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

Relevant provisions of UAE Corporate Tax Law explained

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.

Losses not connected with or arising out of the taxable person’s business are not allowed, and if already considered in the accounting profits, these will be added back to the accounting profits. If the taxable person has incurred expenses for more than one purpose, an identifiable part or proportion of the expenditure incurred wholly and exclusively to derive taxable income will be allowed for tax purposes. For example, if X Ltd and Y Ltd are being managed from the same office, then rent and other common expenses, like electricity, telephone, internet etc will be shared between X and Y Ltd. None of the entities can claim the total expenses but their share of the expense.

Taxable persons cannot claim total interest expense but must follow the interest capping rules in article 30 of the UAE CT law. The UAE CT Law says that a taxable person can claim net interest at 30 per cent of Ebitda (earnings before interest, tax, depreciation and amortisation). The rest of the interest expense can be carried forward for further tax periods of ten years. Our next article will cover the interest deduction rules in detail.

Article 32 of the UAE CT law states that the taxable person can claim only fifty per cent of the entertainment, amusement, or recreation expenditure incurred during a tax period. These expenses include meals, accommodation, transportation, admission fee, facilities and equipment used for entertainment, amusement or recreation. These expenses may pertain to the taxable person’s customers, shareholders, suppliers or other business partners. While calculating accounting profits, total entertainment expenses are deducted, so fifty per cent of such expenses will be added back to the accounting profits to arrive at the taxable profits. For example, hotel accommodation has been provided to the taxable person’s shareholders, which costs Dh50,000 to the company, along with transportation and meal incurred costs of Dh5,000 and Dh10,000, respectively. Since the accounting expense of Dh65,000 will not be allowed for tax purposes so, fifty per cent (Dh32,500) will be added back as a non-allowable expense to arrive at the taxable profits.

Expenses like donations, grants or gifts, fines and penalties, bribes or other illicit payments, dividends, profit distributions or benefits of a similar nature paid to an owner of the taxable person, claimable input tax, tax on income imposed on the taxable person outside the UAE etc. are generally not allowed for tax purposes as given in article 33 of the law. We will cover these in detail in the following articles.

Taxable persons must analysse their expenses properly and adjust the accounting profits accordingly to calculate the taxable profits.

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.