How to calculate corporate tax payable, adjust foreign tax credit

The corporate tax will be applicable on the taxable profits, and businesses will be required to calculate the taxable profits to ascertain the correct amount of tax payable. The mechanism provided in the public consultation document is to calculate the accounting profits under the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP) and then convert these profits into taxable profits.

While mapping the accounting profits into taxable profits, corporations will observe that some items, like dividend income, fines, and penalties, will create permanent differences and some items, like the pattern of consumption (depreciation) of assets, will create temporary differences.

The permanent differences are differences of permanent nature that have an effect in one period, and it does not have any impact on future period/periods. While the temporary differences, as the name suggests, are differences of temporary nature. This means that some transactions will create differences in one period, which will be offset in the subsequent period/periods.

Temporary differences can further be classified into deductible and taxable temporary differences. In the deductible temporary differences, companies will pay more tax in the current period and less tax in future periods due to available tax allowable expenses. While in the taxable temporary differences, businesses will pay lesser tax in the current period and more tax in the future due to the future taxability of the items.

The profits calculated under the IFRS will be adjusted by disallowing some accounting expenses and allowing some taxable expenses. In the same way, some taxable income will be added, and nontaxable income will be deducted from accounting profits to arrive at the final taxable income/taxable profits. The tax law will provide us with more clarity about such items.

The taxable income of up to Dh375,000 will be subject to tax at zero per cent, and taxable income above Dh375,000 will be subject to tax at nine per cent to arrive at the corporate tax liability. The foreign tax credit will be deducted from the corporate tax liability to calculate the final tax payable.

Foreign Tax Credits (FTC) will be available to UAE resident companies which will be liable to pay tax on worldwide income, including foreign-sourced income. To avoid double taxation, the UAE CT regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE CT liability on the foreign-sourced income that has not been otherwise exempted. The maximum allowable FTC will be lower of the tax paid in the foreign jurisdiction; or the UAE CT payable on the foreign-sourced income. Any unutilized FTC will not be able to be carried forward or back to other tax periods, nor will the Federal Tax Authority (FTA) refund any unutilised FTC.

For example, XYZ Ltd has an annual income of Dh30 million, including UK sourced net income of Dh5 million, at which a tax of Dh0.95 million has been paid at 19 per cent. The cost of goods sold for the UAE operations is Dh18 million. The company's operative expenses in the UAE are Dh7 million which includes: Accounting depreciation of Dh0.05 million while tax depreciation is Dh0.07 million; Provision for doubtful debts of Dh0.1 million while actual debts of Dh1.2 million have been written off; Bank charges Dh0.05 million, Audit fee Dh0.10 million, Utilities Dh0.05 million; Penalties Dh0.15 million, and Other expenses Dh6.5 million. The company sold a machine, and the gain was Dh0.15 million. XYX Ltd earned a dividend income of Dh0.5 million. XYZ Ltd Interest expense is Dh1 million, while the actual interest payment is 1.75 million.

In the above example, we have calculated an accounting profit of Dh4.65 million (sales 30 – cogs 18 — operating expenses 7 + other income 0.65 — Interest expense 1), and converted the accounting profits into taxable profits, which resulted in a taxable profit of Dh2.28 million as shown in the diagram.

There is zero per cent tax up to Dh0.375 million, and the remaining taxable profit is Dh1.905 million, which is subject to a nine per cent tax.

The corporate tax liability of XYZ Ltd is Dh0.171 (Taxable profits 1.905*9 per cent). The available foreign tax credit is Dh0.45 [lower of the (i) amount of tax paid in the foreign jurisdiction Dh0.95 million (5m*19 per cent), or (ii) UAE CT payable on the foreign-sourced income Dh0.45 million (5m*9 per cent)], and out of this Dh0.171 has been utilised against the available corporate tax liability and remaining Dh0.279 will be lost as it cannot be carried forward/back or refunded by the FTA. Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the public consultation document on corporate tax. For any queries/clarifications, please write to him at compliance@kresscooper.com