Last week, the UAE Ministry of Finance updated the Frequently Asked Questions (FAQ) on the corporate tax for a second time since July. After the new update, the total FAQs has risen to 351 as compared to the increase to 209 (from 158) in July.
The updates demonstrate that the concerned authorities are providing timely guidance on important tax aspects. Business owners should take a note of the updates on the requirements to maintain audited financial statements.
A taxable person’s income is to be determined on the basis of adequate, standalone financial statements prepared as per the prescribed accounting standards. Accordingly, taxable persons are expected to prepare and maintain financial statements under the corporate tax laws. All documents and records should be maintained to support the information in the tax returns or in other filings, including:
- Relevant correspondence, invoices and tax invoices, licenses and agreements/contracts related to the business.
- Documents containing details of any election of tax reliefs, determination or calculation made by a taxable person in relation to its tax affairs.
- Documents with respect to related party transactions, wherever applicable.
The records should be preserved – physically and/or electronically - for 7 years following the end of the relevant tax period.
Audited vs certified financial statements
The requirement to maintain financial statements should be distinguished from maintaining audited financial statements as the latter is applicable only in the following categories:
- A taxable person having revenue over Dh50 million in a tax period.
- A Qualifying Free Zone Person (QFZP).
The earlier FAQs suggested that the specified persons could prepare and maintain ‘audited or certified’ financial statements. The updated FAQs, post the relevant ministerial decision, have clarified that it is not allowed to substitute audited financial statements with ‘certified’ financial statements.
The financial statements must be audited by a registered auditor pursuant to federal law 12/2014 and ministerial resolution 403/2015.
There is currently no obligation, or option, to prepare certified financial statements.
The obligation to prepare audited financial statements, wherever applicable, under any other existing legislations has not been altered by the corporate tax laws.
Even if a company is not required to maintain audited financial statements under the corporate tax laws, it may still be obliged to maintain the same if required under any other existing legislations such as the relevant free zone legislations.
The financial statements - audited or unaudited - may be asked by the Federal Tax Authority (FTA) in the prescribed form and manner.
Consolidated financial statements
Considering the legacy practices, business owners often wonder if a consolidated financial statements covering more than one company could be maintained for corporate tax purposes. Does each company require a stand-alone financial statement?
It has been reaffirmed that – except in the case of a ‘Tax Group’ - each UAE entity will need to prepare and maintain stand-alone financial statements. If a Tax Group’s revenue exceeds Dh50 million in a tax period, their financial statements will need to be audited, as prescribed.
For UAE corporate tax purposes, all amounts - income, expenses, deductions and credits - must be measured in dirhams. Income and expenses in a foreign currency need to be converted into dirhams.
The conversion should be based on the applicable exchange rate - set by the Central Bank of the UAE - at the time the foreign currency transaction is to be translated into UAE Dirhams.
The earlier FAQs stated that, in principle, taxpayers are expected to translate amounts denominated in a foreign currency on a transaction-by-transaction basis. However, the updated FAQs does not specify such transaction-by-transaction conversion.
The compliance requirement may need further clarification. The FTA will prescribe the method under which the conversion is to be undertaken.
Akin to other tax regimes, corporate tax is also a self-assessment regime. Robust financial records, documents and records would ensure that tax compliance and future assessments is seamless and comprehensive.