FTA Releases New Guide on Calculating Taxable Income

The Federal Tax Authority (FTA) in the UAE has recently issued a comprehensive guide that outlines the procedure for calculating taxable income for UAE taxpayers. This guide is essential for ensuring compliance with the UAE's tax laws, offering clear and detailed instructions to help taxpayers accurately compute their taxable income and properly file their corporate tax returns. The guide addresses previously ambiguous areas, making the process of preparing and submitting tax returns more straightforward.

The guide is structured into five key sections: Glossary, Introduction, Overview, Key Concepts, and Case Studies. The Glossary section provides definitions of crucial terms, arranged alphabetically, with detailed explanations. The Introduction outlines the guide's purpose—to assist taxpayers in accurately calculating taxable income and correctly filing returns. The Overview section summarizes the guide, including three templates, one of which is particularly important for calculating taxable income. This template helps taxpayers start with their accounting net profit or loss and make necessary adjustments, such as considering unrealized gains or losses, exempt income, reliefs, non-allowable expenses, and related party adjustments, to determine their taxable income or loss.

The Key Concepts section delves deeply into the calculation of taxable income. It emphasizes that taxpayers should begin with their net accounting profit or loss, determined using either the cash or accrual basis of accounting as required by law. For businesses with annual revenues exceeding Dhs 50 million, audited financial records are mandatory. The guide also clarifies that juridical persons registered outside the UAE but managed within the country must have their financial statements audited by UAE-registered auditors if they are established or operating in the UAE.

This section further discusses the tax period, modifications to it, and the treatment of exempt income. It also addresses the choice between the realization and unrealization approaches for gains and losses, whether applicable to all assets and liabilities or only those in capital accounts. The guide provides detailed instructions on handling dividend income, distinguishing between dividends from resident juridical persons, which are exempt from corporate tax, and those from foreign juridical persons, which have specific conditions.

The guide also offers comprehensive guidance on the deductibility of expenses. Business-related expenses are fully deductible unless they relate to exempt income. For shared expenses, a proportional claim can be made using allocation keys based on cause-and-effect relationships, provided the allocation justifies the benefit received.

Additionally, the guide notes that, in general, there is no distinction between accounting and tax depreciation, with some exceptions. Staff salaries can be claimed at market rates, except for salaries drawn by a natural person for themselves. Employee entertainment expenses are fully deductible, while other entertainment expenses are 50% claimable. Pre-incorporation and pre-trading expenses are also allowed, and provisions are considered deductible. However, when provisions are reversed, the reversal is taxable. Notably, if a provision was recorded before a taxable person’s first tax period and is reversed after they become subject to corporate tax, the reversal is taxable when credited in the financial statements.

The guide also provides an in-depth explanation of interest calculations, detailing how to determine net interest and calculate adjusted EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). A specific template is provided for this calculation.

Extensive discussions are included on losses, reliefs, and credits. The guide specifies that the withholding tax credit takes priority over the foreign tax credit.

The final section of the guide presents nine case studies, each starting with a factual scenario and concluding with explanatory notes on calculating taxable income and tax liabilities. These case studies use hypothetical figures to demonstrate how corporate tax is applied, providing valuable insights into the legal application.

For anyone involved in UAE corporate tax, it is highly recommended to review this guide to fully understand the practical aspects of tax implementation in the UAE.