UAE corporate tax: The role of external financial audit

There is uncertainty about where liability arises with returns that are later found to include errors

An entity’s accounts are presented differently depending on whom they are being read by. Getty Images

From the college law lectures I attended as a student, I particularly remember the Latin phrase non est factum. While this translation is not strictly accurate, as students we were taught to remember the plea as "not my problem".

Fundamentally, it maintains that a defendant can ask to set aside an executed agreement on the basis that a mistake has been made with regard to the interpretation of one, more or all elements in an executed contract.

I bring this up because it appears we might be in danger of experiencing such a position in the future. In particular, in the field of the external financial audit of juridical entities where it interacts with corporate tax.

In the same way that there are many ways to look at a situation, an entity’s accounts are presented differently depending on whom they are being read by. You might imagine that the total will always be the same, however, that is not the case.

Financial accounts will be comprehensive. Management accounts will similarly be complete, but have adjustments in layout to allow an executive team to have a deeper focus on specific elements of the business.

A set of audited accounts will have a version that tracks cash events, the actual receipt and spending of monies for the reviewed period.

Finally, there are two versions that are tax computations: one for VAT and the other for corporate tax. Neither of these will match your financials accounts, internal or externally audited.

I was asked recently to provide a written opinion on the corporate tax position of a UAE entity by its owner. This was because the entity’s audit firm were refusing to sign off the audit until it was provided.

While financial accounts are part of the submission requirement to the Federal Tax Authority for your annual return, it is inevitable that there will be differences between these reported numbers and the audited numbers.

A number of things struck me about this case.

Earlier in my career, when working in the UK, it was not unusual for an auditor to additionally prepare the tax computation. The audited accounts would be filed with Companies House and the tax element with His Majesty’s Revenue Commissioners. Any amounts due would be settled no later than nine months after the end of the financial year.

That deadline is the same in the UAE. Many chief financial officers and finance directors holding the required experience might prepare the tax calculation themselves. What I am highlighting is that these tasks can be completed by different parties. There is no need for one to impinge on the other.

As part of completing a corporate tax filing on the FTA portal, both the audited accounts and the tax computation can and should be uploaded. It would be obvious that these are different things and serve different purposes.

The latter would be used to complete those numbers that form part of the return. For example, a business is allowed to reclaim half of its entertainment expenditure against taxable revenue. By default, the audited accounts will show a lower net profit or higher loss of this amount.

There will be many points of divergence. So why the request? If an audit practice does want to prepare the tax computation, for whatever reason, then surely it could just make a note of this in the published pack? There would be nothing unreasonable about such a statement. It could not be read as a limiting qualification on the results themselves.

Maybe there is an uncertainty about where liability arises with returns that are later found to include errors. I am unsure how a third party could be held responsible for something they specifically said they were not going to do and were not involved in. In such a scenario, who would depend on a non est factum defence?

What the situation does demonstrate is the degree of uncertainty that exists with regard to responsibility with the new tax regulatory regime. It is impossible to expect an official decision on the matter or other such nuances, considering the short time that has elapsed since the initial announcement of corporate tax. The court cases that will provide specific clarity are years away and no one wants to be the entity whose name is associated with a given decision.