Corporate Tax Guide: Accounting Standards and Interaction with Corporate Tax

Federal Tax Authority (FTA) has issued the Corporate Tax Guide: Accounting Standards and Interaction with Corporate Tax. This recently issued Corporate Tax Guide is specifically designed to provide comprehensive guidance on the interaction between Accounting Standards and Corporate Tax.

Overview

Some of the key highlights are as follows:

• International Financial Reporting Standard for small and medium-sized entities (“IFRS for SMEs”) should not be used as the default Accounting Standard. The Taxable Person may use IFRS for SMEs only if the revenue does not exceed AED 50 million in a tax period. Where the requirement is not satisfied, International Financial Reporting Standards (“IFRS”) shall be used.

• Under Corporate Tax Law, Taxable Persons are required to use IFRS or IFRS for SMEs (as applicable) to calculate Taxable Income. Failure to do so will lead to violation of the Corporate Tax Law and may attract administrative penalties under Tax Procedures Law.

• In case of Tax grouping, consolidated financial statements needs to be prepared for determining the taxable income of a Tax group by eliminating any transaction between the Parent Company and each subsidiary, as if the Tax Group were a single Taxable person. If a Tax Group derives Revenue exceeding AED 50 million on a consolidated basis during the relevant Tax Period, the consolidated Financial Statements of the Tax Group (as the Taxable Person) will be required to be audited. The Parent Company and Subsidiary Company will not be required to maintain separate audited financials even if the revenue exceeds AED 50 Million.

• A Taxable person can apply Cash Basis of Accounting, in case where Revenue does not exceed AED 3 million, without a need to submit an application to the FTA. 

• Once a Taxable Person’s Revenue exceeds AED 3 million in the Tax Period, they must prepare Financial Statements on an accrual basis, except under exceptional circumstances and following the FTA’s approval.

• While submitting first Tax Return, Taxable Person has to make an election for the realization basis. Such election if made is irrevocable. However, under exceptional circumstances and pursuant to FTA approval, it may be revoked.

• Transactions and arrangements between Related Parties must meet the arm’s length principle. In case of a transfer of an asset or a liability between Related Parties, if the consideration paid exceeds or is lower than the Market Value, adjustments shall be made by the transferor and the transferee, to achieve the arm’s length result.

• The parent company should replace the effect of Equity Method of Accounting, if applied, with the effect of Cost Method of Accounting for Corporate Tax purposes. This means that while calculating Taxable Income, the Parent Company should not include the share of income or loss of the equity accounted investment. Instead, only Dividends and other profit distributions (which may qualify for exemption under Article 22 of the Corporate Tax Law) should be recognized for Corporate Tax purposes.

• Under Transitional rules, market valuation needs to be determined for computing the excluded amount of the gain in relation to Qualifying Immovable Property under market valuation method, The Market Value at the start of the first Tax Period shall be determined by the relevant government competent authority in the UAE such as the Department of Municipalities and Transport (DMA) in Abu Dhabi, the Dubai Land Department (DLD) in Dubai, or similar authorities for each Emirate. It may also be determined by outsourced third parties authorised by the government competent authority.

• Items in the opening balance sheet relating to transactions with Related Parties, such as other group companies, should reflect arm’s length market pricing, consistent with the arm’s length principle. Where this is not the case, any deductible or taxable amounts in the first and subsequent Tax Periods (where relevant) should be adjusted to reflect the arm’s length basis.