UAE corporate tax: How to account for fixed and depreciating assets

The first corporate tax returns are due at the end of December 2024. Getty images

Think of corporate tax as a carefully choreographed dance, similar to the traditional Scottish ceilidhs. Sometimes there are regional variations or particular industry or location options, but often there are not. In these ambiguous situations, it is the caller, the master of the music, who may appear to set the tone at first glance.

Today, let us delve into a particular set known as group dance. My objective is not to set rules and provide you with a definitive path to follow. After all, no specific guidance has been given by any regulatory authorities. Rather, I encourage you to consider the various aspects of this seemingly straightforward practice and contemplate the questions and avenues of thought that may be relevant to your individual situation.

Whether you are a business owner or the designated employee responsible for managing your entity's corporate tax returns accurately and efficiently, it is crucial to stay organised and up-to-date with your financial obligations.

The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

In today's digital age, smartphones have become an essential tool for conducting business operations. The cost of a smartphone typically ranges from Dh1,500 ($408.30) to Dh6,000, depending on the features and specifications you require. Most people will get at least three years of usage from it.

There are only two treatments in accounting for this purchase. One is that it is considered a one-off expense, in its entirety, on the date of purchase. The other is that it can be capitalised and depreciated over its useful life. Let us set this at three years. This means one third of the cost is an expense in your financial accounts each year assuming it is purchased on day one.

If you want to be fancy, you could choose between straight line and decreasing balance depreciation, the latter meaning a smaller charge each period. Finally, you can choose not to depreciate in the fiscal year of acquisition. This is as complicated as the accounting gets. The corporate tax rules could take a different view, a ruling we are eagerly awaiting.

Businesses that capitalise fixed assets usually set a materiality threshold below which they recognise the total cost of minor purchases that fall into the fixed asset category. The specific threshold varies from case to case and depends on factors such as the type of business, its revenue, and complexity. This variance can result in different figures, each with a different proportion of zeros. Perfectly normal.

Why would the taxman care? Because your choice might be influenced by your decision to minimise your corporate tax bill. Pay less today and more tomorrow. Yes, it does even out over time, but who does not want cake today?

The gain to a business is in both cash flow and inflation. The issues caused by Covid-19 and geopolitical events have disrupted and altered supply chains, which, in turn, fuelled inflation.

Current guidance is that all must follow International Financial Reporting Standards (IFRS). However, this leaves us with choices, allowing us to set our own limits.

Take a tale of two small businesses. One is run by a detail-orientated person. The decision is made to capitalise any purchase that has multi-year utility. A white board for keeping notes. The cost is minimal, but technically it is a fixed asset. This Dh100 purchase is taken as a cost over three years.

The other business decides not to capitalise anything. It just adds to the accounting effort and for what? The money is spent. Recognise the expense and let’s take a quasi-cash approach to accounting. In this situation, IT equipment costing Dh5,000 might not be depreciated.

The UAE's corporate tax law explained: Business Extra

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The numbers here are small enough that the relevant authorities might let it slide. Add some zeroes to these numbers and increase the size of the businesses and we are likely to see a different perspective being brought to bear.

To ensure some consistency, will law be introduced to set minimum monetary levels at which a purchased asset must sit on an entity’s balance sheet? Will we see minimum and maximum periods over which costs must be written down? How much will this diverge from IFRS?

Thanks to a recent Federal Tax Authority decision, No 7 of 2024, the first corporate tax returns are now due at the end of December 2024 rather than February 2025. If you were unaware of this change, you are not paying sufficient attention to the legislative landscape. It genuinely is that fluid.

Your business might have just two months to make what might be a critical decision in submitting a final version of your corporate tax return.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE