Month: February 2022
The New Rate Change in Saudi GOSI Contribution
HLB KSA Payroll Team
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The General Organization for Social Insurance (GOSI) amended the contribution rates in the unemployment insurance system. It was approved to reduce the contribution rates to be (1.5%) one and a half percent instead of (2%) two percent. The GOSI indicated that the rates of bearing the new contributions will be (0.75%) on the Employee and (0.75%) on the employer, instead of (1%) on the Employee and (1%) on the employer.
With this change, the total GOSI percentage for Saudi nationals is 21.5%.
Please find the below breakup,
Employer’s Contribution
Employee’s Contribution
There is no change in the mechanism of collecting the contribution and the decision to reduce the subscription rate does not affect the amount of compensation being paid to the beneficiaries of this program.
Payroll Service in KSA
The process of payroll is a little complicated and time-consuming; hence it is always recommended to outsource your company’s payroll function. Outsourcing payroll will ensure the assistance of a team of trained payroll professionals and it frees up the time of the organization, helping them focus on other projects that add value to their business.
One should be extra vigilant while selecting their payroll provider, as payroll data is highly sensitive, and one should opt for a provider that can ensure high levels of data security.
As a leading payroll outsourcing company, HLB HAMT can help solve your payroll complexities through customized strategies. We take care of our clients’ entire payroll cycle that includes preparation of payroll reports, processing salary payment with WPS compliance, accrual management including Gratuity, pension funds, an online portal for accessing payslips, and many more. Our leadership team spends the necessary hours in every project, ensuring our clients get refined consulting services to take your business forward.
To know more about our payroll process, click here.
To know more about our KSA payroll process, click here.
Disclaimer:
Whilst every effort has been made to ensure the accuracy of this information, HLB HAMT will not accept any liability arising out of errors or omissions. Please note that this blog is not all-inclusive. Our guidance is designed only to give general information on the issues/topics covered. It is subjected to change and not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.
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The UAE’s new Labour Law has been formally Announced
HLB HAMT News Team
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The UAE has introduced a new labour law for employees, which came into effect on February 2, 2022. The New labour Law, like the current labour law, will govern employee-employer relationships within all private sector enterprises and employees in the UAE, with the exception of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), which have their own employment rules.
What influence do labour regulations have on today’s workplace?
The law aims to improve the UAE labour market’s growth and stability, as well as protect employees’ rights. Substantial initiatives were undertaken to guarantee that all private-sector employees work in a pleasant, fair, and welcoming workplace.
The new labour law was enacted in order to react to the substantial change in the way UAE employees currently work as a result of technology improvements and the emergence of the COVID-19 pandemic. With the introduction of new provisions, the UAE’s new labour law aims to establish a more dynamic and efficient working environment, while also providing employees with additional safeguards against bullying and harassment in the workspace.
Several amendments to the old legislation, such as the introduction of three-year work contracts or new work models, have been made under the new labour law. It also includes many facets of employer-employee interaction in the UAE private-sector workplace.
The important components of the new labour law, as well as the key focal points for businesses, are listed here.
- Three-Year Contract – This is a limited/fixed-term contract that cannot last more than three years and can be renewed for the same period or less with consent from both parties. Unlimited contracts under existing labour law continue, but they must be changed to limited contracts within one year of the new legislation’s implementation, i.e., on or before February 2, 2023.
- Protection against discrimination and harassment – Sexual harassment, bullying, or any other type of behavioural, emotional, physical, or mental aggression against an employee by an employer, coworkers, or superiors is illegal. The new rule prohibits discrimination based on sex, race, colour, religion, national or social origin, or handicap.
- Equal pay for men and women – In the workplace, men and women should be paid equally. It underlines that women should be paid equally to men while executing the same activity or other duties of similar value.
- Period of probation – In comparison to prior labour laws, the new legislation states that if a person is recruited on a probationary basis not surpassing six months, the employer may cancel the worker’s employment during the probationary period by giving him a 14-day written notice prior to the date set for his termination.
- Termination by employee & employer during probationary period – During the probationary phase, the employee may cancel the contract by giving at least one month’s written notice. During the probationary period, an employer may terminate an employee’s contract by giving the employee 14 days’ written notice.
- Flexible Working Models – Full-time, part-time, temporary, and flexible employment options are available to employees.
- End of Service Gratuity – The law explains in detail how an employee’s gratuity will be computed depending on the length of their employment. According to the new regulation, an expat who has worked full-time for an enterprise for one year or more would be awarded end-of-service rewards assessed based on the basic pay. Each of the first five years of service will be paid a salary of 21 days, and each year beyond that will be given a salary of 30 days.
- Notice period – The new law requires a notice period of 30 to 90 days be issued. If both parties agree, this notification time might be waived as well.
- Parental Leave – In the six months following the birth of their child, employees will be entitled to five days of paid leave.
- Compassionate leave – Depending on the deceased’s degree of kinship, the employer may provide compassionate leave of between 3 to 5 days.
- Study leave – Every year, employees are entitled to ten-day study leave, provided they are enrolled in a university of repute, and such leave shall be provided only after providing a certificate from the university.
- Non-compete – According to the new UAE labour law, if an employer wants to preserve its business interests, it must enter into a non-compete agreement with its workers.
According to the UAE Ministry of Human Resources and Emiratization (“MOHRE”), the new UAE labour law is a solution to the constantly shifting labour setting in a COVID-19 society, which is characterized by technological breakthroughs. The Ministry of Labour and Employment is now drafting executive rules to supervise the execution of the revised labour law.
With the change in labour law, the need to re-draft existing HR policies and manuals arises. Companies are required to update employment policies, amend contracts, and possibly, use redraft their entire HR Policies and Processes to keep up with compliance requirements, and maybe other organizational changes that may have occurred in the past. Our team of experts at HLB HAMT can offer a diverse range of HR management solutions to help you stay up to date and compliant with the changes in labour law.
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FTA’s Revamp on Tax Administrative Penalties in UAE
Reshma Raju Thomas
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The recent Cabinet decisions on administrative penalties came forth as a relief for the business sector as the reduction would mean a decrease in the legal obligations and a boost in their capabilities to nurture and contribute to the growth of the national economy. This reform further enhances FTA’s goal to provide an environment that promotes a high level of tax compliance.
Redetermination Of Administrative Penalties (Public Clarification TAXP004)
On 28 April 2021, the Cabinet issued Decision No. 49 of 2021 on Amending some provisions of Cabinet Decision No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE. Cabinet Decision No. 49 of 2021 amended some of the administrative penalties related to certain violations and allowed for a redetermination of some of the penalties already imposed.
On 30 December 2021, Cabinet Decision No. 49 of 2021 was amended by Cabinet Decision No. 108 of 2021 which replaced the third Article of Cabinet Decision No. 49 of 2021 and provided an extended timeframe to benefit from the concessionary measures provided in the form of redetermination of administrative penalties and is applicable from 1 January 2022. The original deadline granted was 28 June 2021 under the previous Cabinet Decision No. 49 of 2021. The Public Clarification TAXP004 released in January 2022 replaces Public Clarification TAXP002.
FTA redetermines the amounts of unsettled payable administrative penalties imposed based on the Cabinet Decision No. 40 of 2017 and imposed in full before 28 June 2021, if all the following conditions are met:
- paid the total amounts of the payable tax by 31 December 2021
- paid the 30% of the total amount of the unsettled administrative penalties which were imposed before 28 June 2021 and paid not later than 31 December 2021.
Where the above conditions are met, the FTA will, redetermine the amount of administrative penalties payable and not settled by 28 June 2021, to equal 30% of that unpaid part. Hence, the person shall not be required to pay the remaining part of 70%.
Where the registrant failed to satisfy the conditions by 31 December 2021, they can benefit from the extended deadline till 31 December 2022 and if the conditions are satisfied by 31 December 2022 and the FTA will redetermine the penalty in 30 business days from 31 December 2022.
Administrative Penalties Installments and Waivers
The Federal Tax Authority (FTA) introduces administrative penalties installments and waivers as per Cabinet Decision no. 105 of 2021 on the Procedures of Administrative Penalty Installments and Waivers, effective from 1 March 2022.
Administrative penalties installments
This scheme allows taxpayers to settle tax administrative penalties through installments. A request should be submitted to the FTA, and the FTA will approve when all the following conditions are met:
- It must be for unpaid penalties.
- The amount of penalty is more than AED 50,000 and subject to amendment by Committee.
- With the exception of the Reconsideration mechanism, the penalties shall not be disputed before the Tax Dispute Resolution Committee (TDRC) or the competent courts or any other relevant authorities.
- All taxes relating to the penalties imposed are paid in full.
Administrative penalties waivers
Taxpayers will need to file a separate request to FTA for this scheme and the grant of penalty waiver will depend on the following conditions:
- Fines are not related to tax evasion crime
- Request to be made within specified time stated by the Committee
- The request shall be related to:
- Where death or illness of registered natural person or owner (in case of sole establishment) led to non-compliance to its tax obligation
- Where death, illness, or resignation of a principal employee was a direct cause of non-compliance to its tax obligation
- Any government-imposed precautionary or preventive measure was the reason for failure to meet the tax obligation.
- Any general defect in Authority’s systems, payment systems, or used telecommunications services was a direct cause of failure to meet its tax obligation on time.
- Implementation of any of the penalties restricting freedom by a registered natural person or the owner of a sole establishment.
- The person carried out its tax duties and paid all tax amounts due under the tax law through another account of the taxpayer
- The person is declared insolvent or bankrupt and due tax amounts were paid before the declaration of insolvency or bankruptcy. Such a declaration must not be the aim to avoid payment of administrative penalties.
- Any other cases approved by Committee.
The FTA takes up to 40 working days to review the penalty installment and waiver requests from the date of submission and a further 20 working days to issue its decision based on the assessment. They will need another 10 working days to inform the applicant of its decision. Where no communication is received within the timeline, the request will be considered rejected.
FTA has the sole right to approve or amend penalty installment requests and they will require a payment guarantee to ensure the installment plan is reasonable.
The decision also states that FTA is responsible to assess the penalty percentage that can be waived if the penalty waiver request is approved, and they can set the rules based on the penalties paid previously within the last five years.
Conclusion
FTA’s latest reforms on tax compliance succeed in fostering growth by the business sectors in the region to attract foreign investment and incentivize companies to set up or expand their operations in the country, further strengthening the economy.
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UAE: Commercial Company Law 2021 Amendments
Lavin Nalinababu, Business Consultancy
Phone:- +971 4 327 7775
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Email:- dubai@hlbhamt.com
The government of the United Arab Emirates has announced Federal Decree No. 32 of 2021, which makes significant modifications to the Commercial Companies Law (CCL) as part of its ongoing round of legislative reforms. On January 2, 2022, the CCL 2021 will take effect, replacing the present Commercial Companies Law No. 2, which was passed in 2015. The CCL 2021 comprises improvements that will have a favourable impact on current company’s activities and entrepreneurs seeking to establish a presence in the UAE. The United Arab Emirates has undertaken the greatest legislative reform in its history, with the goal of improving the regulatory environment and stimulating economic growth.
Key changes in CCL
SPAC’s & SPV’s
- The Special Purpose Acquisition Company (SPAC) will be constituted as a public joint-stock company (PJSC) and authorised by the UAE Securities and Commodities Authority (SCA) under the New Companies Law 2021 for the exclusive purpose of acquiring or merging companies. This is in line with the current practice of using SPACs for IPOs, and it will provide another avenue for M&A activity, including international investment. The SCA will govern the operations of a SPAC through regulations that it shall adopt in this respect.
- The idea of a special purpose vehicle (SPV) has been developed, which is a company created for the purpose of segregating the responsibilities and assets connected with a specific financing operation from the parent entity’s obligations and assets. Credit activities, borrowing, securitization, issuance of bonds, and risk transfer connected with insurance, reinsurance and derivative activities can all be used to fund the project, as long as the SCA’s laws are followed.
Changes Affecting Limited Liability Companies
- Expiry of Manager’s Tenure – When a manager’s term expires without being replaced, their term can be prolonged for up to six months, and if no one is appointed, the Department of Economic Development (DED) can appoint aboard for a period of not exceeding one year, wherein the LLC must nominate a new board of managers.
- Formation of Supervisory Board – To form a supervisory board, CCL 2021 has raised the needed number of shareholders to fifteen (15). The Supervisory Board is made up of at least three shareholders who are responsible for overseeing the company’s annual reports, budgets, and profit distribution, as well as overseeing the LLC’s management and submitting a report to the General Assembly.
- Legal Reserve – The mandatory reserves, which are made up of net earnings, have been decreased from 10% to 5%, which is clearly a positive improvement for businesses.
Public Joint Stock Company (PJSC)
- Subscription shares of PJSC – Founders must now subscribe to the stipulated percentage of shares in the prospectus, subject to SCA restrictions. Previously, the percentage of subscription shares was set to be anywhere between 30% and 70%.
- Remuneration for directors – Board members’ remuneration cannot exceed 10% of the fiscal year’s net profits (after depreciation and reserves deductions), but if the company does not create revenue, a board member could be paid a lump sum fee not exceeding AED 200,000 at the close of the financial year, pertaining to the company’s constitution and approval by the general assembly.
- Issue shares at a discount – A PSJC can now issue shares at a discount if the market price of the shares falls below the nominal value, subject to SCA approval and the passage of a special resolution.
- General Assembly Meeting – If shareholders owning no less than 95 percent of the company’s share capital authorise a time shorter than 21 days before convening the General Assembly meeting in line with the SCA’s requirements and procedures, the meeting must be announced 21 days prior to the date of the meeting.
- Hiring for the position of Director – The CCL 2021 states that if a directorship becomes vacant, the Board of Directors (Board) must hire a substitute within 30 days, given that such an appointment is reviewed by the General Assembly in its first meeting for approval or to appoint another individual, and the newly appointed director shall hold the position for the remainder of the predecessor’s period.
- Corporate Social Responsibility (CSR) – CCL 2021 permits newly formed businesses to engage in CSR and set aside any revenues for that purpose. Moreover, the CCL 2021 requires public notification on a company’s website even if it does not participate in CSR, whereas the CCL 2020 does not.
- PJSC division – The option of separating a PJSC was introduced in the CCL 2021. This separation can be made in two ways.
- Horizontal, that is, when the shareholders of the dividing firm and the new business formed as a result of the division are the same and have identical ownership percentages, or
- Vertical division, which occurs when a company carves off a portion of its assets or commercial operations by forming a subsidiary to purchase the carved assets or commercial activities, and the subsidiary is completely owned by the firm.
Liquidation Notice to Creditors
Creditor claims against a firm in liquidation must be submitted within 45 days of the company’s bankruptcy, according to CCL 2020. This time limit has been shortened to no less than 30 days by CCL 2021.
Conclusion
The incorporation of the New Companies Law is an optimistic step towards enhancing the United Arab Emirates’ economic viability in the form of business development, demonstrating to the rest of the globe the nation’s capacity to cope with global standards, thereby encouraging established companies and recruiting potential investment opportunities.
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UAE to implement Corporate Tax from 2023
HLB HAMT News Team
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The United Arab Emirates has decided to introduce federal tax on corporate revenues for the financial year starting on or after June 2023. Companies have to pay a standard statutory tax rate of 9%, which would apply only when income topped Dh375,000 ($100,000) ultimately positioning the UAE in a powerful advantage when considered against other major and established economies throughout the world.
The proposed model, which is due to take effect from next year, will apply to all economic activity in the UAE excluding natural resource exploitation, according to a statement from the finance ministry. Although this regime would not be applicable to those firms functioning inside free zones in the UAE, they will remain immune as long as they don’t conduct business with the mainland.
The key objectives for corporate tax introduced in the UAE are as follows:
- Boosting the UAE’s prominence as a global commercial and investment centre
- Achieving International tax transparency standards and avoiding fraudulent practices
- Accelerating the UAE’s development to align itself with global markets
The UAE’s well-known tax haven status has received extensive reception from international corporations and rich individuals, allowing the country’s economy to diversify beyond oil and gas income, particularly in commercial and recreational heartland of Dubai.
Key takeaways
Personal income from work, real estate, and other investments, as well as any other income generated by people that is not derived from a business or other kind of commercial activity licensed or otherwise authorised to be conducted in the UAE, would be tax-free
- Capital gains and dividends earned by a UAE firm from its qualified shareholdings will not be subject to corporate tax
- Foreign tax will be credited against the corporate tax due in the UAE
- On both domestic and cross-border payments, there will be no withholding tax
- Free zone businesses that meet all necessary requirements can continue to benefit from corporate tax incentives.
- Foreign investors that do not conduct business in the UAE will be exempt from corporate taxes.
- Qualifying intragroup transactions and restructurings will be exempt from corporate tax.
- Businesses will only have to submit one corporate tax return every fiscal year, and they will no longer have to make prior tax payments or produce provisional tax filings. UAE enterprises will be subject to transfer pricing and documentation procedures based on OECD transfer pricing principles.
- Businesses engaged in the “extraction of natural resources” — such as oil and gas production — will be excluded since they are taxed at the emirate level.
- Generous loss transfer and utilization rules will be available to businesses.
Previously, the UAE’s corporate taxes solely belonged to limited industries, which were subject to a 20% tax. While personal income tax is not yet implemented in the Gulf, the UAE government’s recent actions can be considered as a strategic approach toward leading economies across the globe seeking to impose a minimum tax on corporations and to end the illicit tax activities of business giants.
Conclusion
With the introduction of corporate tax, the UAE reaffirms its commitment to meeting international standards by diversifying its economy to reduce its reliance on crude oil and also to tackle the rising competition from other economies, thereby pursuing its own drive to attract foreign businesses.
If you have any questions or concerns about the newly proposed federal corporate tax regime, HLB HAMT, one of the leading tax consultants in the UAE, will provide the necessary assistance.
Contact us at tax@hlbhamt.com
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Challenges of Accounting in IT and Software Industry UAE
Gireesh Kumar, Partner Audit and Assurance
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IT and Software sector is one of the complex industries in terms of accounting and reporting of financial statements. There is high global increase in the spend on IT system and Services, especially in post-COVID period. When comparing to earlier IT Industry, the sector has grown vastly to cloud computing, quantum computing, artificial intelligence and cyber security. It is very critical for the accountants and auditors to understand the products and services, technical terms, accounting terms, organizational structure and revenue recognition policies as per IFRS 15.
Industry-Specific Expenditures
- Software research cost – The cost during research phase generally includes manpower cost, both employee & freelancer, fees for certain license etc. All the cost in the research phase must be expensed off since in this phase the company will be researching the unknown. At this stage no economic benefit can be expected.
- Software development cost – The nature of the cost incurred during development phase is mostly similar to that in research phase. However, the development cost can be capitalized from the point in time in which technological feasibility is established up until the point the product is ready for general release.The capitalized costs can subsequently be amortized over the life of the product.
- Cost to obtain contracts – These may take form of any sales commission, modification in the product for obtaining a contract. Any incremental costs of obtaining a contract must be capitalized and amortized on a straight-line basis over the expected customer relationship period if the company expects to recover those costs.
- Startup cost – The startup cost for an IT company generally are cost for setting up the Infrastructure and technology requirements like equipment, data storage and includes domain cost, web design, advertisement, marketing and surveys. These cost has to be expensed of as and when incurred
- Cost of IP rights – The company licenses and sells rights to certain of its intellectual property (IP) like internally developed patents, trade secrets and technological know-how. Some of the IP transactions are licensing/royalty-based while some are transaction-based sales/other transfers. Licensing arrangements include IP partnerships whereby a business partner licenses source code and becomes responsible for developing, maintaining and enhancing the product.The accounting treatment requires assessment of the pattern of economic benefits flowing to the company
- Product warranty cost – Providing warranties are most common part of IT sales and services. Any cost of standard warranties should be accrued when the corresponding revenue is recognized
Industry-Specific Revenues
- Sale of licenses – Companies that are selling IP licenses are commonly known as SaaS providers. They are mostly providing licenses on a subscription model which are centrally hosted. Revenue of license providers can be categorized as follows:
- When licensing of intellectual property is a distinct good or service or where sale of license is a predominant component in a performance obligation. Then,
- Revenue from right to access the license is recognized over a period of time.
- Revenue from right to use the license is recognized at the point in time at which the license is granted.
- When the license of IP is a non-distinct component of a performance obligation or a non-dominant component of a performance obligation, the general criteria for revenue recognition has to be followed
- When licensing of intellectual property is a distinct good or service or where sale of license is a predominant component in a performance obligation. Then,
- Training services and custom development services – Determining the pattern of revenue recognition needs an evaluation of the transfer of control, benefits of the service and right of payment.
The revenues are recognized over the point of time if;- They sell these services on a stand-alone basis or
- The customer can hire a third party to perform these services
The revenue is recognized over time if;
- Services may be delivered over a period or
- Services are based on meeting certain milestones or achieving other metrics which requires the customer acceptance on the progress of the service.
- Sale of third-party hardware and software – An assessment to be done to confirm if the company is acting as an agent or principal. The “control of the products or services” needs to be considered before they are transferred to the customer. The revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent. When the company is the principal for the transaction then revenue is recognized on gross basis.
- Implementation/installation/integration service revenue – Over time revenue recognition is normally followed for these services but a full understanding of the situation is required. The factor to consider here is to determine if clients have purchased these services to get desired features and function or whether customer is simply outsourcing for convenience.If the customer can implement the software but has outsourced, then the services are termed as “Distinct” and then revenue should be recognized as “at the point of time”
- Revenue from extended warranty – These revenue from such contracts are initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period.
- Revenue in case of termination right clauses – Termination clauses are often a part of software sales contracts. If a customer can terminate a contract without substantive cost or penalty, only the noncancelable portion of the contract is accounted for revenue. The undelivered performance obligations associated with such arrangements must be excluded from deferred revenue.
- Upfront fees – IT companies receives payment for part or all of a service before completing the service. This requires companies to consider whether the fee is associated with the transfer of promised goods or services or an advance payment for future goods or services
Basics of Revenue Recognition
Conclusion
To overcome the accounting challenges in IT and software industry and for a better presentation of financial statements, following are very important factors:
- Understanding the business
- Understanding the contract with customers
- Understanding the cost elements
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