In the UAE, as the corporate tax is applicable from 1st June 2023, and onwards, there are various aspects that businesses must look to. One of the key areas is the change or effect on accounting services. As the calculation of corporate tax is primarily based on financial information, there is a strong relationship between the two. In this blog,a we detail the impact of corporate tax on accounting functions in the UAE. However, before we move further, let’s understand some basics.
Impact of Corporate Tax on Accounting Function in the UAE
The first and foremost question one should ask is why corporate tax is dependent on accounting information. The answer to this question is available in the section below.
How is Accounting Information Important for Corporate Tax?
A ubiquitous term in taxation is taxable income. A taxable income is an income that is subject to corporate tax. It may or may not be similar to accounting income. This is because taxable income is subject to tax laws and regulations. Therefore, certain expenses can be deductible under accounting standards but not deductible under the tax laws, and vice versa. For instance, tax laws might allow certain tax incentives to specific businesses.
Thus it is evident that taxable income is derivable from accounting income, which is profit or loss as per the business books. This is per the International Financial Reporting Standards (IFRS). However, there are certain areas where tax laws collide with accounting standards, i.e., IFRS. In such a case, accounting income is adjusted, and the result is taxable income. Thus, we can easily say that both accounting and taxation relate in this way.
What Changes Does the Accounting Function Need to Cope with the Corporate Tax Matters?
The role of accounting may not be a legal requirement if seen separately. On the other hand, taxation is a legal requirement for businesses; therefore, entities must remain compliant. As taxation is legal, its backbone, i.e., accounting, needs certain adjustments and additions to aid the compliant environment. So what changes or additions does an accounting function need? Let’s highlight a few of them below.
Tax Team to Comply with New Regulations
Accounting firms now need tax experts on the UAE tax laws. This is because taxation is not simple; it needs proper training and education. Therefore, businesses in the UAE now need tax experts; they can either hire new people or train existing personnel. However, they can also outsource their accounting and tax matters to tax firms such as CZTA. The point here is that entities now need resources to cater to tax responsibilities and comply with the UAE laws.
Enhanced Recording and Documentation
As the tax liability depends on the profit and loss figure (adjusted to become taxable income), it is critical to maintain high-quality business records. The entities must ensure the accurate recording of transactions that will ultimately result in true corporate tax liability. Furthermore, entities must ensure proper recording, archiving, and preservation of business records. A taxable person shall maintain all records and documents for seven (7) years following the end of the tax period to which they relate. The documents include the ones that:
a) Support the information to be provided in a tax return or in any other document to be filed with the authority.
b) Enable the taxable person’s taxable income to be readily determined by the authority.
Tax Adjustments and/or Provision
There are instances where an enterprise might need to adjust its financial statements concerning tax adjustments. These may include recording tax expenses, deferred tax assets and liabilities, and tax provisions. These are some advanced accounting concepts and may need expert knowledge.
Furthermore, the financial statements will now need tax disclosures such as the calculation of tax expense and reconciliation of accounting profit to taxable income.
Proactive for Potential Tax Audits
One impact of corporate tax on accounting function is readiness for potential tax audits. As there is a need to file corporate tax returns, there is a higher likelihood of tax inspections. Therefore, accounting departments need to be more proactive and adaptable to promptly respond to tax-related inquiries by tax authorities.
Other Matters
There are several other matters where there is a need for a change within the processes. For instance, for a capital investment, firms now need to have incorporation of expected tax cash flows to properly calculate the net present values. Furthermore, firms will now focus on tax planning as part of their long-term strategy. Therefore, there is increased collaboration between the accountants, tax experts, and other management people within an organization. This in turn will enhance the overall decision-making process.
Conclusion
The impact of corporate tax on accounting function in the UAE is a new phenomenon from 1st June 2023. There are several areas where the accounting profession needs adjustment or addition in its work. For instance, firms now need to have accurate records of transactions to properly calculate the tax liability. Furthermore, entities must ensure proper filing of documents and preservation in case of a potential demand from the tax authority. Some companies may need to hire new employees who are experts in the field of tax. However, certain businesses may take advantage of existing employees by providing them with on-the-job training. Similarly, there are various areas where the accounting function needs rectification. The collaboration between accountants and tax experts is now the need of every business in the UAE.
Creative Zone Tax & Accounting (CZTA)
Our firm, CZTA, can assist you so that you don’t face any drastic impact of corporate tax on your accounting function. As a by-product, your business operations will be running smoothly in a compliant manner. We have a skilled team in the field of corporate tax; therefore, contact us today with confidence.
