4Rs principle: A guide for dedicated tax strategy

For the last 5 years, businesses are evolving along with the taxation regime in the UAE.

Value Added Tax (VAT), excise duty, Economic Substance Regulations (ESR), transfer pricing and the upcoming corporate tax (CT) are some of the significant disruptions for businesses requiring a dedicated tax strategy.

If I were to summarise my experience of tax advisory, tax litigation and as an in-house tax leader, in Europe, the United Kingdom, India, the US and the UAE, the tax strategy should be drawn on the 4Rs principle.

Ready to comply

It is a global principle that taxation regimes rely on self-assessment by the taxpayers.

The onus of tax compliance is on the businesses. A taxpayer cannot shift this responsibility on the tax authorities to identify the compliance errors and claim penalty waivers based on existing industry practice or because the authorities failed to highlight the errors.

The businesses are required to know the prevailing tax laws. Ignorance of law, or a misunderstanding thereof, cannot be an excuse for non-compliance.

Tax compliance is much more than just a timely submission of the VAT returns or a conservative calculation of tax payments & credits. Businesses need to first understand their compliance obligations.

Any default in compliance, howsoever inadvertent, could spiral into interest, significant penalties, litigation costs and bad press.

Be ready to comply with the tax laws. Tax compliances are not just a mandatory obligation, it should be a way of doing business.

React for advice

Tax inefficiencies in the transaction structures could significantly increase business costs.

Taxes such as VAT are essentially a tax on transactions. The manner in which the business transactions are structured will axiomatically determine the tax implications.

Corporate tax and transfer pricing are no different. The business models need to be planned in advance for optimising tax on the transactions. Free Zones and Designated Zones are some peculiar features for UAE tax planning.

It is often too late to structure a business model if the only role for a tax advisor is to prepare and submit a VAT return based on historic data of transactions long completed.

Changes in the tax laws and tax developments also needs to be actively tracked. A general clarification by the Federal Tax Authority (FTA) given to one industry could impact many other industries. Our tax conversation published on July 3, 2022 highlights one such instance.

It is for the businesses to react in a timely and proactive manner to seek optimum solutions.

React for advice on new business models, transactions structures, ever changing tax laws and tax developments.

Reveal to optimise

Regular work may result in tax saving opportunities and hidden tax exposures skip the attention of in-house tax and finance teams.

Businesses should also not hesitate to reveal past/existing tax positions on a hope of passing through the audit limitation period of 5 years without detection. The audit period is continuously rolling from each tax period/VAT return submission instead of calendar years.

Periodic due-diligence/health-check helps to identify the opportunities for tax savings and exposure areas.

Reveal to optimise tax savings and tax risks.

Revolutionise to maximise

From policy advocacy to employee trainings, from private clarifications to tax litigation, it is time that tax awareness should be built into an organisation’s culture.

The tax culture of an organisation plays an important part in strengthening its future growth and position.

Taxation is not just an accounting compliance. A taxation regime impacts a multitude of business functions such sales quotations & margins, business relationships with vendors & customers for correct documentation, human resources for employee recoveries etc.

Revolutionise the way you see and operate in a tax environment to maximize the business profits.

Future of tax compliance

The relationship between a business and its tax advisors is no longer that of a service provider and a service receiver. The sheer significance of tax costs and compliance obligations require businesses and tax advisors to work as partners. Both the stakeholders need to bring substantial knowledge and value addition on the table to succeed in the ever evolving tax environment in this country.

(The writer is the managing director of AskPankaj Tax Consultants. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.)