How to Calculate Your Tax on Business Revenue | A Simple Guide

It is important for companies to know how to compute company income tax if they want to be compliant and make the most of their financial strategy. In an effort to improve the country’s tax system and bring it closer to global norms, the United Arab Emirates announced updated laws related to corporate taxes and value-added taxes (VAT). 

You easily understand the different business taxes and calculate them with the help of this simple guide. Whatever the size of the company, it is important to understand its tax responsibilities to avoid fines and improve financial stability. Among the most important features of taxes such as sales tax, corporate earnings tax, and tax deductions ae also discussed in detail.

Business Taxes in the UAE

There are two primary types of corporate tax and value-added tax in the United Arab Emirates’ tax system. Company activities and income conditions affect the application of each tax in a unique way. 

• VAT (Value-Added Tax): When products and services are sold, a standard value-added tax (VAT) rate of 5% is applied. Value-added tax payments from companies are sent to the Federal Tax Authority (FTA). Companies that earn more than AED 375,000 in taxable supply annually are required to register for VAT, while those that make more than AED 187,500 are free to choose not to.  
• Corporate Tax: Introduced in 2023, the corporation tax is a type of direct tax on business profits. A 9% tax rate is applied to profits over AED 375,000. In the Free Zone, a business that meets particular requirements is approved for a zero percent tax rate.  

Accurate tax calculations and compliance are guaranteed when you know which taxes apply to your firm. Avoiding penalties for both taxes requires correct computations, timely filing, and thorough record-keeping. 

Step-by-Step Guide to Calculating VAT on Business Revenue

Step 1: Determine VAT on Sales

The value-added tax is 5% of the overall income which is subject to taxation. Check up the formula: 

VAT = Total Sales revenue * 5

For instance, if taxable sales at your company total AED 500,000:  

VAT = 500,000 * 0.05 = AED 25,000

Step 2: Identify Input VAT (VAT Paid on Purchases)

The VAT received on sales can be subtracted by businesses from the VAT paid on qualified purchases. This amount can be subtracted if your business paid AED 8,000 in VAT for business costs. 

Step 3: Calculate Net VAT Payable

Net VAT Payable = VAT on Sales – Input VAT 25,000 – 8,000 = AED 17,000.

The UAE Free Trade Area requires your company to pay AED 17,000 in value-added tax. 

Step-by-Step Guide to Calculating Corporate Tax 

Step 1: Determine Taxable Profit

The formula to calculate corporate tax is net profit, which is: 

Net Profit = Total revenue – Allowable Business Expenses

For example; if your net income is AED 1,000,000 and your allowed expenses are AED 400,000, then: 

Taxable Profit = 1,000,000 – 400,000 = AED 600,000

Step 2: Apply Corporate Tax Rate

Profits over AED 375,000 are subject to a corporate tax rate of 9%. Anything below this line item is exempt from taxes. 

With a taxable profit of 600,000 Emirates dirhams: 

Taxable Amount = 600,000 – 375,000 = AED 225,000

Corporate Tax = 225,000 * 9 

So, the total amount due in corporate tax is AED 20,250. 

Common Tax Calculation Mistakes Businesses Make

Due to inaccurate VAT filing, improper deduction claims, and misunderstanding of tax legislation, many companies have difficulty with tax computations. Regular mistakes consist of: 

Incorrect VAT Collection

Correct VAT classification is essential for companies to avoid compliance problems, financial discrepancies, and possible fines from tax authorities caused by applying the ordinary 5% VAT rate to exempt or zero-rated goods. 

Failure to Deduct Input VAT

Companies waste money on unnecessary operating expenses because they fail to claim VAT on qualified charges. Tax liabilities can be reduced and financial efficiency can be improved with proper documentation and knowledge of reclaimable input VAT.

Understated Profits

Corporate tax audits, fines, and reputational risks can result from inaccurately reported taxable income. The solution to staying in compliance and out of legal consequences is making sure that your profit estimates are accurate.

Missing Filing Deadlines

The Federal Tax Authority (FTA) charges very heavy fines for late VAT returns. To make sure that companies pay their taxes on time and avoid penalties, they must set up a structured tax schedule.

Businesses can stay in compliance and reduce their tax payments with proper tax management. 

How TAG Management Consulting Can Help

TAG Management Consulting is an expert in helping companies with complying with UAE tax laws. Here is a list of everything we offer:

• VAT Compliance & Filing: Making sure timely returns and accurate VAT calculations are made. 
• Corporate Tax Planning: We help companies in maximizing their tax deductions and payments. 
• Financial Record Management: Keep accurate tax records to avoid mistakes and fines. 
• Tax Consultation & Advisory: Strategies customized to your needs for maximum tax efficiency and most legal compliance. 

Working with TAG Management Consulting allows companies to concentrate on business while they take care of all tax issues. 

Conclusion

For companies in the United Arab Emirates, calculating taxes on their earnings is a basic duty. Knowing corporation tax and VAT guarantees legal compliance and avoids unnecessary financial burdens. To avoid fines, businesses must file their returns on time, keep accurate records, and apply the appropriate tax rates. 

With tax regulations often changing, it’s important to have the help of experts. TAG Management Consulting offers expert tax services to help companies minimize their tax obligations while staying in compliance. 

Need help with tax calculations and compliance? Contact TAG Management Consulting today for expert tax advisory services!