Understanding Deferred Taxation: A Must-Know for Business Owners in the UAE

Navigating the UAE corporate tax has become a new reality for entrepreneurs. With the introduction of corporate tax from January 1, 2024, it is essential for entrepreneurs to familiarize themselves with the various tax requirements.

Of these, deferred tax stands out as an important concept that requires attention. In this article, we take a closer look at the importance of understanding deferred taxes and why it’s important for business owners to be aware of them.

Who is Affected by the UAE Corporate Tax?

The company must have a turnover that exceeds AED 1,000,000 in a calendar year for the owner of the business may be subjected to the new corporation tax. Whether to be taxed or not also depends on the net income of the business owner.

A 9% tax will be charged if the net income exceeds AED 375,000, taxable profits below this threshold will be subject to a 0% rate. The tax is directly levied on the net income, not the gross income.

From now on, businesses can register through the EmaraTax digital platform to submit required documents to comply with the government’s regulations.

Note: Personal income from employment, investments, and new estates is not subject to tax.

What is Deferred Taxation?

Deferred taxes are the discrepancies between the values assigned to assets and liabilities in a company’s financial accounting and the corresponding values provided by tax law. These differences can have a significant impact on the amount of tax a business must pay.

It is important to note that deferred taxation is not a form of tax avoidance or tax evasion. Rather, it is a result of different accounting and tax regulations.

Examples of Deferred Taxation

Depreciation expenses

Tax laws and accounting rules treat depreciation expenses differently. Depreciation expense for long-lived assets for financial statement purposes is typically calculated using the straight-line method, although tax law allows companies to use the accelerated depreciation method.

As the straight-line method has lower depreciation expense than the accelerated method, a company’s accounting profit may temporarily be higher than its taxable income. The company records a deferred tax liability for the difference between accounting pre-tax income and taxable income.

As a company continues to depreciate its assets, the difference between straight-line and accelerated depreciation decreases, and a series of offsetting entries gradually eliminates the amount of the deferred tax liability.

Installment Sales

This is the revenue a company generates when it sells its products on credit and then repays the same amount in the future.

Accounting regulations allow companies to recognize the entire revenue from installment sales of general merchandise, but tax law requires companies to recognize revenue when the installment payments are made.

This creates a temporary positive difference between the company’s accounting and taxable profits and also creates a deferred tax liability.

The Significance for Business Owners

Understanding deferred taxation has significance for business owners from five perspectives: complying with the UAE corporate tax requirements, accurate financial reporting, effective tax planning, maintaining control over finances, and collaboration with professionals.

Complying with the UAE corporate tax requirements

As a responsible business owner, it is vital to ensure compliance with corporate tax regulations. Understanding deferred taxation enables you to accurately assess your tax liabilities and fulfill your tax obligations promptly.

By staying informed, you can avoid penalties and legal repercussions that may arise from non-compliance.

Accurate Financial Reporting

Deferred taxes have a direct impact on a company’s financial statements. Understanding this concept allows business owners to present accurate financial information that complies with both accounting standards and tax regulations.

This increases transparency and credibility, which in turn strengthens the company’s credibility in the eyes of stakeholders, investors, and financial institutions.

Effective Tax Planning

Knowledge of deferred taxes enables effective tax planning strategies. By identifying temporary differences between accounting and tax values, business owners can optimize their tax positions.

This may include using deductible temporary differences to reduce tax liability or aligning business decisions with permanent differences to avoid tax consequences. Proactive tax planning can result in significant cost savings and improved financial results for your business.

Maintaining Control Over Finances

Deferred taxes can be complex, and not understanding that complexity can lead to misinterpretation of financial data. Entrepreneurs who understand deferred taxes stay in control of their company’s finances.

This knowledge enables you to make informed decisions, accurately interpret financial reports, and effectively manage your company’s tax position.

Collaboration with Professionals

Given the technical nature of deferred taxes, we strongly recommend that you seek the advice of your tax advisor, accountant, or financial professional.

Working with a tax expert can provide valuable insight and help you optimize your tax benefits while ensuring your business remains compliant. Their expertise can help you navigate the complexities of deferred taxes so you can focus on your core business.

Conclusion

As corporate tax becomes a reality for business owners in the UAE, understanding deferred taxation emerges as a vital component of financial management. By recognizing the aforementioned significance for business owners, one can ensure compliance and optimize tax positions.

Embracing the concept of deferred taxation empowers business owners to navigate the evolving tax landscape with confidence and make informed financial decisions that contribute to the long-term success of their enterprises.

Pacific Prime Dubai continues to provide you with the most up-to-date information about finance-related matters. Visit our blog for more recent updates in the UAE! You will be able to find useful information to help you navigate through your expat journey.

If you wish to make adjustments to your employee benefits or corporate insurance, or to protect your business with business insurance, feel free to talk to our expert advisors for impartial advice or a FREE comparison quote.

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Eric Chung

Eric is an experienced content writer specializing in writing creative copies of marketing materials including social media posts, advertisements, landing pages, and video scripts.

Since joining Pacific Prime, Eric was exposed to a new world of insurance. Having learned about insurance products extensively, he has taken joy and satisfaction in helping individuals and businesses manage risks and protect themselves against financial loss through the power of words.

Although born and raised in Hong Kong, he spent a quarter of his life living and studying in the UK. He believes his multicultural experience is a great asset in understanding the needs and wants of expats and globe-trotters.

Eric’s strengths lie in his strong research, analytical, and communication skills, obtained through his BA in Linguistics from the University of York and MSc in Teaching English to Speakers of Other Languages (TESOL) from the University of Bristol.

Outside of work, he enjoys some me-time gaming and reading on his own, occasionally going absolutely mental on a night out with friends.

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