For many of you, corporate tax became real on January 1, 2024.
Your fiscal year, or what your corporate tax year is being called by the relevant authorities, might not be a calendar year. That information is in your formation documents. Check them. Register for corporate tax. If you do not know where to do it or how to do it, ask for help.
Technically, you do not need to register until the day you have to submit your corporate tax return. That will not be until 2025 at the earliest.
However, do not wait to register, believing that you can submit your tax return on the same day.
You need to prepare and review your fiscal year accounts before filing and you must know for certain when that year is.
Here, I would like to look at deferred taxation. Your accountant knows that the same figure can come in different ways, depending on how you are approaching it. I am not suggesting anything fraudulent; this is all about treatment.
Financial accounting tells you how much you invoiced. Management accounting tells you how much you can recognise in a reporting period. Value added tax demands that such invoicing is conducted under legislation for time of supply rules.
From June 1, 2023 corporate tax has its own accounting perspective.
Part of this accounting perspective is known as either a permanent or a temporary difference. It is possible to have both in the same reporting period. Accountants call these deferred tax assets (DTAs) or deferred tax liabilities (DTLs).
As a business owner, you are going to have to become conversant with these terms. Otherwise, you risk losing control of your financial understanding of your entity.
Permanent differences are those items that are included for accounting profits but not for your corporate tax computation. For example, half of your entertainment expenditure is not allowable, therefore is permanently excluded. In terms of understanding, this is the more straightforward of the two.
Meanwhile, temporary differences are what cause deferred taxation. These are the differences between what your accounts say an asset or liability is worth and what the tax law says its worth at a point in time.
As we are dealing with corporate tax, that date will be at the end of your entity’s fiscal year.
They come in two forms, one that increases the tax you will need to pay, and conversely, one that reduces it.
Let us take an example.
A provision for bad debts will reduce your accounting profits but must be removed for a corporate tax return. When that provision becomes a write-off of monies owed to the business in a later year, there is no profit and loss effect as the provision has already been made. However, you will now get a tax deduction.
The first element will be a taxable temporary difference, with your tax payable going up. The second element is a deductible temporary difference, with your tax payable going down.
This assumes that the rules will allow for this and there is no reason that they should not.
You should maintain records that demonstrate the original bad debt provision and be able to highlight the communication made to your customer(s) confirming that you no longer expect them to settle the amount that they owed you.
In terms of claiming back charged VAT on invoices to customers, similar burdens of proof are required. Additionally, a credit note should be raised, including a reference to the original invoice raised. You can now reclaim the VAT that you paid to the Federal Tax Authority in the period the original invoice was reported.
Some of you may be feeling that this is too difficult to comprehend, but for those of you who have been through an external audit, you will already have seen a similar process.
Statutory accounts or audited accounts include a section on cash flow movements. In that schedule, starting with your net profit or loss, items are added back or deducted.
For example, if you purchase and pay for a vehicle in full, then the amount is spent.
However, you will depreciate the value of the car over its useful life, measured in an acceptable number of years.
In this case, your net profit will be reduced by the difference between the depreciation in the reporting period and the amount actually paid to the supplier.
To stay with provisions for bad debts, while this will reduce your profit, no money has exchanged hands, so this will be added back.
David Daly is a partner at the Gulf Tax Accounting Group in the UAE
