Determination of Taxable Income and Corporate Tax Payable

                                                                                                LISTEN TO THIS ARTICLE

The FTA has released the Guide on Determination of Taxable Income on 31 July 2024. This guide explains the essential concepts of determining taxable income and calculating corporate tax payable for taxpayers (both, resident as well as non-resident in the UAE). The guide begins with an introduction to the starting point for determining taxable income, which is the accounting income from financial statements. It covers the essential adjustments needed to calculate the taxable income, including exemptions, deductible and non-deductible expenses, and interest deductions. The guide also provides detailed case studies illustrating the practical application of these concepts.

In this write-up, we provide an overview of the guide from the perspective of determination of taxable income and the corporate tax payable. 

Financial Statements

The initial step in determining the taxable income is to use the accounting income stated in the financial statements of a taxpayer. For taxpayers with revenue below AED 3 million, the cash basis of accounting can be applied. Taxpayers exceeding this threshold must use the accrual basis, adhering to International Financial Reporting Standards (IFRS) or IFRS for small and medium entities (being entities whose revenue does not exceed AED 50 million).

Further, taxpayers deriving revenue exceeding AED 50 million must maintain audited financial statements. 

Financial statements are prepared with reference to a ‘tax period’, i.e., a defined timeframe for calculating taxable income. It may be the calendar year or any other period allowed under the UAE corporate tax law. 

Unrealised Gains and Losses

The guide discusses about the unrealised gains and losses, i.e., changes in the value of assets and liabilities that are not yet realised through transactions. It provides an option to elect the realisation basis for such gains and losses, meaning they will be accounted for when realised rather than when they occur. This election must be consistent and irrevocable, ensuring that the same basis is applied to all similar transactions.

Exempt Income

Certain types of income are exempt from corporate tax. This includes domestic dividends and income from foreign permanent establishments, provided certain conditions are met. The guide details the participation exemption, where income from qualifying shareholdings is exempt.

Deductible and Non-deductible Expenditure

Expenses must be incurred wholly and exclusively for the business to be deductible. Non-deductible expenses include those which are not related to the business, capital expenditures, and non-arm’s length transactions. The guide highlights specific categories such as employment-related expenses, pre-incorporation costs, and entertainment expenses, detailing the conditions under which they can be deducted.

General Interest Deduction Limitation Rule

This rule limits the deductibility of interest expenses to 30% of adjusted EBITDA. It aims to prevent excessive interest deductions that can erode the tax base. Interest includes all amounts paid for the use of money or credit. The guide provides a comprehensive formula for calculating net interest expenditure and adjusted EBITDA, including necessary adjustments and exclusions.

Further, specific rules apply to certain types of interest expenditures, providing further limitations or exclusions beyond the general rule. These are designed to address particular tax avoidance concerns and ensure fair taxation practices.

Tax Losses

The guide outlines the rules for carrying forward and utilizing tax losses. Tax losses can be carried forward indefinitely but are subject to a limitation on the amount that can be offset against taxable income in future periods. Additionally, tax losses can be transferred between group companies under certain conditions.

Tax Credits

Tax credits are available for taxes paid to foreign jurisdictions, preventing double taxation on the same income. The guide details the calculation of foreign tax credits and the treatment of unutilized credits, ensuring that taxpayers are not unfairly taxed on their international income.

Conclusion

Determination of taxable income has its own challenges. This guide makes an attempt to address and clarify the matters of general importance. It can serve as a referencer for tax advisors, lawyers as well as the CFOs and book-keeping personnel of any organization. 

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.