The recent release of a new guide by the Federal Tax Authority (FTA) in the UAE outlines the procedure for calculating taxable income for UAE taxpayers. Proficiency in determining taxable income is essential for adhering to the UAE’s tax statutes, and the FTA’s updated guidelines are designed to offer clear direction in this domain. This article delves into previously ambiguous aspects now clarified in the guide, facilitating a smoother process for preparing and submitting corporate tax returns.
The guide is divided into five sections: Glossary, introduction, overview, key concepts, and case studies. In the glossary section, essential terms are defined in alphabetical order along with detailed explanations. The introduction section sets out the guide’s objective of providing further assistance to taxpayers in accurately computing their taxable income and correctly filing their returns.
The summary section provides a summary of the guide, featuring three templates. One of these templates is of significant importance for computing taxable income. By using this template, taxpayers can initiate the process with their accounting net profits/losses and then proceed to make a series of adjustments including considerations for unrealized gains/losses, exempt income, reliefs, non-allowable expenses, related party adjustments, and other relevant factors to arrive at their taxable income/loss.
The fourth section, which is a crucial area, provides an in-depth discussion on the calculation of taxable income. The guide emphasizes that taxpayers should commence with their net accounting profit/loss. Before commencing this process, it is essential for the taxpayer to determine their accounting profit/loss using either the cash basis or accrual basis of accounting as mandated by law. Additionally, if their annual revenue exceeds Dhs 50 million, they must have their financial records audited. In the case of juridical persons registered outside the UAE but controlled and managed from within the UAE, it raises the question of whether they are obligated to have their financial statements audited by UAE auditors? The guide stipulates that companies established in the UAE or operating in the UAE through a permanent establishment are only mandated to have their financial statements audited by a UAE-registered auditor.
The section also discusses the tax period and any modifications to it, the treatment of exempt income, the choice to opt either the realization or keep following the unrealization approach for gains and losses, and whether this applies to all assets and liabilities or solely to assets held in capital accounts. Detailed information is provided on the handling of dividend income by categorizing dividend receipts from resident and foreign juridical persons. Dividend income received from resident juridical persons is exempt from corporate tax unconditionally, whereas specific conditions apply to dividends received from foreign juridical persons.
Comprehensive instructions have been outlined regarding the deductibility of expenses. The guidelines specify that expenses incurred solely for business purposes are fully deductible, except when they pertain to exempt income. In cases of shared expenses, a proportional claim can be made by utilizing allocation keys based on cause-and-effect relationships, with the condition that the allocation justifies the benefit received.
According to the guide, there is generally no distinction between accounting and tax depreciation (with some exceptions). Staff salaries can be claimed at market rates, except when drawn by a natural person for themselves. Employee entertainment expenses are fully allowed, while other forms of entertainment are 50% claimable. Pre-reincorporation and pre-trading expenses are permissible, and provisions are considered claimable expenses. Notably, when provisions are reversed, the reversal becomes taxable. It is crucial to emphasize that if a provision was initially recorded before a taxable person’s first tax period and later reversed after the person becomes subject to corporate tax, the reversal becomes taxable when the credit is reflected in the financial statements.
An excellent explanation is given on interest, detailing the process to determine net interest and calculate the adjusted EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). A specific template has been provided for the calculation of adjusted EBITDA.
Extensive discussions have been held on losses, reliefs, credits, and more. According to the guide, the priority for the withholding tax credit will supersede the foreign tax credit.
In the fifth section, nine case studies are featured, starting with factual scenarios and concluding with explanatory notes on the calculation of taxable income and tax liabilities. These case studies illustrate the application of corporate tax using hypothetical figures, offering a detailed insight into the legal application.
It is highly recommended to review the guide for a comprehensive understanding of the practical implementation of UAE corporate tax.
(Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above article is not an official view of Khaleej Times but an opinion of the writer. For any clarification, please feel free to contact him at [email protected])