Overlapping Impacts of UAE Corporate Tax on VAT and IFRS

The UAE’s tax and reporting environment is evolving rapidly, especially with the introduction of Corporate Tax (CT) and the increasing need for accurate VAT and financial reporting under IFRS. Because these frameworks are interconnected, businesses must revisit their accounting treatment, contract structures, and documentation processes to ensure consistency and compliance. 

This article provides a consolidated and practical review of the key areas where Corporate Tax, VAT regulations, and IFRS standards intersect, often creating timing differences, reporting mismatches, and compliance risks for UAE businesses. 

1. Reimbursements: Revenue or Not? Impact Across VAT, IFRS, and Corporate Tax 

Reimbursements are commonly misinterpreted and can significantly affect financial reporting. 

IFRS Perspective 

Revenue is recognised only when income is earned from ordinary business activities. Although IFRS 15 and other accounting standards do not explicitly define “ordinary activities,” a key assessment criterion is whether the entity has historically engaged in similar profit-generating operations. If not, such reimbursements should not be classified as revenue; rather, they represent recovery of cost. 

Corporate Tax Impact 

Incorrectly recognising reimbursements as revenue: 

• artificially inflates turnover, 

• may push the business out of SME relief criteria, and 

• may trigger transfer pricing or audit thresholds. 

VAT Impact 

VAT treatment depends on the nature of the recovery: 

• Taxable: when part of a wider supply 

• Non-taxable: when it is a pure disbursement on behalf of another party 

Misclassification can cause under-reported output VAT or delayed VAT registration. 

2. Consignment Stock: The IFRS 15 vs VAT “12-Month Rule” Mismatch 

Under IFRS 15, consignment arrangements do not trigger revenue until control passes to the end customer. Therefore, unsold goods remain in the consignor’s inventory. 

VAT Complication: Deemed Supply After 12 Months 

If consigned goods remain unsold for 12 months, VAT rules treat the movement as a deemed supply, even without an actual sale. 

This creates: 

• VAT output tax without corresponding accounting revenue 

• Timing mismatches between VAT returns and corporate tax profit 

• Planning challenges for businesses holding long-duration stock 

Businesses must monitor inventory aging to avoid unexpected deemed supplies. 

3. Undocumented Leases Between Parent and Subsidiary: IFRS 16, CIT, and VAT Implications 

In many UAE groups, subsidiaries occupy premises owned by the parent without a formal lease. IFRS 16 may consider this arrangement a lease if the subsidiary controls a specific space and would suffer a penalty if it vacates. 

Corporate Tax Considerations 

• Transfer pricing rules may apply, requiring arm’s-length rental charges. 

• Incorrect treatment impacts taxable income and group profitability. 

VAT Considerations 

Related-party adjustments—such as year-end true-ups—may be treated as changes in consideration for supplies, becoming subject to VAT. 

Written agreements are strongly recommended to ensure consistency across IFRS, VAT, and Corporate Tax. 

4. Rebates and Commercial Support Payments: When Is It a Credit Note or an Invoice? 

Rebates and support payments often create confusion in accounting and VAT treatment. 

IFRS and Corporate Tax Perspective 

Volume rebates reduce the cost of purchases, not revenue. Incorrect treatment can distort gross profit and taxable profit. 

VAT Perspective 

• Rebate / Discount → Requires a Tax Credit Note 

• Service provided (marketing, display support, promotions) → Requires a Tax Invoice 

Differentiating between the two prevents errors in tax returns and supports correct financial reporting. 

5. Contract Assets: Why VAT and Corporate Tax Timing Often Differ 

Contract assets arise when a company has performed work but cannot yet raise an invoice due to contractual conditions—such as pending LPOs or customer approvals. 

VAT Perspective 

VAT is triggered by the date of supply, not accounting recognition. This may be the earlier of: 

• completion of service, 

• issuance of invoice, 

• receipt of payment, or 

• the 12-month rule for continuous supplies. 

This means VAT may become due before invoice is issued  depending on the completion of service. 

Corporate Tax Perspective 

Revenue must be recognised when performance obligations are fulfilled under IFRS 15—regardless of whether VAT was triggered. 

This creates timing differences between VAT reporting and taxable profit. 

6. Gift Cards: Prepayments Creating Different VAT and CIT Outcomes 

Gift cards are treated as prepayments for future goods or services. 

IFRS and Corporate Tax 

Gift card receipts are recognised as a contract liability. Revenue is recorded only upon redemption or when breakage becomes probable. 

VAT 

VAT becomes due at the time of sale since the consideration and VAT rate are known. 
Unredeemed cards do not result in VAT adjustments. 

This leads to timing differences between VAT and revenue recognition. 

7. Customer Loyalty Programmes: Timing Differences Between VAT and CIT 

Loyalty programmes create multiple accounting and VAT challenges. 

Under IFRS 

Loyalty points represent a separate performance obligation. A portion of the sale must be deferred until points are redeemed or expire. 

Under VAT 

VAT is charged on the full value at the time of sale. Issuing points is not treated as a separate supply. 

This results in: 

• VAT recognised upfront 

• Revenue recognised later 

Such timing differences must be reconciled periodically. 

8. Asset Recognition: Payment Does Not Mean Ownership Under IFRS 

Many businesses pay for assets before receiving them, especially in construction and capital-intensive industries. 

IFRS and Corporate Tax 

Assets cannot be capitalised until control is transferred. 
Advance payments remain an asset (prepayment), not PPE. 

Corporate Tax depreciation begins only after the asset is recognised in the books, not when payment is made. 

This impacts planning for deductible expenses. 

Conclusion 

UAE businesses now operate within a unified tax and financial reporting ecosystem where Corporate Tax, VAT, and IFRS interact at multiple levels. This intersection creates timing differences, compliance complexities, and financial reporting implications. 

To stay compliant and avoid penalties, businesses should: 

• Align accounting policies across IFRS, VAT, and CT 

• Strengthen internal controls and documentation 

• Maintain well-structured contracts for rebates, leases, consignment stock, and reimbursements 

• Regularly reconcile VAT, CT, and IFRS reporting 

• Conduct periodic tax reviews or internal audits 

Proactive planning ensures accurate reporting, reduces exposure to errors, and enhances the overall financial integrity of the organisation. 

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.