Welcome to the 8th installment of our series offering comprehensive insights into UAE corporate tax. In the realm of business operations, one of the critical areas demanding meticulous attention is accounting standards and the calculation of taxable income. For businesses operating in the United Arab Emirates (UAE), navigating the guidelines set forth by the International Financial Reporting Standards (IFRS) and understanding the rules for determining taxable income are crucial for compliance and effective financial planning.
If you’re just joining us, we recommend starting from the beginning of our series to get a full grasp of the insights we’ve shared so far. You can find the first blog post here.
Accounting Standards: Foundation for Financial Clarity
Applying IFRS for Taxable Persons
Taxable Persons in the UAE should apply the International Financial Reporting Standards (IFRS). However, if their revenue remains under AED 50,000,000, they have the option to utilize the IFRS for Small and Medium-sized Enterprises (SMEs).
Cash Basis of Accounting: Simplifying Recognition
The Cash Basis of Accounting stands as an alternative method where recording income and expenditures upon actual cash receipts and payments. This method offers simplicity, particularly for businesses with revenue not exceeding AED 3,000,000.
Exceptions to Cash Basis Threshold
Should a business exceed the AED 3 million threshold, utilizing the Cash Basis of Accounting is still plausible under exceptional circumstances. This requires an official application approval by the Federal Tax Authority.
Standards for Document Maintenance
Despite no specific standards for entities using the Cash Basis of Accounting, the Federal Tax Authority retains the right to request pertinent supporting documents such as bank statements and receipts.
Consolidated Financial Statements: A Tax Group’s Core
The consolidation of Financial Statements within a Tax Group, as per IFRS, aims to align taxable income calculations. By aggregating standalone Financial Statements of the Parent Company and its Subsidiaries, discrepancies in tax liabilities are minimized.
General Rules for Determining Taxable Income
Defining Taxable Income
Taxable Income, essential for every Tax Period, represents the net profit or loss after adjustments based on the Corporate Tax Law’s stipulated items.
IFRS Compliance for Financial Statements
Businesses within the UAE have to prepare their Financial Statements in adherence to the International Financial Reporting Standards (IFRS). For entities with revenue under AED 50,000,000, utilizing the IFRS for SMEs is permissible.
Accrual Basis vs. Cash Basis
Taxable Persons typically prepare their Financial Statements on an accrual basis, unless the Cash Basis of Accounting is deemed suitable. Ministerial Decision No. 114 of 2023 outlines the circumstances permitting Cash Basis usage. Read more about Accrual vs Cash basis.
Adjustments for Taxable Income Calculation
Calculating Taxable Income involves adjustments such as unrealized gains or losses, exempt income like dividends, and deductions disallowed for Corporate Tax purposes. Transactions with Related Parties and other specified adjustments also play pivotal roles.
Realisation Principle: Key to Taxable Income Timing
The UAE Corporate Tax system aligns with the realisation principle, where income becomes taxable and deductions allowable upon realization of gains or losses. This occurs, for instance, upon asset sales or terminations.
Election for Realisation Basis Method
All Taxable Persons possess the option to elect the realisation basis method, provided their Financial Statements adhere to accrual basis preparation. However, Banks and Insurance Providers can solely elect this method for assets and liabilities on the capital account.
Irrevocability of Election
Once the realisation basis method is elected, it generally remains irrevocable. Exceptions can be considered under extraordinary circumstances with approval from the Federal Tax Authority.
Recognition of Gains and Losses
Taxable Persons with fluctuating asset values may choose among recognizing unrealized gains and losses, or utilizing the realisation basis for assets subject to fair value or impairment accounting, or solely for those on the capital account.
Tax Treatment of Unrealized Gains/Losses
For businesses adopting accrual basis Financial Statements, options exist regarding the UAE Corporate Tax treatment of unrealized gains and losses. These choices impact when these gains and losses become taxable or deductible.
Taxing Capital Gains
In the UAE, capital gains from asset disposals are treated akin to other business income, included in the annual Taxable Income. However, exemptions might apply to capital gains from share sales, subject to specific conditions.
In navigating the realm of accounting standards and methods, businesses must strategically align their practices with the UAE’s regulations. Whether adhering to IFRS, exploring the Cash Basis of Accounting, or electing the realisation basis method, each decision influences the calculation of taxable income. By comprehensively understanding these standards and making informed choices, businesses can navigate tax obligations while optimizing financial outcomes within the legal framework.
To stay updated with Corporate Tax Law and related implementing decisions you can visit this link.
