Deferred tax is a regularly tested topic in Financial Reporting. It is often tested in more detail in Strategic Business Reporting as well. Deferred tax in the UAE generally outcomes in a liability being known within the financial statement positions. IAS 12 states a deferred tax liability as the amount of income tax due in forthcoming periods regarding taxable momentary differences. In modest words, deferred tax is a tax your company have to pay in the future.
- Adoption of IAS 12 and Measurement of Deferred Tax
- Influence of Cabinet Decision No. 116 on Deferred Tax Calculation
- Accrual VS Realization
- What Adjustments are Essential to Convert Accounting Profits into Taxable Profits?
- How Do Temporary Differences in Tax Basis Impact Deferred Tax Calculation?
- Conclusion
- FAQs
Adoption of IAS 12 and Measurement of Deferred Tax
IAS 12 Income Taxes actually handles deferred tax. The International Financial Reporting Standards (IFRS) are already very prominent in the UAE. IAS 12 postulates that “Deferred tax liability must be measured at the rates of tax that are likely to apply to the period when the asset is active in know or the liability is settled. It should be based on tax rates or laws that have been passed or practically passed by the end of the reporting period”.
Influence of Cabinet Decision No. 116 on Deferred Tax Calculation
On 30 December 2022, Cabinet Decision No. 116 of 2022 was issued. It was in effect on Feb 1, 2023, and imposed within 15 days from its publication. It needs that a typical rate of 9 % will apply to all taxable income surpassing a threshold of AED 375,000.
On the other hand, a rate of 0 % will apply to taxable income not surpassing that threshold. The tax law is considered passed as of January 16, 2023, after the issuance of the cabinet decision. Therefore, companies are obligated to assess the implications of deferred tax and computation of deferred tax for reporting periods before or after January 16, 2023.
Accrual VS Realization
The computation of deferred tax depends on two major things such as accrual or realization. These are implemented by the company for the core purpose which is tax.
| Accrual basis | Realization basis |
| If the company employs the accrual basis for tax drives and the financial accounts are ready on an accrual basis, at that time there will be no change between the tax base for most items and carrying amount. It shows that the balance sheet is reflecting the fair market value. | If the balance sheets are not passed at the fair market value as directed by tax law to be carried as per transitional provisions of the law, deferred tax will be experienced unless difference is of a permanent nature. |
What Adjustments are Essential to Convert Accounting Profits into Taxable Profits?
As per Article 20(2) of the law, it is obligatory to convert some of the accounting profits into taxable profits. Those items are presented in the financial statements such as;
- Depreciation
- Amortization
- Provisions
These are permissible for tax purposes unless specified. If not then you must take some necessary actions to make them allowed by the Minister under Article 20(2)(i) of the law.
How Do Temporary Differences in Tax Basis Impact Deferred Tax Calculation?
When a taxable person implements the realization basis for tax drives, the resonant values of assets and deferred tax liability presented in the financial statements will vary from the tax base.
- The figures are presented on an accrual basis
- Taxation drives are presented on the realization basis
These temporary differences lead to deferred tax. For example, if the written down value of a plant in the financial statements is AED 20 million it has an actual cost of AED 25 million. The same case is the carrying amount for tax drives, while the tax base is AED 25 million on a realization basis. This difference generates a deductible temporary difference of AED 5 million. It leads to deferred tax assets although which is a significant deferred tax percentage.
Conclusion
The complications of deferred tax in the UAE demand a deep understanding of laws and computation of deferred tax UAE. By identifying the implications of accrual and realization basis, companies can efficiently accomplish their deferred tax positions.Tax Consultant in dubai is very renowned for its proficiency in tax suggested services. To reveal the mysteries of deferred tax it is important to consult Farahat & Co for accurate reporting and strategic decision-making.
FAQs
What is the deferred tax in the UAE?
IAS 12 describes a deferred tax liability as the amount of income tax payable in future periods regarding taxable momentary differences. In modest terms, deferred tax is a tax that is due in the future.
What is deferred income tax?
Deferred income tax refers to tax. It imposes on money that your company receives for goods or services that have not been distributed to your customers.
What is deferred income tax asset?
A deferred income tax is a liability. It is usually logged on a balance sheet. It results from a variance in income recognition between rules of tax and the business’s accounting approaches. For this reason, the company’s due income tax may not be associated with the total tax expense reported.
