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UAE Corporate Tax Accounting Standards

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On November 6, 2023, the Ministry of Finance and Federal Tax Authority (FTA) introduced new guidelines regarding accepted accounting standards for Corporate Tax purposes in the UAE.

According to Ministerial Decision no. 114 of 2023:

– Taxable entities must prepare their financial statements following the International Financial Reporting Standards (IFRS).
– Entities with revenue below AED 3 million have the option to use cash basis accounting.
– Entities with revenue below AED 50 million can choose to prepare their financial statements according to either IFRS for SMEs.
– Tax Groups are required to prepare consolidated financial statements adhering to either IFRS or IFRS for SMEs.

Failure to comply with these standards may lead to Corporate Tax violations and subsequent administrative penalties.

Audit requirement for Financial Statements:

Audit requirements for Financial Statements are as follows:

– Taxable individuals or entities exceeding AED 50 million during the relevant Tax Period must maintain Audited Financial Statements.
– For Tax Groups, if the cumulative revenue surpasses AED 50 million, the consolidated Financial Statements must be audited. However, the Corporate Tax law does not mandate separate audits for the Parent Company and its Subsidiary Companies within the Tax Group.
– Additionally, any Qualifying Free Zone entities must also maintain Audited Financial Statements.

Accounting methods:

1. Accrual Basis: Revenue and expenses are recorded when they’re earned or incurred, regardless of when payments are actually made.

2. Cash Basis: Revenue and expenses are recognized only when payments are received or made, respectively.

3. If a Taxable Person exceeds AED 3 million during the Tax Period, they must transition from Cash Basis to Accrual Basis of Accounting.

4. However, exceptions may be granted under extraordinary circumstances at the discretion of the Federal Tax Authority (FTA).

How to Prepare for Implementing Corporate Tax in UAE for your Business?

If your business falls under the purview of the UAE Corporate Tax, there are several essential steps you should take to prepare for its implementation:

1. Consult a Tax Expert: Seek professional guidance from a tax consultant or accounting firm experienced in UAE taxation laws. This will help you understand the corporate tax’s implications for your business and determine the most tax-efficient structure for your operations.

2. Evaluate Your Tax Liability: Calculate your business’s tax liability based on the corporate tax rate. Ensure your financial records are accurate and up-to-date to facilitate this process.

3. Learn the Tax Laws: Familiarize yourself with the corporate tax law, including the procedures for filing tax returns, deadlines, and any available exemptions or deductions your business might qualify for.

4. Upgrade Your Accounting Systems: Ensure your accounting systems and software are capable of managing corporate tax requirements. This includes tracking and recording taxable income, preparing tax returns, and generating tax invoices.

5. Educate Your Staff: Train your staff on the new tax laws and ensure they understand the filing and reporting requirements. Consider utilizing corporate tax training programs available in the UAE for accountants, auditors, or other interested professionals.

6. Plan for Cash Flow Management: Assess the impact of the corporate tax on your cash flow and plan accordingly. Ensure your business maintains sufficient cash reserves to meet its tax obligations.

Steps to implement Corporate Tax UAE

Before implementing Corporate Tax, it is crucial to understand the procedure. Here are the steps to follow:

1. Review and Verify Accounting Books: Assess your accounting books and verify the accuracy of your accounting policies to ensure they align with Corporate Tax liabilities.

2. Determine Expenses and Revenue Items: Identify and evaluate the expenses and revenue items in your financial statements relevant to Corporate Tax.

3. Examine Filing Methods and Reporting Models: Decide whether to file as a Tax group or submit separate Corporate Tax returns for each entity. Evaluate the tax benefits of each reporting method.

4. Assess Legal and Capital Structures: Determine if there is a need to restructure your legal and capital structures, including system and technology infrastructure, to comply with Corporate Tax requirements.

5. Implement Relevant Systems and Technology: Ensure that your systems and technology are capable of addressing the requirements of the Corporate Tax policy.

6.Focus on Transfer Pricing: Pay special attention to transfer pricing requirements, including thorough documentation, particularly for businesses that are growing and expanding.