FTA issues a new guide with detailed steps for determining taxable income.

Having the necessary skills to calculate taxable income is crucial for complying with the tax laws in the UAE.

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The Federal Tax Authority (FTA) in the UAE has recently issued a new guide that explains how taxable income is calculated for taxpayers in the country. A good understanding of how to calculate taxable income is crucial for following the UAE's tax laws, and the FTA's latest instructions aim to provide explicit guidance in this area. This article explores formerly unclear elements now explained in the manual, making it easier to prepare and file corporate tax returns.

The guide is broken down into five parts: Glossary, introduction, overview, key concepts, and case studies. In the glossary section, important terms are defined alphabetically with in-depth explanations. The introduction part outlines the guide's goal of offering additional support to taxpayers in accurately calculating their taxable income and properly submitting their returns.

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The summary section gives an overview of the guide, showcasing three different templates. One of these templates is crucial for calculating taxable income. Taxpayers can start by entering their accounting net profits/losses in this template and then make various adjustments such as unrealized gains/losses, exempt income, reliefs, non-allowable expenses, related party adjustments, and other factors as per the FTA corporate tax guide to calculate their taxable income/loss.

The important fourth section delves deeply into the calculation of taxable income. The guide stresses the importance of starting with their net accounting profit/loss for taxpayers. Prior to starting this procedure, it is crucial for the taxpayer to calculate their accounting profit/loss according to the cash basis or accrual basis of accounting as required by law. Furthermore, they are required to undergo financial audit if their annual turnover exceed 50 million dirhams. For juridical entities registered internationally but controlled and operated from within the UAE, the issue arises of whether they must have their financial records inspected by auditors based in the UAE. The guideline specifies that companies located in the UAE or conducting business in the UAE with a permanent presence must have their financial statements reviewed by an auditor registered in the UAE.

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The part also covers the tax period and any changes to it, how exempt income is treated, deciding between realizing gains and losses or sticking with unrealized approach, and if this applies to all assets and liabilities or just assets in capital accounts. Specific details are given regarding how dividend income is managed by classifying dividend payments from companies based in the same country and those based abroad. Dividend income from domestic legal entities is completely tax exempt, while certain conditions must be met for dividends from foreign legal entities to be exempt from corporate tax.

Detailed guidelines have been provided on the deductibility of expenses. The rules state that costs incurred only for business reasons are completely deductible, unless they relate to exempt revenue. When there are shared costs, individuals can request a fair share by using allocation keys that consider cause-and-effect links, if the allocation shows the benefit they gained.

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As per the guide, accounting and tax depreciation are usually considered the same, except for a few cases. Workers can request their salaries based on market rates, unless they are taken by an individual for their own benefit. Employee entertainment expenses can be fully reimbursed, but other types of entertainment are only 50% covered. Pre-incorporation and pre-trading costs are allowed, and clauses are seen as eligible expenses. Significantly, if provisions are overturned, the overturning will be subject to taxation. It is important to note that a provision recorded before a taxable person's first tax period, and later reversed after becoming subject to corporate tax, becomes taxable once the credit is shown in the financial statements.

A great clarification is provided about interest, explaining how to figure out net interest and compute adjusted EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). A particular format is available for computing adjusted EBITDA.

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Extensive discussions have been held on losses, reliefs, credits, and more. According to the guide, the priority for the withholding tax credit will supersede the foreign tax credit.

In the fifth section, nine case studies are featured, starting with factual scenarios and concluding with explanatory notes on the calculation of taxable income and tax liabilities. These case studies illustrate the application of corporate tax using hypothetical figures, offering a detailed insight into the legal application.

It is highly recommended to review the guide for a comprehensive understanding of the practical implementation of UAE corporate tax.

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