One crucial set of rules to consider is the International Financial Reporting Standards ( IFRS ). UAE regulatory authorities have mandated adherence to IFRS rules unless specified otherwise in tax laws.
Last week saw the introduction of two new corporate tax releases, wherein both the documents feature a detailed section on Legislative References, forming the cornerstone of their content. Beyond these references, consider external rules and regulations unless explicitly overridden by tax legislation.
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In addition to IFRS, factors such as VAT, treasury management, and financial accounting are pivotal for effective business management. Balancing these elements is essential for informed decision-making within your organisation.
Now, let’s consider a scenario involving a significant sale of a valuable item—a piece of art—for Dh10 million ($2.72 million), with a monthly payment plan spread over three years. A Dh2.5 million deposit was paid upfront during the first corporate tax fiscal year.
In such transactions, two distinct elements are typically transferred: risk and title to the goods. The seller transfers the artwork to the buyer, who assumes all associated risks. If the artwork is damaged, the buyer remains liable and obligated to make payments. True ownership, or title, transfers only upon full payment.
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Under IFRS rules, in our scenario, the sale of the artwork would be recognized for revenue purposes, obliging the seller to record the full sale value in their accounts.
Consider another scenario involving a transaction between parties in the UAE. Here, the standard VAT rate of 5% applies. Upon filing their return, the seller must remit Dh500,000 to the Federal Tax Authority. However, full payment from the buyer is not expected until three years later, posing a cash flow challenge.
From a corporate tax perspective, the seller must pay 9% on the gross profit of the artwork, despite payment not yet being received.
Some argue for revenue recognition only upon receipt of payments. They might suggest issuing one invoice for the deposit and subsequent monthly invoices to stagger corporate tax and VAT payments.
However, this approach is not advisable. As a business, you’ve committed to these terms, and managing them is your responsibility, not the tax authority’s.
The second document, concerning the selection of your entity’s fiscal year, raises an intriguing question. Can your entity have two fiscal years?
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When registering for corporate tax, entities theoretically have the flexibility to choose a reporting period ranging from six to 18 months, aligning with operational needs. However, the online portal currently limits selection to a 12-month period. It is advisable to choose an end month that aligns with your preferred reporting cycle.
If your initial reporting period isn’t 12 months, the system doesn’t pro-rate thresholds, except for interest charges under the de minimis rule.
Before June 2023, entities had five options for fiscal year selection, but a Cabinet decision brought significant changes to this system.
Today, laws operate at both emirate and federal levels. Emirate-level authorities typically issue trade licenses, often dictating fiscal years by the entity’s formation documents. Corporate tax, however, falls under federal jurisdiction.
Given this framework, it is wished for that the UAE Federal Tax Authority allows separate fiscal years for each entity to avoid confusion and potential loss of tax allowances.
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