From the consultation document released by the MOF, we have been given a basic understanding of the calculation of the taxable income. We need to keep in mind that this is yet to be finalized however from this we can use the current information we have to be prepared for when the law is implemented

Corporation tax is a new concept in the UAE, we need to be well prepared to calculate the taxable income. This will give us enough time to optimize the tax liability.

Bottom Line

How is Taxable Income Calculated?

To make the calculation of taxable income easier the starting point is going to be the net profit or loss of the company. This way the compliance cost on businesses would be less as they would not have to maintain 2 sets of accounts. The financial accounting period of the company will be the same as their annual tax period as well.

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The public consultation document has allowed for businesses to follow any accounting standards that are acceptable in the UAE. IFRS is the most commonly used accounting standard in the UAE. In order to make sure the accounting standards followed are correct, it is best to make sure that the books of accounts are audited. This way each year’s financials can be finalized. The company will not have to go back and make corrections to already filed returns.

There are obviously some adjustments that will have to be made after using the net profit as the basis for the taxable income calculation. The details of what is exempt income and limitations deductible will be discussed in a later blog.

How are Unrealized Gain and Loss Treated?

An unrealized gain or loss occurs if the asset or liability has changed in value but no transaction has happened to general the gain or loss. For example, the investment held in hand might increase in value, and the company may not have sold the investment to realize the profit.

The public consultation document states that it will not be treated as taxable income if the unrealized gain or loss is related to the capital items, that have a long-term impact on the business. However, if it is related to a revenue item that has a short-term impact on the business, then it must be taken into account for calculating the taxable income, for example, the inventory.

In summary, the good news is that the financial statements will be used as the base for the calculations of the taxable income. This makes the compliance burden on companies, especially smaller businesses and start-ups very low.

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