UAE: Can you claim all accounting expenses to prepare tax return?

Taxable persons are liable to pay tax on their taxable profits. As required by the Corporate Tax Law of the UAE (UAE CT law), taxable persons are responsible for adjusting their accounting profits to arrive at the taxable profits. The adjustments to the accounting profits can be allowable and disallowable expenses, adding and deleting income to calculate the taxable profits. Our previous articles established that Taxable profits equal accounting profit as per financial statements + disallowable expenses - allowable tax expenses + other taxable income - other nontaxable income.

The core objective of disallowing some expenses and allowing others is to ensure the taxable person claims only tax-allowable expenses to arrive at the taxable profits.

Regarding the deductibility of expenses, article 28 of the UAE CT law carries general provisions. Article 28 (1) requires that if the revenue expenses are wholly and exclusively for business purposes, the taxable person can claim all expenses in the same tax period in which these expenses are incurred.

Revenue expenses are incurred for the day-to-day operation of the business, and it does not add any value to the assets or reduce liability. For example, courier charges, salaries, sales and marketing expenses, postage, repair and maintenance etc, are all revenue expenses and can be claimed in the same tax period in which these expenses are incurred. However, the capital expenses are incurred in one tax period and have benefits over multiple tax periods, like plant and machinery, building etc. The pattern of allocation (depreciation charge) of capital expenses may differ in the accounting standards and UAE CT law, and we need to wait for UAE CT Regulations to clarify the allocation pattern of capital expenses. If the allocation pattern is identical in the applicable accounting standards and UAE CT law, then accounting depreciation will be equal to tax depreciation, and any depreciation adjustment will not be required in the accounting profits to calculate taxable profits. On the contrary, accounting depreciation will be added back to the accounting profits, and tax depreciation will be deducted.

Clause 2 of article 28 of the UAE CT law deals explicitly with expenses not allowable for tax purposes. If the expenses do not pertain to the taxable person’s business or relate to the exempt income of the business, these expenses are not allowed for tax purposes. Based on this provision of the law, any personal and non-business expenses will not be allowed for tax purposes. If any such expense has been taken in the financial statements, it will be added back. For example, the expenses of B Ltd have been taken in the financial statements of A Ltd while calculating taxable profits of A Ltd, these expenses will be added back to the accounting profits of A Ltd.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official opinion of the Khaleej Times but a personal opinion of the writer. For any queries/clarifications, please write to the writer at mahar@kresscooper.com.