The UAE federal tax authority issued a guide on the interaction of accounting standards with corporate tax on 6 November 2023. The UAE Federal Tax Authority has been introducing guides and publications on different aspects of UAE corporate tax Law. Moreover, many businesses find it difficult to understand the new guides properly.
Moreover, some understand the wrong implications of the new updates. So, it is not best for businesses to skip the update and stay non-compliant. Also, all businesses must stay informed about the new updates in corporate tax law and accounting standards.
Here are the common issues that businesses face whenever FTA publishes a new corporate tax guide.
- Technical language and jargon
- The lengthy and complex guide
- Frequent changes and updates
- Lack of clarity about the topic
- Lack of proper training and resources
- Impacts on business operations
- Difficulties in interpreting and applying the guides
These factors could be challenging whenever FTA issues a new guide about corporate tax. However, you don’t have to worry because ebs is all here to assist you. Also, you can get detailed guidance about the guides from the best accounting and bookkeeping companies in UAE.
Purpose of the Corporate Tax Guide
Accounting standards are a set of rules and guidelines that companies follow while preparing their financial statements. Also, the purpose of accounting standards is to ensure that financial statements are accurate and fair. So, the purpose of the corporate tax guide is to provide tax professionals with a proper understanding of the interaction between accounting standards and corporate tax.
The guide covers a wide range of topics, which include:
- The application of accounting standards to corporate tax
- Preparation of tax returns and other tax documentation
- The impacts of changes in accounting standards on corporate tax
- The resolution of tax disputes
Who should use the corporate tax guide?
The corporate tax guide is an effective resource for a wide range of tax professionals, which includes:
- Tax lawyers
- Tax compliance officers
- Corporate tax managers
- Tax accountants
- Tax auditors
Overview of UAE corporate tax
The UAE introduced a federal corporate tax system that is effective from June 1, 2023. Also, the new tax regime applies to businesses operating in the UAE. You can calculate the taxable income for corporate tax based on financial statements. You should prepare these financial statements in accordance with the International Financial Standards or International Financial Reporting Standards for Small and Medium-sized Entities.
The standard corporate tax rate is 9% in the UAE. However, businesses with an annual profit rate of less than AED 375,000 are exempt from corporate tax.
The following entities are considered taxable persons under the UAE corporate tax law:
- Individuals carrying on business in the UAE
- Partnerships
- Foreign companies with a permanent establishment in the UAE
- Companies incorporated in the UAE
The taxable base of corporate tax is the total revenue of a taxable person minus allowable expenses and deductions.
Also, taxable persons have to file tax returns with the FTA on an annual basis.
Accepted Accounting and Reporting Standards
The UAE corporate tax law requires that taxable persons use either IFRS or IFRS SMEs to prepare their financial statements for corporate tax purposes. The only accounting standards in the UAE for corporate tax purposes are the IFRS and IFRS for SMEs.
Taxable Persons that derive Revenue not exceeding AED 50 million in a Tax Period must use IFRS for SMEs. However, IFRS for SMEs should not be used as default. The Taxable person must use the IFRS only if they satisfy the Revenue requirements.
Taxable persons need to use IFRS or IFRS for SMEs to calculate Taxable income under the corporate tax law. If you fail to comply, then it will be viewed as a violation of the corporate tax law. It can also result in administrative penalties.
Here are some of the important takeaways about the tax groups.
- Tax groups must prepare a consolidated financial statement. They must use IFRS or IFRS for SMEs to determine their taxable income.
- If a Tax Group’s consolidated revenue exceeds AED 50 million, its consolidated financial statements must be audited.
- Subsidiaries and parent companies don’t need to have their separate financial statements audited even if their revenue exceeds AED 50 million.
Accounting methods
Accrual basis of accounting
Expenditure and revenue are recognized when they are incurred or earned, not when payments are made or received.
Revenue and expenses are included in the taxable income in the tax period in which they are incurred and earned.
Cash basis of accounting
You can recognize the Revenue and expenditure in the tax period in which the amount is paid or received.
Companies with revenue exceeding AED3 million must use the accrual basis of accounting.
Small business relief
Businesses with revenue not exceeding AED 3 million can elect for small business relief. Also, it must prepare financial statements using the cash basis of accounting.
Realisation basis of accounting
The corporate tax guide by FTA is in detail and explains further about the realisation basis of accounting as well. Let’s look at some important highlights of the realisation basis of accounting.
Realised and unrealised
Realised gains are converted into consideration received, such as cash, through the completion of a transaction.
Unrealised gains are not converted into consideration and arise from their items subject to fair value accounting.
Fair value accounting
It estimates the price at which a transaction to transfer a liability or sell an asset would occur under market conditions.
Realisation Basis for Corporate Tax Purposes
Its gains and losses are determined based on revaluation or other changes in book value. Taxable people can elect to take into account gains and losses on a realisation basis.
Moreover, Disposal, sale, transfer, settlement, and complete worthlessness of an asset constitute realisation. Also, settlement, transfer, assignment, and forgiveness of a liability.
Most importantly, realisation basis of accounting gains and losses is determined on the basis of revaluation or other changes in book value. Taxable Persons can elect to take into account gains and losses on a realisation basis.
Also, fair value accounting estimates the price at which a transaction to sell an asset or transfer a liability would occur under market conditions.
Interaction with corporate tax
Unrealised losses or gains arising from a change in the value of an asset or liability are recorded in the financial statements. Also, even when no transaction to realise such losses or gains has yet taken place.
The election to sue the realisation basis is irrevocable. FTA may revoke it under exceptional circumstances and pursuant to approval by the FTA.
Upon realisation, unreaslised gains or losses are in the taxable income.
Conclusion
We discussed the main points that are in the corporate tax guide. This blog outlined the calculation of taxable income based on financial statements prepared in adherence to IFRS. Also, the blog provided a comprehensive overview of the complexities of corporate tax and accounting standards. However, it is quite difficult to cover all the points in the blog post. It is advisable to contact the best accounting and bookkeeping companies in UAE, such as ebs. You can discuss all the requirements in detail. ebs provides one of the best corporate tax services in UAE.
Moreover, we also provide other services such as accounting and bookkeeping services, Auditing, Due Diligence audit services, and many more. Also, you should get in touch with our experts to discuss more about our services and contact us today.
FAQs
What are the accounting standards that the Taxable Persons in the UAE must follow?
In addition, taxable persons deriving revenue exceeding AED 50 million during the relevant tax period and all Qualifying Free Zone Persons need to maintain and prepare audited Financial Statements for the purposes of the corporate tax. Also, a UAE-registered auditor should perform the audit.
Can Taxable Persons use the Cash Basis of Accounting?
Significantly, the taxable Persons with revenue exceeding AED 3 million must use the accrual basis of accounting. However, there is potential for this to qualify as an “exceptional circumstance” for which you can make an application, and the FTA may approve or not the continued use of the Cash Basis of Accounting.
What is the Realisation Basis of Accounting?
Moreover, the relaisation basis of accounting is an option available to a taxable person to determine losses and gains on a realisation basis rather than on the basis of revaluation or other change in book value.