Corporate Tax - Importance of Accounting Standards

FTA has recently given clear advice that the entities that are required to prepare the financial statements in accordance with IFRS which will be the basis for determination of Taxable income of a taxable person.  

 In case of entities that do not derive Revenue exceeding AED 50 million in a Tax period , may use IFRS for SME's.  

Failure to comply with the prescribed Accounting Standards so will be viewed as a violation of the Corporate Tax Law and may result in administrative penalties.  

For purposes other than Corporate Tax, Taxable Persons may use different accounting standards as long as all relevant calculations and reporting are performed and provided (where required) using IFRS or  IFRS for SMEs for Corporate Tax purposes  

 An Exempt Person under the Corporate Tax Law may use other accounting standards.   

However, if an Exempt Person, specifically a Government Entity, a Government  Controlled Entity, an Extractive Business or a Non-Extractive Natural Resource  Business, has Business or Business Activities treated as a separate taxable Business  (or Businesses) as per the Corporate Tax Law, the Exempt Person is required to use  IFRS or IFRS for SMEs to prepare the Financial Statements for that taxable activity.  

Taxable Persons deriving Revenue exceeding AED 50 million during the relevant Tax Period and all Qualifying Free Zone Persons (irrespective of the level of Revenue) are required to prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law.  

The threshold of AED 50 million is not pro-rated if a Tax Period is longer or shorter than 12 months. The audit must be performed by a UAE-registered auditor, pursuant to Federal Law.  

If a Tax Group derives Revenue exceeding AED 50 million on a consolidated basis  during the relevant Tax Period, the consolidated Financial Statements of the Tax  Group (as the Taxable Person) will be required to be audited. However, the Corporate  Tax Law does not require separate Financial Statements of the Parent Company and  Subsidiary members to be audited, even when a member’s Revenue exceeds AED 50 million.  

In addition, private pension or social security funds that have made an application to  and received an approval from the FTA to be exempt from Corporate Tax must have  an Auditor.12  

Accrual Basis of Accounting  

Under the Accrual Basis of Accounting, Revenue and expenditure are recognised when they are earned or incurred, not necessarily when payments are received or made, or invoices received or sent.  

Example 1: Revenue recognition under the Accrual Basis of Accounting  

ABC LLC has a Financial Year ending on 30 April.  

• On 01 April 2025 - ABC LLC delivered consulting services worth AED 15,000 to XYZ.  

• On 01 May 2025 - ABC LLC sent XYZ an invoice.  

• On 01 June 2025 - XYZ paid for the services.  

Company X should recognise the Revenue as soon as the services are provided, as this is when it was earned. Therefore, the Revenue should be recorded on 01 April 2025, which falls in its Financial Statements for the year ending on 30 April 2025. It does not matter when the invoice is issued or the payment is received.  

 Example 2: Expense recognition under the Accrual Basis of Accounting   

(continuation of Example 1)  

XYZ also has a Financial Year ending on 30 April.  

XYZ should recognise the expense when the service is delivered on 01 April 2025, as this is when the expense was incurred. It does not matter when the invoice was received or the payment was made.  

Revenue does not exceed AED 3 million within the relevant Tax Period  

OR  

Exceptional circumstances and pursuant to an application submitted by the Person to the FTA.  

Revenue does not exceed AED 3 million, the Person can apply the Cash Basis of Accounting without needing to submit an application to the FTA.  

Under the Cash Basis of Accounting, Revenue and expenditure are reported, for Corporate Tax purposes, in the Tax Period in which the amounts are received or paid.   

XYZ LLC, a Taxable Person using the Cash Basis of Accounting with a Financial  Year ending on 31 December, concludes the following two transactions in   

November 2024:  

1. A cash sale for AED 5,000;  

2. A credit sale for AED 11,000 where a payment of AED 9,000 is received in December and the remaining balance is received in January 2025.  

• Accounting for Transaction 1 : 10,000 accounted in 2024 Tax Period  

• Accounting for Transaction 2 : 9,000 accounted in 2024 Tax Period and 2000 accounted in 2025 Tax Period  

When it comes to expenditure, a credit purchase, for example, is not recognized as an expense by the buyer at the time of receiving the invoice or the products/services.  

 During its life cycle, a Taxable Person may face Revenue fluctuations. If Revenue  derived during a Tax Period exceeds AED 3 million by applying the Cash Basis of Accounting, the Taxable Person should switch to the Accrual Basis of Accounting   

A Person may apply either IFRS (or IFRS for SMEs) or the Cash Basis of Accounting in order to calculate their Revenue to determine if they are eligible for Small  Business Relief. The Cash Basis of Accounting is always used to determine eligibility  to prepare Financial Statements on the Cash Basis of Accounting for Corporate Tax  purposes. Therefore, if IFRS or IFRS for SMEs is used to determine Revenue for the  purpose of Small Business Relief, the cash basis still has to be used with regard to eligibility for the Cash Basis of Accounting.  

 As a conclusion, the corporate tax doesn't have to be intimidating. It's about understanding how different accounting methods, such as accrual and cash basis, affect your tax outcome. As the rules evolve, keeping it real with compliance and smart accounting choices will keep your business on the road to success in the world of corporate taxation.