Year-end book closure by including the effect of Transitional Provisions for Corporate Tax (CT) and other Provisions
What is Year End Closure of Books of Accounts?
A systematic review of books of accounts to ensure completeness in all respects to the books of accounts which involves the following:
- Passing of all transactions till the last date of the financial year, including Sales, Purchases, Payments and receipts.
- Getting third-party confirmations to ensure the balances agree with real numbers.
- Passing the Non-cash expenses, viz., Depreciation and amortisation.
- Passing of Accrual entries Deferred Entries for Expenses and Revenue.
- Provision entry for bad debts.
- Proper recognition of revenue.
- Valuation Of Inventory by doing the physical count and adjusting the inventory value after considering their market value or obsolescence.
- Verify fixed asset records and reconcile them with physical assets to ensure accuracy and dispose of the assets that will no longer be useful.
Apart from the above, the most essential treatment for this 2023-year end will be the taking of effect of Transitional provisions for Corporate Tax, as The UAE Ministry of Finance has issued Decision No (120) of 2023 on Transitional Rules for Corporate Tax, providing guidelines for adjusting a Taxable Person’s opening balance sheet under the Corporate Tax Law.
The decision applies to certain assets and liabilities, such as immovable property, intangible assets, financial assets, and financial liabilities, held by businesses before the Corporate Tax Law comes into effect.
Businesses can adjust their tax treatment of such assets and liabilities based on specific rules and must decide how to do that when they submit their first Tax Return. Their choice would be permanent except in special circumstances. The decision also considers the ownership history of assets and liabilities, including those owned by the company or other members of the same business group.
There is further flexibility for the real estate sector where companies with immovable property recorded on a historical cost basis have an option to select the basis of the relief, using either a time apportionment method or valuation method, thereby allowing groups to determine the most favorable outcome for them on immovable property on an asset-by-asset basis.
For example, consider a UAE company that owns a real property asset, such as a building or land, before the effective date of the Corporate Tax Law. Upon selling the property after the enactment of the law, the company can choose one of two methods for adjusting its Taxable Income:
- They can either exclude a portion of the gain based on the property’s holding period or
- They can use a fixed formula based on the property’s value (as determined by the relevant government entities in charge of the valuation of land and real estate property in the UAE) at the start of the first Tax Period. This ensures a fair tax calculation considering the property’s ownership or value history and only taxes the business gains on such immovable property attributed to periods after the Corporate Tax Law is effective.
Another possible scenario for financial assets and liabilities would be a local business that holds shares in another company recorded on a historical cost basis before the Corporate Tax law’s enactment. When this local business sells these shares after the law comes into effect, it can adjust its Taxable Income by excluding a portion of the gain based on the shares’ value at the start of the first Tax Period. This transitional rule ensures only gains of that business on such shares that are attributed to periods after the Corporate Tax Law is effective are taxed.
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