Corporate Tax Checklist for Audited Financial Statements (Year 2023)
It has been nearly two years since UAE announced in Jan 2022 that it will introduce corporate to in its taxations system which was followed by a decree law, and nearly other 50 different regulations, guides, and decisions from the Cabinet, Ministery of Finance, FTA.
Since we are approaching the financials closing for 2023 we are highlighting certain aspect to take care of while closing 2023 audited financials:
Accounting Standards
According to current regulations in place as of date, IFRS is the approved accounting standard for the preparation of financial statements for corporate tax purposes and therefore all companies required to register for corporate tax whether they are qualified free zone entities or mainland entities must follow IFRS standards. Companies may elect to use IFRS for SMEs if they match the criteria stated in IFRS for SMEs, so the company must make sure that their financial statements for 2023 are completed as per IFRS.
Internal policies
Considering that IFRS has several possible ways to determine the same aspect in financial statements report, every organization must have its own internally approved policies such as Depreciation policy, dividends distribution policy, legal reserve policy, capital gains recognition policy, revenue recognition policy, asset classification policy, and many others. Some may argue that this is not is required but we have to consider that this is very much required to ensure the main principle of consistency in the financial statements. So each company should have it is internal policies approved by the board or shareholders.
Legal, Accounting, and Tax Harmonization
Many companies are still oblivious to the size of the task ahead for corporate tax where so many structures were created in the past to cater to business consideration without consideration for standards in the areas of accounting and legal which is not suitable for tax purposes, the introduction of corporate tax has made a significant change in this approach, so each organization has to look into its structure and match between the legal structure, Accounting reporting and corporate tax where corporate tax return is derived from the financial statements which has to match with corporate tax registration. So all companies must do an extensive review of three aspects and ensure that they are harmonized to achieve maximum compliance and the best tax management approach.
Transfer pricing
The corporate tax law in UAE has clearly stated that OECD transfer pricing guidelines to be followed when it comes to related parties transactions and as it is known to the whole market by now related parties are the companies that may have the same ownership of 51% and above and/or shareholders and their family members up to the fourth grade. This means that any balances due to or from related parties as of 31 December 2023 have to be evaluated as per transfer pricing rules/guidelines which is an additional burden to take care of when closing the financials for 2023.
Multi reporting purpose:
Since there was no corporate tax before in UAE and since the structures were built for business purposes mainly there were different considerations while creating the financial statements such as – do the company has a loan from the bank, do the company has to report its financial to free zone authority or any other authority, do the company have to report to specific authority on regular basis and so on, so companies may have to continue in this approach and add one more reporting purpose for corporate tax. There are instances where the organizations may create consolidated financials for bank purposes and have to create separate audited financials for tax purposes as well. This is an interesting factor for companies to think about and consider while preparing the financial statements.
Multiple external auditors
Due to the possible existence of multiple reporting purposes and different consolidations & the possibility of having multiple audited financials and the fact that some authorities may not have the same “approved” external auditors so the companies may be forced to deal with several external auditors which is another burden to be added to the process while considering financial statements.
Chart of Accounts
While preparing the financial statements in the past chart of accounts were created to fulfill the considerations mentioned above such as business, and multiple reporting purposes but it did not take into account corporate tax, now the chart of accounts must change to have the translation of internal policies established to illustrate the process of creating the financial statements as per IFRS standards, a famous example which may mention is the absence of Dividends account in the chart of accounts where in the past current owner’s accounts is used as a replacement for this specific account or retained earnings and legal reserves.
Finance IT systems
This consideration is critical since setting up the IT systems to provide reports as illustrated above is extremely important to save time and ensure easier compliance and reporting to multiple purposes, and to think carefully if an organization used to do consolidation for 20 companies and set it systems to do the same not it may need to issue three different financial statements for the purpose of corporate tax in addition to the current structure. So IT systems configuration is a crucial aspect of managing the human error risks associated with manual work.
Multiple compliance requirements and compliance risk management
Last but not least is the multiple compliance requirements, there are several regulations in place taking care where it maybe used by tax authorities to apply fines and penalties or highlight discrepancies in financial statements such as commercial company law or the regulation of a free zone entity and the discrepancy between the financial reports that are issued to several authorities may represent a problem so harmonization of these reports are very much needed and reconciliation between all of them under a bigger compliance framework is a must in order to ensure proper compliance risk management.
Conclusion
Financial statements for 2023 are going to be crucial since they represent the opening balance of 2024 and therefore it will be subject to any audit by FTA as part of compliance and comparison basis therefore it can not be dealt with lightly, lots of considerations has to be implemented and considered before issuing final audited statements for 2023. Luckily there is time to ensure that financial statements are prepared inline with required compliance for corporate tax and other compliance considerations.
To understand more about Corporate Tax Law and Registration reach out to us on:
contact@itc-tax.com | +971523205619
This article was published on 27 December 2023.
