Adjustments of accounting profit in the UAE

The UAE Corporate Tax Law does not provide for separate tax accounting. The initial basis for calculating the corporate tax base is the financial statements, i.e. accounting data. This data is subject to adjustment in cases where the accounting rules of a particular transaction differ from the rules established for tax purposes.

However, the situation may change over time – indeed, it's already changing via by-laws. These are allowed by Article 20(2) of the Corporate Tax Law, according to which:

• The Cabinet may specify ‘in a decision issued … at the suggestion of the’ MoF an adjustment of ‘any income or expenditure that has not otherwise been taken into account in determining the Taxable Income under the provisions of this Decree-Law’ (para (h)).
• The MoF may specify ‘any other adjustments’ (para (i)).

You may think that the Minister alone is not allowed to establish by his decision such an adjustment as falls within para (h) of Cl. (2) of Art. 20, i.e. an adjustment in the absence of which costs and income will not affect taxable profit. In this case, the appropriate tool is para (h), i.e. the Minister must submit a proposal on this issue to the Cabinet, which may decline or accept it in the form of a decision of the Cabinet. Otherwise, what does para (h) stand for if the Minister can always ordain any adjustment at his own discretion under para (i), depriving the rest of the Ministers of the authority granted to them by the para (h)?

Does this make sense? Yes, but only before you reach Cl. (5) of the same Article where you find para (b). This sets forth that ‘notwithstanding Clauses 1 and 3 of this Article, the Minister may prescribe … any adjustments to the accounting standards to be applied for the purposes of determining the Taxable Income for a Tax Period’. Thus, the MoF has the following authorities:

• ‘The Taxable Income … shall be the Accounting Income … adjusted’ as the MoF has decided, and
• ‘The accounting standards to be applied for the purposes of determining the Taxable Income for a Tax Period’ with an adjustment prescribed by the MoF.

To distinguish these two authorities is easier said than done. As per Art. 1 and Cl. 1 of Art. 20, Accounting Income adjustable under Art. 20 (2)(i) ensues from the application of the accounting standards. Thus, the adjustments that the MoF is entitled to make by Art. 20(2)(i) cover any adjustment of accounting standards that the MoF may prescribe under Art. 20(5).

In the Explanatory GuidePages 52 and 53.
, the MoF construes:

• para (i) of Cl. (2) as authority for adjustments ‘and regulations to address particular types of transactions whose accounting treatment may be vulnerable to manipulation of the determination of Taxable Income’,
• and Cl. (5) as authority to prescribe adjustments ‘to the calculation of Taxable Income that could be an exception to the general rules of calculating Accounting Income on an accrual basis or the treatment of unrealised gains or losses for Corporate Tax purposes’.

Under this interpretation, Cl. (5) is auxiliary to the adjustments stipulated in the other regulations: directly in the Corporate Tax Law, in a decision of the Cabinet or in the decisions of the MoF issued within the scope of para (i) of Cl. 2 of Art. 20. Therefore, the purpose of Cl. (5) is to authorize the Minister to pinpoint an IFRS rule which entails Accounting Profit being calculated out of concert with existing tax regulation and to specify how a taxpayer may adjust his accounting approach to eliminate the difference in favor of tax regulation.

Example 1

Art. 20(5)(a) states that ‘the Minister may prescribe … the circumstances and conditions under which a Person may prepare financial statements using the cash basis of accounting’. On May 9, 2023, the Minister exercised this authority in Art. 2 of his Decision No. 114: ‘For the purposes of paragraph (a) of Clause (5) of Article (20) of the Corporate Tax Law, a Person may prepare Financial Statements using the Cash Basis of Accounting, where the Person derives Revenue that does not exceed AED 3,000,000’.

In addition to this, the MoF may identify IFRS rules that hinder qualifying taxpayers from preparing financial statements with the cash basis and may exclude the application of these rules for such taxpayers. To do so, the MoF shall apply para (b) of Cl. (5) of Art. 20.

Example 2

Clause (11) of Art. 42 of the Corporate Tax Law obliges a Tax Group to ‘prepare consolidated financial statements in accordance with accounting standards applied in the State’, i.e. with IFRS. As per IFRS 10 “Consolidated Financial Statements”, all subsidiaries shall be consolidated with the parent company. However, for the purpose of the Corporate Tax, only those subsidiaries shall be consolidated that are members of the Tax Group.

Moreover, the scope for elimination is determined differently:

Therefore, the Minister determined in Art. (3) of Decision No. 114 that ‘the reference to the preparation of consolidated Financial Statements of a Tax Group under Clause (11) of Article (42) of the Corporate Tax Law shall mean the preparation of standalone Financial Statements on the basis of the aggregation of the standalone Financial Statements of the Parent Company and each Subsidiary that is a member of the Tax Group, eliminating the transactions between them as required under Clause (1) of Article (42) of the Corporate Tax Law’. The Minister referred to the authority vested in him by para (b) of Cl. 5 of Art. 20 of the Law.

In any event, neither Cl. (5), nor para (1) of Cl. (2) of the Corporate Tax Law vests the MoF with the authority to negate the Cabinet’s power to prescribe an adjustment of ‘any income or expenditure that has not otherwise been taken into account in determining the Taxable Income under the provisions of this Decree-Law’.Art. 20, Cl. 2, para (h) cited above.

In my opinion, the Cabinet’s right to make such adjustment is underestimated in the current regulations. Indeed, only the Cabinet is allowed to make income taxable when it should never be accounted for as part of the profit according to IFRS. The same goes for ‘expenditure’. The MoF may only propose that other Ministers do so. If agreed, the Cabinet shall prescribe the adjustment.

But, let’s look at how it really works. In Cl. (1) of Art. (2) of Decision No. 134, the Minister ordained an adjustment of Accounting Income ‘to include any realised or unrealised gains and losses that are reported in the Financial Statements insofar as they would not be subsequently recognised in the statement of income’. In my opinion, this is perfect match with the disposition of para (h) of Cl. (2) of Art. 20 of the Corporate Tax Law. As cited above, this paragraph vests the Cabinet, rather than the Minister, with the authority to ordain such adjustment.

Example 3

A Company reevaluated its assets that had a surplus in their value. According to para 39 of IAS 16, ‘if an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus’. Para 41 of IAS 16 provides that ‘the revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised… Transfers from revaluation surplus to retained earnings are not made through profit or loss’.

Article 1 of the Corporate Tax Law determines Accounting Income as ‘the accounting net profit or loss for the relevant Tax Period as per the financial statements prepared in accordance with the provisions of Article 20 of this Decree-Law’. Thus, a revaluation surplus will not affect the profit and loss statementThe section in the statement of profit or loss and other comprehensive income.
 save for a subsequent decrease in the carrying amountPara 40 of  IAS 16
.

The Corporate Tax Law does not prescribe any adjustment for the depreciation. Therefore, a surplus in depreciation is deductible, on the one hand, without the surplus being included in the carrying amount in the Accounting Income, on the other hand.

Clause (1) of Art. (2) of the MoF’s Decision No. 134 may be applicable to address this issue by adjusting the Accounting Income with unrealized capital gains (a surplus from revaluation) at the moment when they are added to the Company’s retained earnings.

The MoF referred to para (h) of Cl. (2) of Art. 20 of the Corporate Tax Law. However, this paragraph provides for ‘any other adjustments as may be specified by the Minister’, i.e. it is not applicable for adjustments which are not “other” than adjustments mentioned earlier in the same clause. One of those mentioned is para (h), which covers adjustments designed to tax income that is otherwise untaxable. Therefore, in my opinion this adjustment should be prescribed by the Cabinet rather than the Minister.