Accounting Adjustments in Corporate Tax
Corporate Tax compliance in UAE apart from profit and expenses has many more adjustments to do. To file a Corporate Tax Return we have to record and adjust your account together with taxable income and by following the UAE corporate tax rule
Making the necessary adjustments helps companies know their accurate tax liabilities and helps to exclude non-taxed items, and benefit from tax relief.
Here we will explain to you how accompany should maintain their books while filing for corporate tax to manage exempt income also to know their nondeductible expenses and get tax benefits.
What Are Accounting Adjustments in Corporate Tax?
Let's understand the adjustment in Books of accounts while filing Corporate Tax. Adjustment in a company's books of account for Corporate Tax is done to know their taxable income
Adjust made as per UAE Corporate Tax law are as follows:
* Non-taxed income is to be excluded, i.e., exempt income.
* Nondeductible expenses to be added.
How to handle Exempt income
The expenses that are not included as per UAE corporate tax law are as follows:-
- If any shareholder (Juridical person) receives income in the form of dividends is considered as exempt income subject to UAE Corporate Tax rules.
- As per the geographic area, any business established in the Free zone and has a qualifying income is eligible for a 0% tax benefit. The income generated by a Qualifying Free Zone person ( Qualifying Income) is subject to Corporate Tax at the rate of 0%.
- Companies can choose not to include profit that is earned from their foreign branch.
How to Handle Exempt Income in Tax Returns: Handling exempt income while filing TAX returns.
* Knowing and separating their exempt income from taxed income.
* Should have documents in place as certificates from Free Zone or shareholders receiving dividends.
* Identify exempt income while calculating taxable income to ensure that the tax liability is accurate.
Impact on Businesses:
Correctly handling expected income has certain benefits for the companies
* By proper identification of exempt income taxable income is lowered and this helps to reduce tax liabilities.
* Helps to maintain the rules and regulations set by the Federal TAX Authority.
Adjustments of the expense that are non-deductible
The UAE Corporate Tax Law outlines specific non-deductible expenses, including: Following are the examples of Nondeductible expenses as per UAE Corporate Tax Law.
- If you have made any payment for any legal issues or legal violence these are not deductible.
- If there is any cost that is paid about having an exempt income will not be deducted
- If you have any personal expenses that are not related to your business such as travel entertainment are not included.
Handling nondeductible expenses
* Identify all disallowed expenditures in your financial books ( Example:- Fines and Penalties, Gifts )
* Identify the partially allowed expenditures ( Ex:- Entertainment expenditures )
* Identify the net interest expenditures which are disallowed in the current tax year and to be carried forward.
Impact on business
If we maintain proper nondeductible expenses this ensures the following:
* Taxable income reflects only eligible business expenses.
* It helps to avoid penalties for inaccurate reporting
Let's discuss the adjustment for Tax losses
If any business has losses they can offset in coming taxable income as per corporate tax law.
- If any business has losses they can offset in coming taxable income subject to certain conditions.
- We can transfer the losses among the eligible companies if the conditions are met.
Let's discuss the handling of Tax loss adjustment
* If you are carrying forward the tax losses make sure that as per the law, the conditions are met.
* By accurately treating tax losses we can carry forward and adjust those losses in taxable income.
* Follow the allowable limits to adjust losses carried forward in the current period taxable income
Impact on Businesses:
If we effectively adjust tax losses it helps in the following ways:
* Helps in reducing taxable income in the profitable period.
* Helps in optimizing the long-term efficiency.
Adjusting for Transactions with Related Parties
Transactions with related parties are subject to Transfer Pricing regulations under UAE Corporate Tax Law. Adjustments may be required to ensure compliance with the arm's-length principle.
Why are Related Party Transactions Important?
Tax Implications: Transactions with related parties can have significant tax implications. If not conducted at arm's length (i.e., at prices that would be agreed upon by independent parties), they can lead to tax adjustments and potential penalties.
Financial Reporting: Accurate reporting of related party transactions is crucial for maintaining accurate financial statements and ensuring transparency.
Corporate Governance: Proper handling of related party transactions is essential for maintaining good corporate governance and building trust with stakeholders.
Conclusion
Accounting adjustments are a vital component of UAE Corporate Tax compliance. By correctly handling exempt income, non-deductible expenses, and other adjustments, businesses can ensure accurate tax filings and minimize liabilities. Mistakes in the tax filings can cause potential penalties and other legal complications.
To learn more about How Accounting Adjustments in Corporate Tax Work?, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.