Sheikh Sultan issues law on natural resources companies’ tax

His Highness Dr Sheikh Sultan Bin Mohammed Al Qasimi, Supreme Council Member and Ruler of Sharjah, has issued a law on corporate tax for both extractive and non-extractive natural resources in the emirate of Sharjah.

The law stipulates that companies engaged in extractive activities and those involved in non-extractive natural resources are subject to the tax specified in accordance with the provisions of this law.

The law specifies that the corporate tax for extractive companies is as follows:

1. A tax of 20 per cent will be imposed on extractive companies based on the taxable base, following the mechanisms and schedules defined in agreements made between the Oil Department and the company.

2. The taxable base for companies engaged in extractive activities will be calculated based on the total share of the company from the value of produced oil and gas, in accordance with the formula dividing the total royalty and any other agreed-upon participation in the division between the Oil Department and the company.

3. Any amounts for royalties, bonuses due, and annual rent for any concession area operated by extractive companies will be determined according to the agreement signed between the Oil Department and those companies.

According to the law, the corporate tax for non-extractive natural resource companies is as follows:

1. A tax of 20 per cent is imposed on non-extractive natural resource companies based on the taxable base for each financial year.

2. The taxable base for non-extractive natural resource companies is calculated based on the company's net taxable profits under the provisions of this law, after making necessary adjustments as follows:

a. The value of asset depreciation may be deducted from the taxable base, with non-current asset depreciation calculated at a rate of 20 per cent annually. If the company follows an international standard for preparing its financial statements that results in changes to the accounting methods for depreciation, it may deduct the depreciation amount according to the rates specified in the financial statements, provided that the finance department approves this during the audit and ensures that the intention is not to reduce profits.

b. Tax losses may be deducted from the taxable base for subsequent tax periods for calculating the taxable base for that tax period. Additionally, tax losses may be carried forward to unspecified future periods.

Under the law, companies subject to its provisions, if they are liable under applicable federal legislation for any type of direct tax, are granted a deduction from the tax due under this law equal to any direct federal tax that is proven to have been paid to the state by the company.

The law specifies the tax payment procedures as follows:

1. Extractive companies subject to this law must pay the due tax amount to the Oil Department in accordance with the mechanisms and schedules defined in the agreement between the Oil Department and the company.

2. Non-extractive natural resource companies subject to the provisions of this law must pay the due tax amount to the finance department according to the declaration submitted for the financial year, no later than the last day of the ninth month following the end of the next financial year.

3. If companies subject to this law fail to pay the due tax amount by the specified deadlines in clauses (1) and (2) of this article, a financial penalty of 1 percent of the outstanding taxable base will be imposed for every 30 days of delay until the full payment of the due tax amount and any applicable penalties for the delay.

The law states the following regarding audits:

1. The finance department has the right to audit all records and documents related to the revenues of companies subject to this law or to authorise anyone it deems appropriate to carry out the audit, in accordance with what the finance department considers necessary for implementing the provisions of this law.

2. Immediately after completing the audit for the relevant financial year, the finance department must prepare a report on the tax amount due from the company and determine if there are any outstanding amounts owed. This report becomes binding on the company after 15 days from the date it is delivered to them.

3. If the audit by the finance department reveals outstanding tax differences owed under the provisions of this law, the company must pay the amount due resulting from the audit within 15 days from the date the company receives the report mentioned in clause (2) of this article.

4. If the company does not comply with the payment of outstanding tax differences resulting from the audit by the finance department by the deadline specified in clause (3) of this article, a financial penalty of 2 percent of the outstanding tax differences will be imposed for every 30 days of delay until the full payment of the outstanding tax amount and any penalties incurred due to the delay, unless the company appeals the decision or payment order to the Oil Department or the finance department.

5. A financial penalty of 5 per cent of the total due tax amount will be imposed on the company if the finance department determines that there were financial violations intentionally committed by the company for the purpose of tax evasion or avoiding the payment of the tax imposed under the provisions of this law.

The law outlines the scope of appeals as follows:

1. Extractive companies may file an objection by submitting a request to the Oil Department, while non-extractive natural resource companies may submit a request to the finance department, each according to its jurisdiction under the provisions of this law. This objection can be made against any decision, payment order, or assessment of the tax imposed under this law within 20 days from the date the company receives the decision, order, or assessment related to the tax in question. The Oil Department or the finance department will issue a decision on the matter within 15 days from the date the objection request is filed with them.

2. The company must pay any outstanding balance of tax amounts within 20 days from the date it is notified of the final decision regarding the objection. If payment is not made, a financial penalty of 2 per cent of the outstanding balance will be imposed for every 30 days of delay until the full payment of the due tax amount and any penalties incurred due to the delay.

The law refers to the appeals process as follows:

1. A committee will be formed by a decision from the head of the finance department, consisting of a chair and two members, all of whom must have tax expertise. This committee will review appeals submitted by the company regarding any decisions made on objection requests according to Article (8) of this law. A designated employee appointed by the head of the finance department will serve as the secretary, and the decision issued by the head of the finance department will define the committee's system and procedures.

2. The company may appeal decisions made on objection requests according to Article (8) of this law by submitting a written appeal to the committee mentioned in clause (1) of this article within 20 days from the date those decisions are issued.

3. The submission of an objection request and the payment of tax liabilities under Article (8) of this law are considered essential conditions for the acceptance of appeals before the competent committee.

4. The committee will review the appeals submitted to it and issue its decisions within 15 days from the date the appeals are registered with them. The committee's decisions in this regard are final.

5. Tax dispute claims will not be accepted before the competent courts if they have not been appealed before the committee mentioned in this article.

According to the law, the company's payment of the due tax under the provisions of this law is a prerequisite for renewing its concession rights or commercial licence in the emirate, as well as for its registration in the commercial register.

Companies subject to tax under this law are required to maintain records and supporting documents for the accuracy of the information provided in financial statements or any other tax-related statements for a period of 7 years from the date those financial statements are issued.

Taxable companies must also ensure that authorised representatives of the Oil Department or the finance department can easily access the required records and financial statements.

In the case of the company being liquidated, it must submit a tax declaration for its operations during the year it ceased operations, up to the date of cessation, according to the rules for submitting annual declarations, within 90 days from the date it stopped operations.

According to the law, the finance department and the Oil Department must maintain the confidentiality of declarations and correspondence submitted by taxable companies for the purposes of implementing the provisions of this law.

This information may not be made available for review by any person except as required for audit and review purposes.

WAM