In the context of taxation, proper books are the backbone of overall tax compliance. Why is it so? The taxable income figure needed to calculate the tax liability is derived from accounting income. So, in simple terms, we start from accounting income, adjust it with tax deductions, and arrive at taxable income. Therefore, the accuracy of accounting figures is crucial for overall tax compliance. In this blog, we discuss the corporate tax and accounting alignment and why there is a need for sound and clean books.
Corporate Tax & Accounting Alignment – The Background
The alignment between the accounting and corporate tax is actually a configuration between accounting standards, such as International Financial Reporting Standards (IFRS), and the Corporate Tax Law. In the UAE, firms usually prepare their books as per the IFRS. However, certain areas are not allowable or are contradictory to the tax laws. Therefore, the accounting income (or net income) may or may not be the same as taxable income. Thus, in many cases, there is a need for adjustments to arrive at the taxable income. If both tax and accounting functions work side-by-side, businesses will reap massive benefits. Let’s discuss these in the next section.
The Importance of Proper Books: Why are Proper Books Necessary?
As we know, the primary source of tax documentation is accounting records. Therefore, proper books will lead to overall tax compliance of an organization. Let’s understand why proper bookkeeping is essential for a comprehensive compliance environment.
Legal Importance
Keeping the books in order and storing them safely is not just the ordinary need of a business, but it is a legal requirement, too. In the UAE, businesses must ensure that the financial statements are prepared in accordance with the relevant accounting standards, such as IFRS. Furthermore, it is their legal obligation to keep the records for at least 7 years from the end of the relevant tax period.
Tax Liability Calculation
Proper record management will result in accurate financial data, which in turn will lead to accurate tax liability calculation. Therefore, if we keep the basics intact and accurate, there will be fewer chances of complexities later in compliance matters. The payment of incorrect tax liability due to improper records might result in penalties. Therefore, the smooth running of a business might be interrupted.
Coordination between Accounting and Tax Departments
The alignment between corporate tax and accounting will result in better coordination between tax and accounting teams. This, in turn, will lead to fewer instances of reporting issues and, of course, a faster closing cycle and smooth tax returns. Accurate and complete financial records will ensure a smooth transfer of data between the two departments. Overall, it will save time and compliance.
Benefits that go Beyond Just Taxation – Audit Readiness & Decision Making
The need for a corporate tax and accounting alignment is necessary to keep the entity compliant with the tax laws. However, strong books will bring benefits to an entity that are beyond just taxation. For instance, accurate financial reporting will assist firms in preparing for the year-end audit. In the UAE, firms operating in the free zones must have audited financials to claim the status of a qualified free zone person and enjoy a 0% corporate tax rate. So, in simpler terms, sometimes proper record-keeping will lead you to audit readiness and also to claim tax incentives.
Furthermore, accounting information is also the backbone of the financial decision-making of an organization. For instance, accurate and informed information is needed to evaluate cash flows, profitability, financial analysis, and so on. Thus, working proactively to keep the books in order will lead you not only to compliance but it will also to control over decision-making.
Conclusion
As a business, it is important to evaluate if its accounting and tax functions are properly aligned. The key here is to understand the significance of complete and accurate books. Accurate accounting records will result in overall tax compliance and fewer chances of penalties. Furthermore, there are many other benefits than just tax compliance. For instance, entities with better record-keeping will have better transparency and audit readiness. Moreover, there are tax incentives that require audited financial statements, such as for a qualified free zone person. Overall, tax compliance will be swift and achievable if there is proper coordination between tax and accounting teams.
Creative Zone Tax & Accounting (CZTA)
For better tax compliance, your business will need to align its books with tax laws. Our team always ensures that an entity keeps its processes and systems efficient to ensure the smooth running of a business. At Creative Zone Tax & Accounting (CZTA), we help businesses establish strong accounting systems that guarantee full tax compliance and long-term success. Contact us today.
