Corporate Tax (CT) is a mandatory legal requirement for all taxable businesses in the UAE. Compliance with CT comes with unique challenges and risks along the way. This is where a CT risk assessment plays its role. A CT risk memo is a document produced as a result of a CT risk assessment of your business. Its purposes can be various, ranging from noncompliance risks to tax misinterpretation risks. However, the outcome is intended to safeguard the company from the possible consequences of the identified risks beforehand.
Let Tax Gian explain to you, with a practical example, what a CT risk memo is and how our expert corporate tax agents in the UAE prepare it for you.
Steps to Prepare a CT Risk Memo
A CT risk memo requires the business or the agent to go through the following key steps;
- Thorough Understanding of the CT Law
The person appointed by the business or the CT agent must have a deeper understanding of the CT laws, including their various significant regulations, such as transfer pricing (TP) requirements. Corporate tax agents in the UAE, such as Tax Gian, are highly educated in the field of tax law.
- Identification of Risks
The next step is to find the potential areas of risk by assessing different aspects such as;
- Inadequate Documentation:A gap may exist in maintaining proper documents and records to support tax filings.
- Noncompliance with CT and TP laws:The business may be heading towards severe noncompliance circumstances due to a lack of understanding of CT and TP rules.
- Incorrect Calculation of Taxes:The business may have miscalculated its tax amount during a taxable period.
- Risk Mitigation Plans
The final step is to develop mitigation plans to mitigate and address the identified risks. These may include;
- Internal Management: The business may need to strengthen its internal management and controls to ensure accurate financial reporting and compliance with tax laws.
- Regular Reviews & Audits: The business may need to periodically review its policies and audit its financial reports.
- Expertise: The business may lack tax expertise to find the necessary tax guidance at the right time.
A Practical Example of Tax Gian Preparing A Risk Memo
Let’s understand, with a real-world example, why businesses need a CT risk memo and how our corporate tax agents in Dubai help them prepare one.
- Starting a CT Risk Memo with a Purpose
Company A reaches out to our expert tax agent at Tax Gian to assess potential risks associated with non-compliance with TP requirements, particularly concerning payments made to connected persons during the financial year ending in 2024.
- Quick Analysis
Our CT agent takes a snapshot of the company’s revenue, net profit, transactions with related parties and connected persons, the need for a TP disclosure form, CbCR report, master file, and local file, etc.
- Our agent notes the presence of related party transactions and connected persons transactions.
- Observations
Our CT agent closely observes the related party and connected persons transactions done during the taxable period and finds out;
- Incomplete documentation for Company A’s rental income from warehouses.
- No benchmarking for staff salaries paid by the group company on behalf of the company.
- No benchmarking for payments made to connected persons.
- Identified Compliance Risks
Our CT agent identifies that;
- TP documents have been prepared internally with low expertise.
- The current documentation might not meet the arm’s length requirements.
- The absence of benchmarking may result in noncompliance, leading to severe penalties under TP laws.
- No experts or advisors are in place to review or prepare Company A’s TP documents.
- Possible Consequences
Our CT agent lists possible consequences for Company A;
- Up to 20,000 AED penalty for incorrect CT return filing.
- Up to 20,000 AED penalty for failure to maintain records.
- Recommendations
Our CT agent suggests immediate actions for Company A;
- Appoint a qualified TP advisor to review the current documentation.
- Conduct benchmarking analysis for all transactions involving related parties and connected persons.
- Supplement or reconstruct the current documentation.
- Ensure that proper intercompany agreements are in place for all related-party transactions.
- Cross-verify TP documentation with audited financial statements and related parties.
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