HOW CAN TAX ACCOUNTING SOFTWARE EASE VAT OBLIGATIONS FOR SMEs IN THE U.A.E
Name:
Course:
Tutor:
University:
Date:
Table of Contents
How Can Tax Accounting Software Ease VAT Obligations for SMEs in the U.A.E.. 3
Applications of the ability to pay taxation theory. 5
Implementation of the ability to pay taxation theory. 7
Added value and benefits associated with the ability to pay tax theory. 8
Applications of the proportionate taxation theory. 10
Variances in implementing the proportionate tax theory. 11
Added value and benefits associated with the proportionate tax theory. 12
How Can Tax Accounting Software Ease VAT Obligations for SMEs in the U.A.E
Up to January 1st of 2018, VAT tax was non-existent in the UAE. However, from this date onwards, the value-added tax (V.A.T) was introduced in the U.A.E with the attempt to cater for the deficits that were incurred in revenue generation due to the fall in oil prices. The move was aimed at the diversification of the country’s sources of revenue and reducing the overdependence on the hydrocarbon and oil revenue generation sector (Perera and Chand, 2015). While the implementation of the policy is new and is yet to develop, the incorporation of technology through the use of tax accounting software among other forms of technology has already been adopted in the region (Budiarto and Prabowo, 2015). However, there has been the identification of the need to support small and medium enterprises, i.e. SME’s with respect to the VAT obligations. While bigger corporations may be in a position to adequately meet their tax compliance requirements due to high productivity and already established dominance in the markets, SME’s are yet to reach this level of market influence. In fact, some of these small enterprises may even be facing financial difficulties in running their day to day operations (Saderuddin and Barghathi, 2018). As a result, the need to use tax accounting software in order to ease the VAT obligations for SME’s in the U.A.E has been identified.
Seventeen months into the introduction of the V.A.T tax in the U.A.E., it was identified that more than 44% of the SME’s in the region had not yet adopted the automated tax compliance returns approach and still carried out their filling returns processes manually. While the SME’s in the U.A.E account for about 94% of the companies in the United Arab Emirates, most of these enterprises did not take part in the tax compliance necessities which accounted for huge losses in the country’s revenue collection (Rumiński, 2018). Two theories that have been identified to provide a rationale on the tax compliance pattern for SME’s in the U.A.E and other regions in the world which include;
- The ability to pay taxation theory
- The proportionate taxation theory
i. The Ability to Pay Taxation Theory
While the concept of VAT may be newly introduced into the operational business sector in the U.A.E., most enterprises have managed to comply with the outlined operational directives and have adopted the use of tax filing software to ensure that they comply with the outlined tax policies (Fattah Odeh, 2015). The ability to pay taxation theory is a progressive taxation approach which advocates that business enterprises should be taxed depending on their ability to make these payments (Ability-To-Pay Taxation, 2020). SME’s are often new business start-ups that are yet to find their footing in the business and the markets that they wish to serve. However, the lack of market establishment does not exempt these small businesses from making tax payments. The ability to pay taxation theory, therefore, ensures that there is the development of effective tax payment policies that ensure that these organizations get taxed with respect to their capability to meet the outlined tax compliance obligations (Al-Ansari, 2014).
The use of tax accounting software is on approach that could be used to ensure that there is a proper implementation of the ability to pay taxation theory. Tax accounting software utilizes basic operational concepts. For an SME to take its tax compliance requirements online, only a few steps are required, i.e. the identification of the accounting software service provider and the upload of the enterprise’s information onto the software (Ability-To-Pay Taxation, 2020). Upon the completion of the above steps, the VAT obligations of the respective business are calculated based on a variety of factors which include; the total revenue generated by the enterprise, the total expenditure incurred in the enterprise operations among other financial obligations (Alrashidi, 2012). Once this data gets uploaded onto the national tax and revenue body, calculations on the tax rates to be made on the SME are made automatically.
There are many accounting software providers in the market who provide business operators with the best possible accounting services (Ability-To-Pay Taxation, 2020). Through process automation, the business owner is just required to make follow-ups of the tax rates, and in the event, there is any discrepancy in the data or miscalculations which is often rare, then they can raise the issue with either the software service provider or the tax collection revenue authorities.
The interaction between the ability to pay taxation theory and the use of taxation software is a suitable tax compliance model that enterprises could use to meet their VAT obligations. While the tax compliance process automation saves on essential time that is used to better other enterprise operation activities, the ability to pay taxation theory ensures that the given enterprise is taxed in accordance to their financial capability and this ensures that over-taxation or other financial obligation to the state that the business incurs does not threaten the financial security of the institution.
Applications of the ability to pay taxation theory
The ability to pay taxation theory is applied across all business operations that comply with their taxation obligations. In the U.A.E for instance, the taxation theory has been proven to be essential in ensuring that there is the development of fair taxation policies based upon the ability to pay taxation theory (Mitev et al. 2017). The country ensures that bigger corporations making more revenue are taxed more as compared to smaller enterprises that are establishing and make fewer returns in terms of the revenue generated. The use of accounting software enhances the effectiveness of the ability to pay taxation policy as the ready availability of the financial statements of the organization at hand ensures that tax return obligations are calculated accordingly (Ability-To-Pay Taxation, 2020). The taxation principle is used even in personal tax compliance, where individuals making more money are taxed more as compared to those making lesser amounts.
While the ability to pay taxation policy has been considered to be ambiguous as we cannot be able to measure “ability”, it is necessary to identify that the principle does not necessarily mean the ability to pay as an arbitrary term. The ability is systematically calculated based on the financial information that the taxpayer provided to the authorities. Based on the amount of revenue generated, it is then possible to determine the tax bracket class under which they fall and therefore apply the taxation obligations accordingly (Miller and Howard, 2019). The taxation principle is therefore applied across the various taxations sectors to ensure that there is the development of fair taxation across business operators in a given region.
In the U.A.E, SME’s have benefited from the application of the ability to pay the taxation principle in that, these firms and organizations are taxed based on their financial capability. As a result, this has helped to ensure that tax discrepancies, such as over-taxation are alleviated (Elmansori, 2014). The efficacy of the principle application has been further enhanced by the development of the use of accounting software. The automation of the tax payment processes through the use of software and other tools has ensured that there is the motivation of SME’s and another business holder to take their tax payment obligations online (Paul and Sadath, 2019). The application of this measure has not only eased the VAT obligation for these firms but also helped to achieve tax compliance obligations among the business operators who wish to benefit from the tax policy.
Implementation of the ability to pay taxation theory
The steps used in the implementation of the ability to pay taxation theory are sequential and are aimed at determining the capability and efficacy of a given taxation system. The initial step in the implementation of the ability to pay taxation theory is the definition of vertical equity (Ability-to-Pay Principle, 2020). Vertical equity is a tax collection policy that operates on the principle that tax return payments increase with an increase in revenue generation. Vertical equity is the basic framework of the ability to pay taxation theory in that; it follows a taxation approach in which an enterprise may start by making lower taxation returns which get adjusted based on the continued increase in their revenue generation.
A key variance in the implementation of the taxation principle is in the tax payer’s tax bracket placement. The tax bracket refers to the rate at which a taxpayer is taxed. The ability to pay taxation policy varies from other taxation policies in that, and the policy takes into account the financial capability of the taxpayer and the return are made in accordance to the revenue generation (Tochitskaya, Glambotskaya and Rakova, 2008). While other taxation principles may maintain a generalized approach in the taxation process, for instance, putting all the SME’s in the same taxation group, the ability to pay taxation theory takes into account the differences in revenue generation by taxpayers and ensures that there is an equitable taxation process development that takes into account the individual differences of each enterprise.
In the U.A.E., the implementation of the tax compliance reforms has seen SME’s get provided with a favourable operational environment that fosters growth and development in the sector (Ganyam and Ivungu, 2019). In other regions in the world, the implementation of the ability to pay policy is evident in the tax compliance reports from these regions. For instance, in the U.S, taxable income up to $9,525 incurs a 10% income tax, while earning over $500,000 face a 37% income tax rate (Ability-to-Pay Principle, 2020). Earnings between those amounts face tax rates as set by income brackets.
Added value and benefits associated with the ability to pay tax theory
The ability to pay tax theory has added value to the tax collection and revenue sector in a variety of ways. For instance, in the U.A.E, the government has managed to diversify its revenue generation avenues through the tax compliance that SME holders and operators (Ability-to-Pay Principle, 2020). A key contribution to the tax compliance has been facilitated the adoption of the ability to pay taxation policy where SME’s have benefited from tax reforms that facilitate fair tax payment policies. More tax compliance by various bodies has meant more revenue generation for the government which has, in turn, helped to improve service delivery in other aspects contributing towards national development (Alzubi, Farea and Al-Dubai, 2017).
Another major benefit that the taxation theory in the SME’s in the U.A.E and other regions in the world is the fact that, the theory facilitates for the development of business-friendly operations thus fostering economic growth and development. This has seen the local investments rates in the region expand significantly which has been attributed to the ease of filling tax obligations through the use of tax accounting software (Faccia, Mosteanu, Fahed and Capitanio, 2019). Business operators have managed to save on valuable time which has been invested in other beneficial aspects of the business.
ii. The proportionate taxation theory
The proportionate taxation theory is another taxation principle that has been incorporated in the taxation reforms for SME’s in the U.A.E and other parts of the world. The taxation principle is implemented with respect to the progressive tax approach whereby, depending on the growth rate of a given enterprise, the proportional tax brackets are placed, and the company is expected to comply with the tax obligations presented (Burns, 2016). The proportionate taxation theory also adopts certain rationalities such as; the purpose of taxation is not only to revenue for the subject but also to facilitate in return (Newman, Charity and Ongayi, 2018). For instance, through the revenue generated through taxation principles, the taxpayers are able to receive public services in return, such as schooling and infrastructure, among other benefits that taxpayers enjoy collectively. A key principle of the proportionate taxation theory is the total inclusivity that the theory incorporates into the taxation system (Hannoon, 2019).
The use of accounting software incorporates many of the proportionate taxation theory principles and has significantly contributed to the provision of better and improved operating conditions for SME’s in the U.A.E and other regions in the world. The proportional tax theory has focused more on the use of incentives to facilitate tax compliance. Theorists in the development of the principle argue that affordable tax caps will see more tax compliance response from the taxpayers (Chawla and Bhatia, 2017). The theory asserts that the more people are able to pay taxes, the more revenue will be generated means those who can pay more must pay taxes it is based on their capabilities.
Applications of the proportionate taxation theory
The proportionate taxation theory has been adopted in the national taxation reforms were in conjunction with accounting software, the two principles have been essential in the ensuring that there is the ease in meeting VAT obligations for SME’s in the UAE (Kasim, Hanafi and Suki, 2016). The maxim formulation was used in the development is the theory where, the key principles used are, “production I accordance to ability, and consumption in accordance to need”. For the SME’s in the U.A.E., the proportionate taxation theory has been essential in that, in the theory’s application, they take into account both the production and consumption aspects of the enterprises (Alsharari, Al-Shboul and Alteneiji, 2020).
The tax bracket placement then follows a critical analysis through which the services provided by an SME or any other organization are categorized as either essential or non- essential. Given that essential service providers may be likely to generate higher revenue and returns, the taxation bracket placement process is conducted in accordance with the revenue produced by the institution at hand (Hannoon, 2019). Non-essential service providers may record anywhere from high to low business returns based on the demand and supply of the service provided. As a result, the use of tax accounting services has now been observed to set in here.
Given that the placement of the given enterprises in a given tax bracket may not be accurate, accounting software has managed to help in easing the above process. When an SME uploads its financial information onto a tax accounting software database, the software makes the necessary calculations, and the tax return obligations are obtained (Albu, Albu and Alexander, 2014). With this data submission to the national revenue authorities, then then the process is automated, and any enterprise can easily meet their tax obligations through the use of these tax accounting software.
Variances in implementing the proportionate tax theory
The proportionate tax theory has variances in the implementation methods that make the tax theory different from other taxation principles. While other taxation approaches have been identified to be heavily reliant on the necessity to maximise the taxation revenue compliance by the taxpayers, the proportionate tax theory provides taxpayers with incentives that motivate tax compliance among the taxpayers (Bakr, 2020). Automation of the tax payment process through the use of tax accounting software has made the adherence to tax payment obligations to SME holders in the UAE easier and also motivated more people to take part in the tax return policies.
While other tax compliance theories may be generalized and place a whole assortment of SME’s in the same tax bracket, the proportionate tax theory accounts for the individual differences of various SME’s based on the kind of services provided and also the nature of the demand and supply of the service or product (Komarev and Preobragenskaya, 2018). As a result, the tax bracket placement is based upon a critical analysis of a given enterprises revenue generation and then calculating the proportionate tax obligations that each enterprise is expected to meet with respect to the financial statements provided (Smulders and Evans, 2017). The individualistic variance in the proportionate tax theory not only increases the workload necessary to compute individual tax returns but also may increase the associated cost through the necessity for more personnel to make the required computations.
However, tax accounting software has come in handy and has significantly helped to ease the VAT obligations that SME’s in the U.A.E are required to adhere to. Business owners are only required to acquire the software and upload their financial data onto the software. Once this has been achieved, only constant updates on the financial reports of the given SME’s is required to ensure that the enterprise is able to easily file their VAT obligations (Smit et al. 2016).
Added value and benefits associated with the proportionate tax theory
The proportionate taxation theory has numerous value additions with respect to compliance with the VAT tax obligations that SME’s are required to meet in the U.A.E and other regions in the world. One value that the theory has introduced in the tax and revenue collection industry could be observed in the ease and efficiency that the principle has introduced in the tax collection principle (Study.com., 2020). The merging between the proportionate tax theory and tax accounting software is a major achievement that has revolutionized tax compliance reforms in the world. Software programs incorporated in the system have significantly reduced the bulk of the workload, and tax computations are computed by the software which has the capability of running independently, thus saving on time and resources.
Another benefit associated with the proportionate tax theory is the provision of incentives which have been identified to be essential in appealing to taxpayers to meet their VAT tax obligations. By ensuring that there is the development of a proper tax collection and compliance mechanism, it has been possible for governments and other administrative bodies to meet their revenue collection objectives. This has consequently ensured that there is an improvement in the quality of services provided to the taxpayers by the governments (Satterthwaite, 2017). The development and implementation of these tax theories into the U.A.E. VAT collection processes have facilitated SME’s with platforms that have enabled them to meet their tax obligations with relative ease. In return, this has enabled the government to meet the set-out goals that were aimed at the diversification of the revenue generation avenues. In return, the U.A.E has viewed the continuous growth in business investments through S.M.E’s due to favourable, easy tax return policies and the improvement of service delivery to the taxpayers of the U.A.E facilitated by the tax collection revenue (Chepkwony, 2017).
List of references
Al-Ansari, Y.D.Y., 2014. Innovation practices as a path to business growth performance: a study of small and medium-sized firms in the emerging UAE market.
Albu, C.N., Albu, N. and Alexander, D., 2014. When global accounting standards meet the local context—Insights from an emerging economy. Critical Perspectives on Accounting, 25(6), pp.489-510.
Alrashidi, A., 2012. UAE SME. American Journal of Economics, 2(6), pp.132-135.
Alsharari, N.M., Al-Shboul, M. and Alteneiji, S., 2020. Implementation of cloud ERP in the SME: evidence from UAE. Journal of Small Business and Enterprise Development.
Alzubi, M.M., Farea, M.M. and Al-Dubai, M.M., 2017. The Mediating Role of Awareness in the Intention to Use Internet Banking Among SMEs in YEMEN. The Journal of Internet Banking and Commerce, 22(2), pp.1-10.
Bakr, S.A., 2020. The Adoption of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) in the Kingdom of Saudi Arabia (Doctoral dissertation, Royal Holloway, University of London).
Barnes, M.R., Van Niekerk, C.T., Gool, A., Groener, W.J., Lee, T., Moola, Z., Bruwer, J.P. and Smit, Y., 2016. The potential influence of value-added tax law amendments on the existence of e-service providing SMMEs in South Africa.
Budiarto, D.S. and Prabowo, M.A., 2015. Accounting information systems alignment and SMEs performance: A literature review. International Journal of Management, Economics and Social Sciences, 4(2), p.58.
Burns, P., 2016. Entrepreneurship and small business. Palgrave Macmillan Limited.
Chawla, N.T. and Bhatia, H., 2017. A Review of Ease of Doing Business for New Age Entrepreneurs in India. Journal of Entrepreneurship and Management, 6(1), p.39.
Chepkwony, C.C., 2017. Auditees case-selection model for evaluating taxpayer corporate tax compliance (Doctoral dissertation, Strathmore University).
Almansor, E., 2014. Fostering innovation and entrepreneurship in Small and Medium Enterprises (SMEs) through business incubators in the Arab world (Doctoral dissertation, Nottingham Trent University).
Faccia, A., Munteanu, N.R., Fahed, M. and Capitanio, F., 2019, August. Accounting Information Systems and ERP in the UAE: An Assessment of the Current and Future Challenges to Handle Big Data. In Proceedings of the 2019 3rd International Conference on Cloud and Big Data Computing (pp. 90-94).
Fattah Odeh, A.A., 2015. Exploring the Quality of SME Audits in the UAE.
Ganyam, A.I. and Ivungu, J.A., 2019. Effect of accounting information system on the financial performance of firms: A review of the literature. Journal of Business and Management, 21(5), pp.39-49.
Hannoon, A., 2019. Assessing the role of factors affecting the adoption of VAT-compliant accounting systems. Management Science Letters, 9(9), pp.1439-1450.
Hannoon, A., 2019. Assessing the role of factors affecting the adoption of VAT-compliant accounting systems. Management Science Letters, 9(9), pp.1439-1450.
Investopedia. 2020. Ability-To-Pay Taxation. [online] Available at: <https://www.investopedia.com/terms/a/ability-to-pay-taxation.asp> [Accessed 22 April 2020].
Jovanov, T., Sofijanova, E., Davcev, L., Temjanovski, R. and Mitev, G., 2017. Make it happen: business steps for competitive market positioning of SMEs in developing economy.
Kasim, M.A.B., Hanafi, S.R.B.M. and Suki, N.M., 2016. The relevance of Technology Acceptance Model for the Implementation of Value Added Tax (VAT) In the United Arab Emirates (UAE): Evidence of Distinctive Behavioral Connections.
Komarev, I. and Preobragenskaya, G., 2018. Designing a market-oriented accounting curriculum: A method and an application with GCC data. Available at SSRN 3292924.
Miller, A.H. and Howard, A., 2019. Tax Strategies Employed by Overseas American Individuals and SMEs. The Journal of Social Sciences Research, 5(3), pp.690-699.
Mintz, J., Afram, G. and Goussous, R., Reformulating the Tax Incentive Program: Analysis and Recommendations.
Newman, W., Charity, M. and Ongayi, W., 2018. Literature review on the impact of tax knowledge on tax compliance among small, medium enterprises in a developing country. International Journal of Entrepreneurship.
Paul, L.R. and Sadath, L., 2019, December. Choosing the Right Accounting Software for Organised Retail Environment. In 2019 International Conference on Computational Intelligence and Knowledge Economy (ICCIKE) (pp. 505-510). IEEE.
Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting standards (IFRS) for small and medium-sized enterprises (SMEs). Advances in Accounting, 31(1), pp.165-178.
Rumiński, R., 2018. Business Ventures and Financial Sector in the United Arab Emirates. In Sustainable Cities and Communities Design Handbook (pp. 373-412). Butterworth-Heinemann.
Badruddin, A. and Barghathi, Y., 2018. The impacts of the introduction of VAT on the audit profession and economy in the UAE: Auditors’ perspective. Accounting and Management Information Systems, 17(3), pp.406-439.
Satterthwaite, E.A., 2017. On the Threshold: Smallness and the Value-Added Tax. Colum. J. Tax L., 9, p.177.
Smulders, S. and Evans, C., 2017. Mitigating VAT compliance costs-A developing country perspective. Austl. Tax F., 32, p.283.
Study.com. 2020. [online] Available at: <https://study.com/academy/lesson/ability-to-pay principle-of-taxation-theory-analysis.html> [Accessed 22 April 2020].
Tochitskaya, I., Glambotskaya, A. and Rakova, E., 2008. Small and Medium Business in Belarus. Minsk: IPM Research Center.
Xplaind.com. 2020. Ability-To-Pay Principle. [online] Available at: <https://xplaind.com/514101/ability-to-pay-principle> [Accessed 22 April 2020].