It’s unbelievable that there are only five months left until the end of the first tax period for the majority of the companies. How prepared are we for Corporate Tax (CT)? Recently, many clients have requested assistance with changes in their ERP systems. Here are some guidance for the same .
- Chart of Accounts Overhaul
Your chart of accounts is the foundation of financial reporting. It needs to be restructured to accurately capture:
- Related Party Transactions: Categorize transactions with related parties (sales, purchases, loans, interest, salaries, cost-sharing) distinctly to meet transparency requirements.
- Payments Outside the UAE: Track these payments separately to determine eligibility for 0% withholding tax.
- Exempt Income: Group dividend income and capital gains to reflect tax exemptions.
- Pre-Tax Period Retained Earnings
Establish a separate account to track retained earnings from before the tax period. This is crucial, as losses from pre-tax periods cannot be carried forward.
- Accrual Entries for Taxable Profit
If your business uses the realization basis of accounting but opts for accrual for tax purposes, use distinct voucher types to record adjustments. This maintains clarity between accounting and tax treatments.
- Disallowed Expenses
Create account groups to identify expenses that will be disallowed for tax deductions (penalties, fines, donations, personal expenses, non-business expenses, etc.). This simplifies tax calculations.
- Input VAT Taxing
Expenses on which input VAT isn’t claimed should be recorded separately to avoid discrepancies in tax calculations.
- FOREX Exchange Rates
Generate a report detailing FOREX rates used throughout the year for accurate tax reporting in cases of foreign currency transactions.
- Interest Expense Grouping
Group various interest expenses (guarantee fees, arrangement fees, interest on capitalized assets, etc.) into a “Net Interest” account to streamline deduction claims as per Ministerial Decision 126.
- Tax Group Transactions
For businesses part of a tax group, establish a mechanism to identify intergroup transactions for elimination in consolidated reports. This is vital for transfer pricing compliance.
- Advance Tax Account
Create an “Advance Tax” account under current assets to record taxes paid outside the UAE (e.g., withholding tax).
- Intragroup Transfers
Record transfers of assets and liabilities within qualifying groups (75% or more common ownership) separately to assess eligibility for relief on gains or losses from these transfers.
