for businesses to weather any storm. With the changing post-pandemic business landscape and the rise of independent contractors, another great way to save big money every year is by utilizing the services of freelancers, outsourcing a few non-core functions, and adopting technologies like AI & ML to automate laborious, time-consuming tasks.

The UAE, through its golden visa programs, has been promoting the ‘gig’ economy and remote working professions. The gig-friendly visa policy is bringing a more diverse, professional, and skilled range of freelancers to work in the country as companies move to a hybrid workforce model. Business owners can start by looking at functions that can be assigned to freelancers.

UAE, labour law, employment, work, flexibility, corporate tax
Overall, writing off unpaid/bad debts can save a company thousands of dirhams in taxes and reduce the corporate tax burden
Understand the impact of the 9 percernt tax
To gauge the true impact of the corporate tax, it is best to take a bottom-up approach rather than look at it top-down. It is natural to apply the tax to net profits to get a quick overview of the situation. But a more sophisticated approach would be to carefully measure the impact of the new tax on every department and function of the business. This approach could also help identify inefficiencies and address them. The end goal is to streamline the entire business, so it is prepared for tax applications when the time comes.

Get insured
Amid the tax transition, a business can reduce the risk and get added protection by insuring the business. It will also reduce tax liability by 9 percent. This is an incentive for companies to get proper protection for key stakeholders. Insurance and taxes have long-standing interplays in terms of exemptions, deductions, etc. So, another way to look at this is that insurance policies just got 9 percent cheaper!

Saving money in your business assumes even greater significance amidst changing fiscal policies and rapid transformations in the economic landscape in the last two years. With 15 more months before the new corporate tax comes into effect, it is best to start implementing key changes at an organisational scale at the earliest, to keep net profits untouched next year, or at least ensure you minimize tax payments.

Broadly speaking, this move could energize government spending, enabling reinvestment into economic sectors, to further enhance the UAE’s competitiveness as a business-friendly nation.

Anselm Mendes is the Executive Director, Sales and Technology, at the Continental Group