Taxable income refers to the income amount that is liable to taxation, considering different adjustments and deductions. The recently issued Corporate Tax Guide provides a comprehensive and detailed explanation of how to determine the Taxable Income for different types of entities and transactions in the UAE. Consult Corporate Tax UAE experts for more detail. This article will summarize the main points and highlights of the guide, covering the following topics:
- Taxable Income: The Core of Corporate Tax
- Tax Period Dynamics
- Essential Adjustments in Tax Computation
As per the corporate tax guide, the tax base depends on the residency status and the nature of the income of the Taxable Person. The guide defines the following categories of Taxable Persons and their corresponding tax base:
- Resident Entities refer to organizations that are either established or registered in the UAE or have their primary management location within the UAE. Corporate Tax is applicable to the income of resident entities, derived from both domestic and international sources, irrespective of whether the income is repatriated to the UAE or not.
- Non-Residents with a Nexus are entities that are not based in the UAE but maintain a permanent establishment or a connection within the UAE A nexus is a connection or link that creates a taxable presence in the UAE, such as having a branch, an office, a factory, a warehouse, or a representative in the UAE.
- Non-Residents without a Nexus are entities that are not resident in the UAE, and do not have a nexus in the UAE. Non-Residents without a Nexus are subject to a withholding tax of 0% on their income that is derived from sources in the UAE, such as dividends, interest, royalties, or fees. If the income of a natural person is associated with their Business or Business Activity in the UAE, it is subject to tax, even if it is earned outside the UAE.
The determination of the Taxable Income is based on the calculation of the Accounting Income of the Taxable Person as reported in the taxpayer’s Financial Statements in accordance with the accepted accounting standards in the UAE for instance IFRS for SMEs (International Financial Reporting Standards for Small and Medium-sized Enterprises. The guide also allows the Taxable Persons to use their Financial Statements for calculating their Taxable Income, reducing the need for dual record-keeping and ensuring consistency in reporting.
The Taxable Income is calculated for a specific period of time, which is called the Tax Period. The guide defines the Tax Period as the period that aligns with the Financial Year of the Taxable Person, which is usually the period for which the Financial Statements are prepared. The guide also states that if the Taxable Person does not have Financial Statements, the default Tax Period is the Gregorian calendar year, which is from January 1 to December 31. The guide also provides some flexibility for the Taxable Persons to change the start and end dates of their Tax Period, subject to the approval of the Federal Tax Authority (FTA). This flexibility is particularly useful for entities that are part of multinational groups, as it allows them to align their Tax Period with their group’s reporting period, and avoid the need for dual accounting periods.
The final step in determining the Taxable Income is to make some adjustments to the Accounting Income, based on the rules and principles of Corporate Tax. The guide explains that these adjustments are necessary to reflect the true economic substance and value of the income and expenses of the Taxable Person, and to prevent any double taxation or tax avoidance. The guide identifies the following key adjustments that must be made:
- Unrealized Gains or Losses:
These are gains or losses that have not been realized or received in cash by the Taxable Person, but are recognized in the Financial Statements. The guide states that these unrealized gains or losses must be excluded from the Accounting Income, as they do not represent actual income or expenses for the Taxable Person.
This is income that is exempt from Corporate Tax, either by law or by agreement. For example, income from certain kinds of investments, for instance income from certain activities such as government bonds, or, such as agriculture or education. The guide states that this exempt income must be deducted from the Accounting Income, as it is not subject to tax.
These are allowances and reliefs that are granted to the Taxable Person for certain types of expenses or transactions, to reduce their tax liability. For example, deductions for depreciation of assets, or reliefs for research and development costs. The guide states that these deductions and reliefs must be added to the Accounting Income, as they represent allowable expenses for the Taxable Person.
- Transfer Pricing Adjustments:
These are transactions with Connected Persons or Related Parties. Related Parties are entities that are under common control or influence, such as parent and subsidiary companies, or entities that have a direct or indirect ownership interest in each other. Connected Persons are natural persons that are related by blood or marriage, such as spouses, siblings, or parents and children. The guide also states that the Taxable Person must apply the transfer pricing rules, which are the methods and principles for determining the arm’s length price of the transactions. The guide specifies that the transfer pricing adjustments must be made to the Accounting Income, to ensure that the income and expenses of the Taxable Person reflect the true economic value of the transactions.
This is the treatment of the Tax Losses that are incurred by the Taxable Person in a Tax Period. A Tax Loss is the excess of the allowable deductions and reliefs over the taxable income of the Taxable Person. The guide states that the Tax Losses can be carried forward and offset against the future taxable income of the Taxable Person, subject to certain conditions and limitations. The guide also states that the Tax Losses can be transferred within a Qualifying Group, which is a group of entities that are resident in the UAE, and that meet certain criteria of ownership and control. The guide also explains the transitional rules that apply to the Tax Losses that were incurred before the introduction of the Corporate Tax.
Seek the Expert Services of Top Tax Consultants in UAE.
The Corporate Tax Guide provides a clear and detailed explanation of how to determine the Taxable Income, which is the basis for calculating the tax liability of the Taxable Person. The guide covers the scope and source of income that is subject to tax, the accounting standards that are used for reporting income, the tax period that is used for measuring income, and the adjustments that are made to the accounting income to reflect the true economic substance and value of the income and expenses. Thus, to effectively determine taxability and to ensure compliance under corporate tax, it is advisable for businesses to seek the expert services trusted Corporate Tax UAE Consultants.