Determination of taxable income is one of the key aspects of corporate tax in the UAE. Finding out accounting net profit, considering tax treatments of different categories of expenditure, unrealised gains and losses, exempt income, et cetera, everything is involved in the determination of taxable income.
According to Article 20 of the corporate tax (CT) law, the determination of taxable income is done on the basis of standalone and accurate financial statements that are prepared according to the accounting standards set for financial reporting purposes in a particular jurisdiction.
To determine your taxable income, it’s critical to know and comprehend what financial reporting standards you have to use in your financial reporting as a taxable person.
Let Tax Gian, one of the expert corporate tax consultants in the UAE, walk you through the details of financial reporting standards for the purposes of CT in the UAE.
Commonly Acceptable Accounting Standards for CT in UAE
For the purposes of corporate tax, the UAE and other entities must prepare their financial statements according to the accounting standards set in the UAE.
The most widely accepted accounting standards are;
- IFRS (International Financial Reporting Standards)
- IFRS for SMEs (Small & Medium-Sized Enterprises)
It depends on the size of the business which accounting standards they will apply.
- Businesses will utilise IFRS to prepare financial statements if their revenue exceeds 50,000,000 AED.
- Businesses will utilise IFRS for SMEs to prepare financial statements if their revenue doesn’t exceed 50,000,000 AED.
Who needs to prepare financial statements using IFRS and IFRS for SMEs?
The following entities are responsible for preparing and maintaining audited financial statements according to the acceptable accounting standards;
- Qualifying Freezone Persons
- Taxable persons whose revenue in a single taxable period exceeds 50,000,000 AED.
If a tax term is greater than or less than 12 months, the AED 50 million threshold is not prorated. Corporate tax consultants in the UAE can help you better understand your liabilities.
What is included in an IFRS-based Financial Statement?
A financial statement prepared in accordance with the IFRS standards is a set of several statements, including;
- Statement of cash flows for the taxable period
- Statement of changes in equity for the taxable period
- Statement of profit or loss for the taxable period (or other comprehensive income)
- A balance sheet or statement of financial position for the taxable period
Other comprehensive income:
- It includes expense and income elements (such as reclassification adjustments) that other IFSs require or allow to be excluded from profit or loss.
- Changes in the revaluation surplus;
- Gains and losses from financial assets and investment in equity instruments measured at the appropriate value from other comprehensive income.
- Gains and losses resulting from the translation of financial statements of a foreign operation.
Preparing Financial Statements on an Accrual Basis of Accounting
Under the IFRS methodology of preparing financial statements, the accrual basis of accounting is a noteworthy aspect. According to IFRS, accrual based accounting represents the impacts of transactions, circumstances and events on the taxable business’s financial resources and claims in the taxable period in which they occurred, regardless of whether the payments and cash receipts are made in the same or different taxable periods. In simple words, revenue is recorded in the taxable period in which it was incurred or earned which can be different from the period in which payments are paid or received.
Except for statements of cash flow, all financial statements are prepared on an accrual basis of accounting as per IFRS.
FTA (federal tax authority) allows taxpayers to choose or change their accounting methods (cash or accrual) when submitting an application at the start of the tax period or for future periods. Request additional information from corporate tax consultants in Dubai.
Preparing Financial Statement on Cash Basis of Accounting
In contrast to accrual-based accounting, expenditures and income are recorded on the actual dates when payments are made or received, i.e., cash outflow or inflow.
Under CT law, a taxable person can choose a cash based accounting method to prepare its financial statements if;
- The taxable person’s revenue does not exceed 3,000,000 AED.
- In extraordinary situations and in response to a taxpayer’s application to the FTA.
How can Tax Gian Help?
Tax Gian has professional and experienced corporate tax consultants in Dubai, UAE, helping hundreds of businesses comply with the dynamic CT framework. Our experts ensure that your business runs smoothly while handling your tax issues on your behalf. Get expert advice and guidance from our consultants with just a click.
