UAE Corporate Tax Compliance: Navigating Financial Reporting and Auditing for Businesses in the UAE

The introduction of the UAE Corporate Tax Law (CT Law) has significantly impacted how businesses manage their financial reporting and auditing processes. As companies face corporate tax for the first time, they must realign their internal structures and financial operations to ensure compliance with the new laws. This shift requires a proactive approach to avoid surprises, especially during year-end financial reporting.

In this blog, we will cover the key aspects businesses need to focus on when preparing for corporate tax compliance in the UAE and what they can do to be fully prepared for hard close and year-end reporting.

Understanding Corporate Tax in Dubai and the UAE

The UAE Corporate Tax Law is a significant change for businesses that were traditionally not subjected to corporate tax. As the UAE aims to diversify its economy and align with global tax standards, businesses must adjust their processes to meet the demands of the UAE Corporate Tax rate.

Corporate Tax Rate in the UAE

A standard corporate tax rate of 9% is applicable to taxable income exceeding AED 375,000.

For businesses generating profits under this threshold, no corporate tax applies.

This rate applies to all businesses operating within the UAE, including mainland companies, free zone entities, and branches of foreign companies, making compliance essential for all.

Key Elements to Consider for Hard Close Procedures

As businesses prepare for corporate tax compliance, hard close procedures are essential to effectively manage the changes. A hard close refers to an interim period in which businesses finalize financial information to prepare for tax reporting, ensuring there are no gaps before year-end. Below are the critical elements to focus on:

1. Business Process Updates

Since this is the first time corporate tax is being applied in the UAE, financial performance will be impacted. Businesses must update their processes to ensure that income tax is accurately reflected in financial statements.

Updating the Chart of Accounts (CoA): The CoA should be adjusted to accommodate new tax entries, including current and deferred taxes, tax on profit and loss, and tax on other comprehensive income.

Health Checks: Perform regular health checks on book-to-tax adjustments and identify opportunities for current and future tax provisioning cycles.

2. Setup of Financial Statements

The financial statements (FS) require adjustments to reflect corporate tax under the new law. Businesses need to engage in timely discussions with auditors to agree on the presentation and materiality of the tax impacts.

Presentation: In line with IAS 1, companies should separately present current and deferred taxes on the balance sheet.

Income Tax Notes: A skeleton version of the expected income tax note, based on IAS 12 standards, should be prepared.

Materiality Check: It's crucial to align internal and external materiality to avoid discrepancies in tax reporting.

3. Uncertain Tax Positions and Technical Considerations

Evaluate uncertain tax positions (UTPs) and technical issues arising from the new UAE Corporate Tax Law. These considerations will affect financial reporting, particularly when factoring in IFRIC 23 requirements, which involve a 50% probability threshold that tax authorities will accept the position.

4. Transitional Relief Rules and Elections

Examine transitional rules, particularly those regarding the tax base of assets, to ensure correct reporting. It's vital to discuss these with auditors early to allow ample time for aligning decisions with the tax provisioning process.

5. Deferred Tax and Loss Carryforwards

Businesses expecting net losses or disallowed interest can apply deferred tax asset recognition. These must be discussed during hard close, ensuring that taxable profit forecasts are substantiated to meet IAS 12 requirements.

Preparing for Year-End Financial Reporting

After completing hard close procedures, businesses must focus on preparing for year-end financial reporting. Since this is the first year for corporate tax implementation, companies must ensure they allow enough time for tax computations and reviews before final submission to auditors.

1. Financial Audit Readiness

Ensuring audit readiness is key for the year-end cycle. Companies must have all necessary supporting documentation ready, including tax computations, position papers, and income tax disclosures.

Meetings with Auditors: Align with your auditors through planned meetings to finalize expectations and discuss any required supporting documentation.

Income Tax Notes: Prepare the final income tax notes based on the actual tax numbers, ensuring all judgements and estimates are well-documented.

Late Adjustments: Ensure that any late adjustments during the audit are properly reflected in the financial statements with appropriate tax implications.

2. Outside Basis Differences

Businesses with foreign investments (e.g., subsidiaries, joint ventures) may face temporary differences between the carrying amount of the investment and its tax base, referred to as outside basis differences. Management must evaluate these differences, particularly in cases where undistributed profits from the investee raise the value of the parent company's investment.

Key Takeaways and Next Steps for Businesses

The introduction of corporate tax in the UAE presents a steep learning curve for businesses. However, with the right steps, companies can minimize risks and ensure compliance:

Proactive Planning: Align internal and external stakeholders to manage expectations and ensure processes are updated ahead of time.

Tax Reporting Readiness: Perform health checks, update financial reporting systems, and ensure materiality thresholds are clear.

Early Auditor Engagement: Engage auditors early to avoid delays during the year-end financial reporting process.

At Elevate Accounting & Auditing, we are here to guide your business through the challenges of corporate tax compliance in the UAE. With our expertise in corporate tax, we can assist in setting up your financial statements, performing tax health checks, and ensuring your audit readiness.

Conclusion

The implementation of UAE corporate tax marks a pivotal moment for businesses in the UAE. By preparing early, updating business processes, and aligning with key stakeholders, businesses can smoothly navigate the transition and ensure compliance with the UAE Corporate Tax Law.

For more information or support with your UAE Corporate Tax Compliance, contact Elevate Accounting & Auditing today. We're here to help you stay ahead of the curve with your corporate tax obligations.