Accounting Standards for Corporate Tax

ACCOUNTING STANDARDS FOR CORPORATE TAX – FTA GUIDELINES

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”) was issued on 3 October 2022 and was published in Issue #737 of the Official Gazette of the United Arab Emirates (“UAE”) on 10 October 2022. The Corporate Tax Law provides the legislative basis for imposing a federal tax on corporations and Business profits (“Corporate Tax”) in the UAE. The provisions of the Corporate Tax Law shall apply to Tax Periods commencing on or after 1 June 2023.

The Federal Tax Authority (FTA) has issued a Guide (CTGACS1) on the accounting standards taxable persons can use for the purpose of corporate tax in the UAE.

Taxable persons must calculate their taxable income using financial statements prepared in accordance with the accounting standards recognized in the UAE.

Accepted Accounting and Reporting Standards

According to the Corporate Tax Law, each taxable entity's taxable income must be calculated individually, relying on appropriately prepared standalone (unconsolidated) Financial Statements for financial reporting, adhering to the Accounting Standards accepted in the UAE for Corporate Tax purposes.

Ministerial Decision No. 114 of 2023 outlines that, for Corporate Tax purposes in the UAE, the exclusive Accounting Standards acknowledged are the International Financial Reporting Standards ("IFRS") and the International Financial Reporting Standard for small and medium-sized entities ("IFRS for SMEs").

International Financial Reporting Standards

Taxable Persons shall use IFRS as the Accounting Standards accepted in the UAE for Corporate Tax purposes. Corporate tax consultants in Dubai can assist businesses in preparing the books of accounts as per the IFRS.

IFRS for SMEs (Small and Medium-sized Enterprises)

Taxable entities, for Corporate Tax purposes, are permitted to utilize the International Financial Reporting Standard for small and medium-sized entities (IFRS for SMEs) if their revenue does not surpass AED 50 million in a given Tax Period. It's essential to note that IFRS for SMEs is not the default Accounting Standard; its use is contingent upon meeting the specified revenue criteria. In instances where the revenue requirement is not met, the standard International Financial Reporting Standards (IFRS) must be employed.

Accounts not prepared under IFRS or IFRS for SMEs

In accordance with the Corporate Tax Law, Taxable Persons must employ either IFRS or IFRS for SMEs, depending on applicability, for the computation of Taxable Income. Neglecting to adhere to this requirement will be considered a breach of the Corporate Tax Law, potentially leading to administrative penalties. However, outside the scope of Corporate Tax, Taxable Persons are allowed to utilize alternative accounting standards, provided that all pertinent calculations and reporting, when mandated, are conducted using IFRS or IFRS for SMEs for Corporate Tax purposes.

Determination of amount and timing of Revenue and expenditure

The Accounting Standards dictate the quantification of revenue and expenditure, along with specifying the timing of their recognition, with the aim of computing Taxable Income. Subsequently, this calculation is subject to any particular adjustments mandated by the Corporate Tax Law for the determination of Taxable Income.

Financial Statements of a Tax Group

A Tax Group is obligated to create consolidated Financial Statements, utilizing either IFRS or IFRS for SMEs, to ascertain the Taxable Income of the Tax Group. This entails preparing standalone Financial Statements by aggregating those of the Parent Company and every Subsidiary within the Tax Group, treating the Tax Group as a unified Taxable Person. It is imperative to consolidate the financial outcomes, assets, and liabilities of all Tax Group members, eliminating any transactions between the Parent Company and its Subsidiaries. The determination of transactions between specific Tax Group members should align with the arm's length principle.

Audit Requirement for Financial Statements

Taxable individuals with revenue exceeding AED 50 million in the pertinent Tax Period and all Qualifying Free Zone Persons, regardless of their revenue level, are obligated to create and uphold audited Financial Statements. The audit of these financial statements must be conducted by an auditor registered in the UAE.

ACCOUNTING METHODS

The UAE corporate tax law permits the utilization of both accrual basis accounting and cash basis accounting, with the respective conditions outlined below:

Accrual Basis of Accounting:

Under the Accrual Basis of Accounting, revenue and expenses are recognized when earned or incurred, regardless of when payments are received or made, or when invoices are received or sent. Revenues and expenses are included in Taxable Income in the Tax Period during which they are earned or incurred.

Cash Basis of Accounting:

The UAE corporate tax law allows taxable persons to adopt the Cash Basis of Accounting under the following circumstances:

1. Revenue does not exceed AED 3 million within the relevant Tax Period; or

2. In exceptional cases, subject to an application submitted by the Person to the FTA.

For cases where the revenue does not exceed AED 3 million, individuals can apply the Cash Basis of Accounting without requiring a submission to the FTA. Corporate tax consultants in Dubai are available to assist taxable persons in preparing financial statements using the Cash Basis of Accounting.

A thorough grasp of approved accounting standards and methodologies is crucial for businesses to guarantee compliance with corporate tax regulations in the UAE. Nevertheless, obtaining professional guidance is essential for ensuring proper adherence to UAE corporate tax law. Experts at AL WAHAT ACCOUNTS & INTERNAL AUDIT SERVICES are well-equipped to assist you in navigating all aspects related to corporate tax.