With the introduction of Corporate Tax (CT) in the UAE, there is a demand on each business to be precise in accounting and comply with tax regulations. All businesses should ensure accuracy in reporting and prepare well in advance to avoid last-minute hassles in filing their taxes without glitches with the tax authorities. The guide below addresses key accounting considerations that companies need to look into when preparing for the new UAE corporate tax regime.
1. Eliminating Assets and Liabilities Not Belonging to the Entity
In multi-entity operations or a group of companies, transactions between the entities may introduce errors such as recording assets or liabilities on the wrong company's books of accounts. A company might pay for sales sold by others. Unless part of a tax group, each company will be treated separately as a legal entity, so all such transactions will need to be adjusted. Ensuring the financial statements present only the assets, liabilities, and income of the respective entity will prevent the misrepresentation of financial information, hence compliance.
2. Adjusting for Personal Expenditures and Income
Personal expenses of shareholders, employees, or any other individuals cannot be included as business expenses. The transactions should be excluded from the financial statements and properly allocated in personal accounts. It avoids overstatement of the company expenses or income; hence, financial statements will represent the operations of the business without covering personal activities.
3. Provisioning for Asset and Inventory Impairments
Under IFRS, the value of inventory shall be maintained at the lower cost or NRV and other assets need to be evaluated for impairment. Therefore, companies have to report on impairment in relation to the carrying values of the inventory and the carrying values of other assets as well, like receivables and fixed assets. It prevents asset valuation that results in overstating taxable income.
4. Assessing Expected Credit Losses (ECL)
Companies must measure and provide for expected credit losses (ECL) on receivables under IFRS 9. This involves an assessment of the probability of non-payment, including consideration of customers' financial health and historical collection performance. Through such recognition of these potential losses, companies ensure their financial statements faithfully represent the risk of non-payment and hence avoid over-reporting taxable income.
5. Managing Deferred Tax Assets and Liabilities
Deferred taxes arise because of differences between the accounting and tax treatments of assets and liabilities. Entities need to maintain schedules that track the recognition and reversal of deferred tax assets and liabilities in the realization of gains from assets that ultimately will be subject to taxation. Proper recognition of deferred tax positions is very important in avoiding differences in taxable income and ensuring the accuracy of tax filings.
6. Ensuring Accurate Revenue Recognition in Accordance with IFRS
Under IFRS 15, entities recognize revenue when control of goods or services is transferred to the customer. Revenue should be recognized at the appropriate time so that the tax year is properly aligned and taxable income is impacted accordingly. Proper revenue recognition is important for compliance with both IFRS and tax regulations.
7. Accounting for Right of Use Assets and Lease Liabilities
In accordance with IFRS 16, most leases require companies to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet. This brings bookkeeping requirements of maintaining depreciation schedules for ROU assets and accounting for interest and expense related to lease liabilities. These entries affect the financial position of the company and need to be properly reflected to ensure that tax computations are accurately performed.
8. Making Provisions for Taxes and Identifying Tax Deductions
Provisions for tax payable should be ensured by the company, including both current and deferred tax obligations. The financial statements should also contain non-deductible expenses and exempt income identification for tax reporting purposes. It segregates such items to enable businesses to correctly estimate their taxable income under tax laws.
9. Maintaining Transfer Pricing Compliance
For businesses, adhering to UAE transfer pricing rules is essential. Companies with annual revenues of AED 200 million or more must maintain comprehensive Transfer Pricing (TP) documentation. This includes a Master File (overview of the multinational enterprise’s structure and operations) and a Local File (detailed information on local transactions and pricing methods. Proper documentation demonstrates compliance with the arm’s length principle (ALP) and minimizes risks of disputes with tax authorities.
10. Preparing Comprehensive Tax Documentation
Before filing taxes, companies should organize a comprehensive Tax File with all the relevant documents that support their tax calculations, adjustments, provisions, and computations. The file is evidence of the company's status regarding taxation and would be useful during a tax audit, since the process for assessment of the taxes may happen even seven years after filing. Companies also need to be cognizant of the Audit requirements depending on the turnover limits and further comply with the specific rules applicable to Qualifying Free Zone Persons, since an understanding of such requirements is indispensable for preparing complete and accurate tax filings.
Conclusion
In light of the corporate tax regime in the UAE, businesses need to ensure that their financial statements are accurate and compliant with tax regulations. The accounting considerations mentioned are very important for the correct reporting of taxable income and liabilities and are subject to certain terms and conditions as outlined by the UAE government. By managing intercompany transactions, creating provisions for impairments, and following revenue recognition standards, companies can reduce errors in their tax filings and be better prepared in case of audits. Maintaining proper documentation, including transfer pricing records and tax files, further safeguard as business’s tax position and ensures compliance with UAE tax law.
For expert assistance in navigating UAE corporate tax requirements and ensuring compliance, feel free to contact us today.
