In the recent few years, the UAE experienced significant tax changes with an objective to streamline its tax system and bring it in tandem with international best practices, also diversifying its state revenue. Starting with the implementation of Value Added Tax (VAT) in January 2018, and followed by the introduction of economic substance rules (ESR) and a Country-by-Country Reporting (CbCR) regulations in April 2019, the UAE has been through a series of successive tax reforms in the recent few years to align with global markets and in turn diversify its revenue.
The new Corporate Tax law will levy corporate income tax on business profits made by UAE businesses, over the course of the tax accounting period.
The Law and details of the regulation were issued in mid-2022, and the natural question that arises is: do businesses have sufficient information to assess the impact of this announcement.
Here we have discussed the taxable and accounting profits of Corporate Tax in depth.
Also known as bookkeeping profits, an accounting profit is achieved as a result of operating and non-operating activities of a company. Reflecting on a business’s profitability and performance in the future, an accounting profit is essentially the actual reflected financial gain that’s additional after abating total expenses from total revenue of a business. It ascertains how judicious resource allocation of the company in question.
And its accounting profit foretells the company’s liquidity and solvency to the previewers of the financial statement.
Taxable profit is the total amount of taxable profit as per the laws of the tax jurisdiction of the country. Often used to contrast between the accounting profit and earnings, taxable profit is always derived taking tax liabilities into account and the accounting profit acts as a basis for the computation. Inclusive expenses and the calculated amount is updated in the profit & loss account books. Businesses try their best to reduce tax liabilities within the acceptable tax guidelines likely resulting in taxable profits higher than accounting profits most times.
Comparison (Corporate Tax Profits)
The profit computation principle and guideline under IFRS and GAAP differ on basis outlined in the corporate tax laws in the UAE leading to differences in the profits and their computation methods.
Let’s demonstrate how both the terms are quite different from each other despite being collectively termed as ‘profits’ for businesses.
- The first and foremost, accounting profits are computed on the accrual basis of accounting unlike taxable profits that are derived by using accrual and cash basis. To better understand the difference, the former shows the accounts receivable once the sale is made while there might not necessarily money is received from the customer while in case of taxable profits, the cash is recorded only when it is actually exchanged or received from the customer to the business, not just on booking.
- While accounting profits in Dubai, UAE are calculated based on the applicable IFRS or GAAP, taxable profits are figured based on the guidelines given in UAE’s corporate tax law and related regulations
- Accounting profit or bookkeeping profit is the net income after explicit cost reduction which includes raw material costs, labor costs, distribution costs, and other production costs/expenses from the total revenue as outlined by accounting standards or GAAP. While taxable profit takes into account tax liabilities such as accounting profits and costs referring to the profit that’s taxable as per income tax guidelines or income tax act.
- Computation of accounting profit is a continuous on-going considering all the payments and receivables. On the contrary, taxable profit is a one-time tax that is determined once all amounts are received and paid.
- Accounting profit of an organization recognizes the business profitability as a whole while taxable profit emphasizes on deriving the tax liability of the company.
- Bookkeeping wise accounting profit stays within the scope of financial reporting while the extent of taxable profit or income remains to Tax reporting.
- Accounting profit is financial gains leaving out all costs whereas profit on which taxes are levied are simply termed as taxable profit.
- For depreciation calculations accounting profit uses the straight-line method while the taxable profit uses the double-declining depreciation method for calculations.
- Accounting profit uses FIFO (First In First Out) inventory valuation method while taxable profit uses LIFO (Last In First Out) inventory valuation method.
- Accounting profits notify positive or negative financial performance whereas taxable profit only determines the tax liability of the organizations.
- Lastly, for calculation of accounting profits, the current financial year is only accounted for. Whereas, income from the previous year is added in case of taxable profits for that matter. For example, if the assessment year is 2023-2024, then the previous year will be 2022-2023.
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(Sources – The FTA & KPMG)