CORPORATE TAX VS VAT: WHAT’S THE DIFFERENCE AND WHICH ONE AFFECTS YOU MORE?

Corporate Tax Vs VAT: What’s the difference and which one affects you more?

Corporate Tax Vs VAT: What’s the difference and which one affects you more?

Blog Article

One essential weapon used by governments to raise money, pay for public services, and affect economic activity is taxation, which is also effectively implied when running businesses, analysing financial planning process and revenue sources.

Corporate Tax vs VAT are two significant tax categories that have paramount impact on both individuals and corporations. Although they both bring in money for the government, they function differently and have different effects on revenue-margins and operating expenses of businesses. The following blog analyses the distinctions between these two taxes, their implications, and which has a greater impact on your business.

What is Corporate Tax?


A corporation's profits are subject to a direct tax known as corporate tax, as it is assessed to companies that operate in a specific region and is determined by subtracting depreciation, operating costs, and expenses from net income.

Key Components of Corporate tax:



  • Direct Tax: Taxes levied directly on individuals and business to be paid to the government.

  • Imposed on Net-Profits: starting point for calculating a company's tax liability after reducing expenses.

  • Practical to Businesses: Applied on affiliated entities and not individual owners.

  • Differs by Authority: Corporation tax quotations and strategies vary according to each country’s regulations.


Corporate Tax in the UAE:


The UAE's tax policy underwent a dramatic change with the implementation of corporation tax, which was intended to bring the region into compliance with international norms. However, companies with profits over AED 375,000 would be subject to a 9% corporate tax in the UAE as of June 2023, depending on their activities and adherence to regulations, exempting freezones.

What is VAT?


Every step of the production and distribution of goods and services is subject to the indirect VAT tax, where businesses collect VAT from consumers on behalf of the government, in contrast to corporate tax.

Key Components of VAT:



  • Indirect tax: Acquired by companies from customers and subsequently passed to the government.

  • Multi-Staged Tax: Applied at every stage of supply-chain by suppliers & retailers

  • Implied to Goods and Services: Imposed on most transactions unless they are zero-rated or exempt.

  • Standard rate in the UAE: In the UAE, the typical VAT rate is 5%. Unless they are explicitly exempted under UAE VAT law, most goods and services are subject to this rate.


Corporate Tax vs VAT: Key Differences













































Aspect Corporate TAX VAT Tax
Definition On Business Profits On Goods & Services
Nature Direct Tax Indirect Tax
Who Pays Owners Customers
Tax Rates Differs (UAE 9%) Differs (UAE 5%)
Tax Calculation Taxable Income * Tax Rate VAT Payable = Output VAT – Input VAT
TAX Collection Businesses Customers
Pricing Impact       No impact on final price Increase the final price of the product.

 

Which Tax has a Greater Effect:


Impact of VAT Vs Corporate Tax on the following:

Businesses:

As for VAT Cash flow challenges may arise when collecting from customers on sales and send it to the government after subtracting VAT paid on purchases, limiting companies' ability to save sufficiently.

Corporate taxes usually impact company’s profitability as must set aside a portion of their earnings for taxes, impacting decisions about expansion and reinvestments.

Consumer:

Since VAT immediately raises the price of products and services, it is more evident. A 5% VAT is paid by the customer each time they make a purchase.

Since businesses may modify their operations, and prices to meet tax obligations, Corporate Tax is indirect for consumers as it’s not imposed directly on individuals.

How to Manage Corporate Tax and VAT Efficiently?


Businesses

1: Accurate Record Keeping: Use reliable accounting software to maintain precise and well-organized financial records, including income and spending.

2: Minimize Corporate tax liabilities: Where appropriate businesses should utilize tax incentives and allowances.

3: Consulting Tax Professionals: Employing a specialist aids companies in navigating complex tax laws.

Consumers

1: Recognizing VAT Costs: Budgeting is made easier when comprehending that VAT is included in purchases.

2: Be-on-Alert for exempted items: Certain necessary items are exempted from VAT.

Conclusion

All in all, corporation tax and VAT are both essential to UAE’s government revenue and economic viability. VAT vs. corporation tax has a direct impact on consumer spending, but corporate tax vs. VAT has an impact on business profitability that involves balancing tax duties.

How SimplySolved Can Help?


Although handling VAT and corporate tax in the UAE can be challenging, your company can maintain compliance and maximize tax efficiency with correct knowledge.

We at SimplySolved offer complete corporate tax and VAT solutions that are customized to meet your company's requirements as our professionals help you increase profitability by making sure your tax returns comply with UAE laws. Get in touch with us right now to expedite your tax procedures and maintain your lead in the UAE's changing tax environment!

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