Which Accounting Standard is Used for Computation of Taxable Income as per UAE Corporate Tax?
Imagine you have a lemonade stand, and at the end of the month, you want to know how much money you made. You need a special rulebook that tells you how to count your money properly. For businesses in the UAE, this “rulebook” is called an accounting standard. Let me explain what this means in the simplest way possible
The Main Rulebook: IFRS
When it comes to UAE Corporate Tax, businesses must use something called IFRS, which stands for International Financial Reporting Standards. Think of IFRS as a worldwide language for counting money and keeping track of business activities.
Just like how everyone in school follows the same rules for a game, IFRS makes sure that all companies count their money in the same way. This makes it fair and easy to understand for everyone, whether you’re in Dubai, Abu Dhabi, or anywhere else in the world.
Why Do We Need These Rules?
Before the UAE introduced corporate tax in 2023, many businesses were using different ways to keep their accounts. It was like everyone was playing the same game but with different rules, confusing, right?
The UAE government decided that starting from June 1, 2023, all businesses must use IFRS to calculate how much tax they need to pay. This makes everything clear, transparent, and fair for everyone
Two Types of IFRS: Full IFRS and IFRS for SMEs
Now, here’s where it gets interesting. The UAE understands that not all businesses are the same size. A small neighborhood bakery is different from a big shopping mall company, right? So, there are two versions of the rulebook:
1. Full IFRS (For Big Businesses)
If your business makes more than AED 50 million in a year, you must use the complete IFRS rulebook. This is like using the full instruction manual with all the details. These bigger companies also need to get their financial statements checked by professional auditors people who make sure the numbers are correct
2. IFRS for SMEs (For Smaller Businesses)
If your business makes less than AED 50 million in a year, you can use a simpler version called IFRS for SMEs (SMEs stands for Small and Medium-sized Enterprises). This is like using a shorter, easier version of the instruction manual with fewer complicated steps.
The simpler version has:
- Fewer complicated rules to follow
- Less paperwork and documentation required
- Easier language that’s simple to understand
How Do Businesses Calculate Their Taxable Income?
Let me break this down into simple steps, like following a recipe:
Step 1: Start with Your Profit
First, you look at your financial statements prepared using IFRS or IFRS for SMEs. You find out how much profit you made this is called your “accounting profit”.
Step 2: Make Adjustments
Not everything counts for tax purposes. The UAE tax law says you need to add or subtract certain things:
- Add back expenses that the government doesn’t allow (like some entertainment costs)
- Subtract income that is tax-free (like certain dividends)
- Adjust for gains or losses that haven’t actually happened yet (unrealized gains)
Step 3: Get Your Taxable Income
After all these adjustments, you get your taxable income. This is the final number that the government uses to calculate how much tax you owe.
Two Ways of Recording Money: Accrual vs. Cash
There are two main ways businesses can record when money comes in or goes out:
Accrual Basis (The Main Method)
Imagine you sold lemonade to your friend today, but they’ll pay you next week. Under accrual accounting, you count that money as earned today even though you haven’t received the cash yet. This gives a more accurate picture of your business because it shows what you’ve earned and spent, not just when cash moved.
Most businesses in the UAE must use this method.
Cash Basis (For Very Small Businesses)
This is simpler. You only count money when it actually comes into or goes out of your pocket. If your friend pays you next week, you count it next week, not today.
Only very small businesses with revenue of less than AED 3 million can use this method. Or businesses can use it if they get special permission from the Federal Tax Authority (FTA).
What Happens If You Don’t Follow These Rules?
The UAE government takes these accounting standards seriously. If a business doesn’t prepare its financial statements using IFRS or IFRS for SMEs (whichever applies to them), it can face penalties and fines. It’s like getting in trouble at school for not following the class rules.
That’s why it’s very important for businesses to:
- Keep proper records
- Use the correct accounting standard
- Get professional help if needed
Simple Summary: What You Need to Remember
Think of UAE Corporate Tax accounting standards like this:
- IFRS is the main rulebook that everyone must follow
- Big businesses (over AED 50 million revenue) use Full IFRS
- Smaller businesses (under AED 50 million revenue) can use the simpler IFRS for SMEs
- Most businesses use accrual accounting (recording when things happen, not when cash moves)
- Very small businesses (under AED 3 million) can use cash accounting (recording only when cash moves)
- The accounting profit is adjusted to get the taxable income
- Following these rules is mandatory no exceptions
Why This Matters for Your Business
Whether you’re starting a small online store or managing a large company, understanding these accounting standards is crucial. They form the foundation of how you’ll calculate and pay your corporate tax in the UAE.
The good news is that the UAE has made these standards internationally recognized, which means if you do business with companies in other countries, everyone is speaking the same “money language”. This makes business easier, more transparent, and more trustworthy for everyone involved.
Remember, just like you need to keep your school assignments organized, businesses need to keep their financial records organized using these accounting standards. It helps the government understand how much tax each business should pay fairly, and it helps businesses understand their own financial health better, too.
If you’re a business owner in the UAE, the key takeaway is simple: use IFRS (or IFRS for SMEs if you qualify), keep good records, and when in doubt, ask a professional accountant for help. Following these rules isn’t just about avoiding penalties, it’s about running your business the right way.
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