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Photos are for illustrative purposes only. – KT file
Taxpayers are obliged to pay taxes on their taxable profits. As required by the UAE Corporate Tax Law (UAE CT Law), taxpayers are responsible for adjusting their accounting profits to arrive at taxable profits. Accounting profit adjustments can be allowable and disallowed expenses, increases or decreases in income to calculate taxable income. Our previous article stipulates that taxable profit is equal to accounting profit in financial statements + non-tax-deductible expenses – tax-deductible expenses + other taxable income – other non-taxable income.
The core objective of not allowing some expenses and allowing others is to ensure that taxable persons only report the expenses that are allowed to be taxed in order to arrive at a taxable profit.
Regarding the deduction of expenses, Article 28 of the UAE CT Law contains general provisions. Article 28(1) requires that a taxpayer may declare all expenditures within the same tax period in which those expenditures are incurred, provided that the income expenditures are wholly and exclusively used for business purposes.
Revenue expense is incurred for the day-to-day running of the business and it does not increase the value of the asset or reduce the liability in any way. For example, courier fees, wages, sales and marketing expenses, postage, repairs and maintenance, etc. are income expenses that can be claimed in the same tax period in which they are incurred. However, capital expenditures are incurred in one tax period and benefit multiple tax periods, such as plant and machinery, buildings, etc. The allocation pattern of capex (depreciation expense) may vary due to accounting standards and UAE CT laws, and we need to wait for the UAE CT regulations to clarify the pattern of capex allocation. If the applicable accounting principles and the distribution pattern in UAE CT law are the same, then the accounting depreciation will be equal to the tax depreciation and no depreciation adjustment will be required in the accounting profit to calculate the taxable profit. Conversely, accounting depreciation is added back to accounting profit and tax depreciation is deducted.
Article 28, paragraph 2, of the UAE CT Law specifies expenses that may not be used for tax purposes. Expenses may not be used for tax purposes if they are not related to the taxable person’s business or to the tax-exempt income of the business. Under this law, any personal and non-business expenses are prohibited for tax purposes. If any such charges have been included in the financial statements, they will be added back. For example, when calculating the taxable profit of A Co., Ltd., the expenses of B Co., Ltd. have been included in the financial statements of A Co., Ltd., and these expenses will be added back to the accounting profit of A Co., Ltd.
Mahar Afzal is the Managing Partner of Kress Cooper Management Consultants. – KT file
Losses unrelated to or arising from the business of the taxable person are not allowed and will be added back to the accounting profit if they have been considered in the accounting profit. If a taxpayer incurs expenditures for more than one purpose, an identifiable portion or proportion of the expenditures incurred wholly and exclusively to obtain taxable income will be allowed for tax purposes. For example, if X Ltd and Y Ltd are managed by the same office, X and Y Ltd will share the rent and other common expenses such as electricity, telephone, internet, etc. No entity can claim the full fee, but their share of the fee.
Taxable persons cannot declare gross interest expenses but must comply with the interest cap rules in Article 30 of the UAE CT Law. The UAE CT Law stipulates that taxable persons can claim net interest at 30% of Ebitda (earnings before interest, taxes, depreciation and amortization). The remainder of the interest expense can be carried forward to tax periods ten years into the future. Our next article will detail the interest deduction rules.
Article 32 of the UAE CT Law stipulates that taxpayers can only claim 50% of entertainment, entertainment or entertainment expenses incurred during the tax period. These costs include meals, lodging, transportation, entrance fees, facilities and equipment used for recreation, recreation or recreation. These expenses may relate to customers, shareholders, suppliers or other business partners of the taxable person. When calculating the accounting profit, the total amount of entertainment expenses should be deducted and 50% of it should be added back to the accounting profit to obtain the taxable income. For example, hotel accommodation for shareholders who are taxable persons will cost the company AED 50,000, and transportation and meals will cost AED 5,000 and AED 10,000 respectively. Since the accounting charge of AED 65,000 is not allowed for tax purposes, 50% (Dh32,500) will be added back as a non-allowable charge to arrive at the taxable profit.
Expenses such as donations, grants or gifts, fines and penalties, bribes or other illegal payments, dividends, profit distributions or benefits of a similar nature paid to taxpayer owners, claimable input tax, income tax on foreign taxpayers According to Article 33 of the law, the UAE etc. are generally not allowed for tax purposes. We’ll cover these in detail in the following articles.
Taxpayers must properly analyze their expenses and adjust accounting profits accordingly to calculate taxable income.
Mahar Afzal is the Managing Partner of Kress Cooper Management Consultants. The above is not the official opinion of Khaleej Times, but the personal opinion of the author. For any questions/clarifications please write to the author at mahar@kresscooper.com.
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