After the introduction of corporate tax in the UAE, there are chains of changes in the business world. It is not just about 9% tax but more than that. Accounting profit is the basis for calculating taxable income. Therefore, there is a strong relationship between accounting and taxable income. However, there are adjustments needed to meet UAE tax compliance. In this blog, we understand how UAE corporate tax affects accounting practices. The new tax regime demands proper documentation that supports the taxable liability, and therefore, accounting information is of prime importance.
How Corporate Tax Affects Accounting Practices in the UAE
In order to grasp how the UAE CT impacts the accounting profession, we need to understand the difference between accounting income and taxable income. For simple reference, taxable income is simply accounting income; however, there are certain adjustments.
Accounting Income
It is profit or loss based on the application of accounting standards, such as IFRS in the UAE. It recognizes or matches revenue and expenses based on the matching principle. Accounting presents the financial performance and financial position of the business in the form of financial statements. The primary financial statements include the income statement and balance sheet.
Taxable Income
In simple terms, taxable income is the 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, there can be certain expenses that are deductible under accounting standards but are not deductible under the tax laws, and vice versa. For instance, tax laws might allow certain tax incentives to specific businesses.
Determining Taxable Income from Accounting Income
Article 20 (clause 2) of the tax law provides adjustments needed in the accounting income to arrive at the taxable income. The adjustments are:
a) Any unrealized gains or losses of assets and liabilities under Clause 3 of Article 20.
b) Exempt income as per the tax law.
c) Tax reliefs as per tax law.
d) Deductions or deductible expenses.
e) Transactions with Related Parties and Connected Persons as specified in Chapter Ten of the tax law.
f) Tax loss relief.
g) Any incentives or special reliefs for a qualifying business activity per Cabinet Decision at the suggestion of the Minister.
h) Any income or expenditure not accounted for in determining the taxable income under the provisions of the tax law will be addressed separately. This will be as per the decision issued by the Cabinet upon the Minister’s recommendation.
i) Any other adjustments specified by the Minister.
Applicable Accounting Standards—Ministerial Decision No. 114
In the UAE, a taxable person must prepare accounts as per International Financial Reporting Standards, commonly known as IFRS. However, a Taxable Person may apply IFRS for small and medium-sized entities, i.e., IFRS for SMEs. This is in the case where the taxable person earns revenue up to AED 50,000,000, i.e., revenue does not exceed AED 50 million.
Furthermore, as a general approach to accounting, businesses usually follow accrual accounting. However, as per Ministerial Decision No. 114, a taxable person can use the cash basis of accounting in preparing financial statements. This is in the case of the following occurrences:
- When a taxable person earns revenue not greater than AED 3,000,000 (United Arab Emirates Dirhams Three Million).
- In other extraordinary instances, it is subject to an application submitted by the person to the authority.
Record Keeping
One of the ways the UAE corporate tax affects accounting practices is the need to maintain and keep records as per the tax law. The goal is to keep the business compliant and avoid penalties. The key points as per Article 56 are given below.
Notwithstanding the provisions of the Tax Procedures Law, 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.
A similar rule applies to an exempt person. The taxable person (exempt person) shall maintain all records that enable the exempt person’s status to be readily ascertained by the authority for seven years following the end of the tax period to which they relate.
Conclusion
The accurate tax liability calculation depends on the accuracy of the books. Therefore, it is necessary to have clean books of accounts. Secondly, as compliance is the goal of every business, it is necessary to stay up to date with tax laws and regulations. Most importantly, tax deductions, exemptions, and other tax reliefs assist in lowering tax liability. Therefore, knowledge of all the tax incentives is necessary to get maximum advantage. The accounting practice needs several changes in its operations. Firstly, they need to tame their services as per the tax laws. Secondly, they need to maintain documentation as per the tax laws. Consulting a tax expert will be a wise decision for businesses to remain compliant and avoid hefty penalties.
Creative Zone Tax & Accounting (CZTA)
The UAE corporate tax affects accounting practices in many ways. If you are at any stage of your business—starting up, growing, or mature—you can seek our services. At CZTA, with our trained team, we provide services from bookkeeping to taxation and even consultancy. Contact us today.
