Corporate taxation is recently being introduced in UAE. The tax rate is “9% on “Accounting Profit with minimum adjustments”. These adjustments are not yet identified by the authorities, and it is expected that detailed guidelines will be issued soon in this regard.
First things first; there would be two kinds of differences between the “Accounting Profit” & “Tax Profit.” One is Timing Differences and other are Permanent.
As the name suggests Timing differences only delay or advance the payment of tax, meaning thereby that the tax authorities accept the nature of expense being chargeable but may have different rules with respect to its allocation to P&L over a period. Permanent differences are the ones’ that the tax authorities do not accept as a deductible expense.
Below we are discussing some potential adjustments that taxpayers may expect to have. Based on their own peculiar circumstances companies can estimate their effective tax rate (Corporate tax expense divided by Accounting Profit) and the tax liability that they would be incurred.
Provision for doubtful debts
Tax authorities do not accept Provision for doubtful debt owing to the involvement of estimation; write off of actual bad debt can be claimed as deductible expense. With IFRS 9 in practice that advances the booking of such provisions/expected credit losses the gap between the prescribed tax rate of 9% and the effective tax rate will further widen.
Provision for Obsolete/slow moving Stocks
Companies do have a practice of creating a provision for obsolete stocks as per some predefined formula. This again is an estimation that tax authorities may not accept.
Entertainment expenditures above a certain limit are not allowed to be treated as a deductible expense. This will be a permanent difference
Fines/Penalties for violation of any Law
Above is not considered as a business expense and hence a permanent difference. Companies need to be more cognizant of these as the financial impact shall be enhanced by a further 9% on the amount of such penalties
Depreciation on Tangible Assets
Different organizations use different rates for the purposes of depreciation based on their own assessment of useful life of asset. Tax authorities are more inclined towards keeping a uniform rate for different class of assets and hence it will give rise to timing differences and recording of deferred tax asset or liability as the case may be
Amortization on Intangible Assets
Like the above this will also give rise to timing differences between the accounting and tax profit.
For discussion on matters of Taxation you are always welcome to contact
Faheem Piracha, FCA