On November 9, 2023, the Foreign Trade Authority (FTA) published a complete guideline titled “Accounting Standards and Interaction with Corporate Tax” in relation to the implementation of the Corporate Tax in the United Arab Emirates (UAE).
It is of the utmost importance for organisations to have a comprehensive understanding of the standards in order to achieve the desirable outcomes of responsible financial practices and seamless compliance.
What is the purpose of this guide?
This general guide provides a comprehensive and in-depth explanation of the applicability of accounting standards with regard to corporate tax, despite the fact that it is not a legally enforceable document. A summary of the Accepted Accounting Standards, accounting procedures for computing corporate tax, accounting adjustments, audit requirements, and the preparation of financial statements are all included in this document.
Accepted Accounting and Reporting Standard (IFRS) and IFRS for Small and Medium-Sized Enterprises
IFRS, which stands for the International Financial Reporting system, is the generally recognised accounting system for ensuring compliance with corporate tax laws. However, if a taxable person’s revenue during a tax period does not exceed fifty million AED, then they are eligible to adopt the International Financial Reporting Standard for Small and Medium Sized Businesses, also known as IFRS for SMEs. It is important to note that the International Financial Reporting Standards (IFRS) for Small and Medium-Sized Enterprises (SMEs) should not be utilised as the default accounting standard. The Taxable Person may only apply IFRS for SMEs if they satisfy the requirement set out by the Revenue. In cases where the criteria is not met, the International Financial Reporting Standards (IFRS) will be utilised.
According to the law governing corporate taxes, the determination of taxable income by a taxable person must be carried out independently on the basis of standalone (unconsolidated) financial statements (using IFRS or IFRS for SMEs), which must be prepared in compliance with corporate tax.
The Methods of Accounting
The following are the accounting procedures that are explained in the guidelines:
- Accounting based on the accrual method
- Method of accounting based on cash
- A basis for accounting based on realisation
- In addition, their eligibility, application, and adjustment in accordance with the Corporate Tax are reviewed.
Accounting based on the accrual method
When using this technique of financial accounting, revenues and expenses are recognised at the time that they are generated or incurred, as opposed to when payments are received or made.
Method of Accounting Based on Cash
Cash basis accounting refers to the practice of recording or counting revenue and expenditures only when the cash is received or paid. This approach is also known as cash basis accounting. This style of accounting is applicable to the recognition of both revenue and expenditures in the same precise manner. In addition to this, the Cash Basis of Accounting does not have a balance sheet in its framework.
A person’s revenue must not exceed three million AED during the relevant tax period in order for them to be eligible to use this method of financial accounting for the purpose of calculating their corporate tax liability. Once a Taxable Person’s Revenue in the Tax Period surpasses AED 3 million, they are required to prepare Financial Statements on an accrual basis, with the exception of extraordinary situations, in order to pursue an application submitted by the Taxable Person and to follow the approval of the FTA.
It is possible for a taxable person to employ the cash basis of accounting in certain circumstances, provided that they provide evidence to support their expectation that they will surpass the AED 3 million revenue threshold for only one tax period.
The cash basis of accounting should be switched to the accrual basis of accounting if a taxable person’s revenue during a tax period exceeds AED 3 million. This happens when the taxable person is using the cash basis of accounting. Nevertheless, depending on whether or not the FTA grants approval following the submission of an application, this occurrence can potentially be regarded as an extraordinary event.
The cash basis of accounting can be used to create financial statements for organisations that fall under the category of small businesses. This type of relief is available to companies that have a revenue that is less than three million AED. As an additional point of interest, the Cash Basis of Accounting is utilised in the calculation of revenue in order to ascertain whether or not this accounting system is applicable. In spite of this, the individual has the option of utilising either the International Financial Reporting Standards (IFRS) or the International Financial Reporting Standards for Small and Medium-Sized Enterprises (IFRS for SME) or the Cash Basis of Accounting for calculating revenue for the purpose of Small Business Relief.
Accounting Based on Realisation
The realisation principle, which asserts that revenue can only be recorded or realised if the services or items relevant to that revenue have been given, is the foundation around which this system is built.
When a transaction is completed, gains or losses that have been realised are those that have been transformed into actual cash or consideration. On the other hand, gains or losses that have not been realised are those that have not been converted into consideration.
Businesses have the option of delaying the accounting of gains and losses until after the actual disposition of assets or the settlement of liabilities in order to avoid incurring a tax burden.
The guideline also provides further information regarding the extent of the realisation basis. In addition, the election to utilise the realisation basis for banks and insurance providers, as well as other taxable people, is further upon, including the timing and the possibility of withdrawal of the election.
In the financial statements of a taxable person, any gains or losses that have not yet been realised are disregarded for the purposes of corporate taxation until these gains and losses are realised, which can take place under specific conditions. During the process of determining taxable income using the realisation basis, special adjustments are performed for both assets and liabilities.
Depreciable assets, non-current assets, and non-trading assets are all included in the category of “assets on capital account.” All liabilities that do not result in deductible expenditures for the purposes of corporate taxation are referred to as “liabilities on capital accounts.” These liabilities are sometimes referred to as non-current liabilities. Furthermore, the assets and liabilities that are not also maintained on the capital account are referred to as “assets and liabilities held on revenue account.”
Various Other Modifications to the Accounting Income
There are a number of adjustments that are described in the accounting standard guideline that are related to the overall accounting income. The following is a list of the major elements that were mentioned:
In the context of transactions involving related parties, the principle of arm’s length must be adhered to. This principle is applicable when dealing with transactions that involve related parties. When the consideration paid during transactions between related parties is lower than the market value or exceeds it, adjustments need to be made in order to guarantee that the results will be equivalent to those obtained by parties acting at arm’s length.
In situations where assets or liabilities are transferred between members of the same qualifying group but not as part of a Tax Group, and where there is no gain or loss relief under Article 26 (1) of the corporate tax, certain adjustments need to be made to the transferee’s taxable income. These transactions are referred to as qualifying group transactions. Specified are the changes that take place throughout the process of realising an asset or a liability, as well as modifications that take place other than upon realisation.
Restructuring Relief for Businesses In the event that business restructuring relief is applicable, adjustments must be made to the accounting income in order to eliminate depreciation, amortisation, and any other changes in the value of assets.
This includes Gains that have been realised or losses that have not been realised include gains and losses that are declared in the financial statements but will not be subsequently acknowledged in the income statements. Adjustments are required to be made on their accounting income in order to include these gains or losses.
It is also said in the guideline that in order to avoid double taxation for the purposes of corporate taxes, Parent Companies should substitute the effect of the Equity Method of Accounting with the Cost Method of Accounting if it is employed. Regardless of how it is reflected in the financial statements, a corporate tax deduction cannot be claimed for an expense that does not comply with the specific tax deduction criteria.
Under the Transitional Rule, adjustments are made.
A taxable person’s opening balance sheet will be the same as the closing balance sheet that was created prior to the beginning of the person’s first tax period for the purposes of corporate tax. This is going to be taken into consideration as the starting point for the calculations of the corporate tax.
Whether assets and liabilities be documented on a historical cost basis or a fair value basis determines how asset and liability are handled in the accounting system.
In addition, the transitional criteria that apply to qualifying immovable property and qualifying intangible assets are clarified forth in the guideline. The valuation method and the time apportionment technique are the two ways that can be utilised for the purpose of determining excluded gains for qualifying immovable property. However, the time apportionment method is the sole method that can be utilised for qualifying immovable intangible assets.
It is also possible to make adjustments to the taxable income that is associated with qualifying financial assets and qualifying financial obligations. The exclusion, which applies to both gains and losses, is applicable to both.
According to the ‘look through’ rule, relevant assets and liabilities are taken into consideration in the computations of excluded gains or losses if they are owned by other members of a qualified group or tax group.
It is imperative that the arm’s length concept be adhered to when dealing with transactions involving related parties.
The requirements for auditing financial statements in compliance with the taxes imposed on corporations
Businesses and Qualifying Free Zone Persons: Businesses that had a revenue that was greater than AED 50 million during the relevant tax period, as well as all of the Qualifying Free Zone persons, are responsible for having their financial statements examined by auditors who are registered with the United Arab Emirates.
The tax group. When the consolidated revenue of a tax group is greater than fifty million AED, it is obligatory for that tax group to have their consolidated financial statements audited. In the case of the parent firms and subsidiaries, the Corporate Tax Code does not mandate that their individual Financial Statements be audited, even in the event that a member’s income is greater than fifty million AED.
Funds for private pensions or social security: Funds for private pensions or social security that have been certified by the FTA as being free from corporate tax are required to undergo an audit on a yearly basis. In order to guarantee that the finances are in accordance with the provisions of Ministerial Decision No. 115 of 2023, this is something that needs to be done.
The preparation of financial statements for the tax management group
For the purpose of assessing the Taxable Income of a Tax Group, it is necessary for a Tax Group to prepare consolidated Financial Statements (using either IFRS or IFRS for its Small and Medium-Sized Enterprises). The Financial Statements must therefore be prepared on the basis of an aggregation of the stand-alone Financial Statements of the Parent Company and each Subsidiary that is a member of the Tax Group, with the Tax Group being treated as a single Taxable Person from the perspective of the preparation of the Financial Statements. In order to eliminate any transactions that may have occurred between the Parent Company and each Subsidiary, it is necessary to consolidate the financial outcomes, assets, and liabilities of all members of the Tax Group.
When it comes to obtaining a competitive edge and developing forward-thinking financial plans, we are able to provide you with unrivalled experience and ensure that your company is in full compliance with corporate tax regulation.
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