Deferred Tax

Concept of deferred tax

Differences in calculation of taxable income against accounting income, which are reversed in a later period, give rise to the concept of “deferred tax”.
International Accounting Standard 12 “Income Taxes” (IAS 12) requires entities to measure deferred tax at the expected tax rate to reflect the accurate position of current and future taxes. For this, the temporary differences between the accounting base and the tax base of assets and liabilities are considered.
For instance, the book profits of an entity before taxes are AED 1,000,000 (net of provision for slow moving inventories). Assuming that for the purposes of tax, inventory losses are only allowed when actually written off, this will result in additional tax that will be required to be paid on the above provision. This will also give rise to a deferred tax asset that will be realized in the future once such inventories are actually written-off.
In another instance, the book profits of an entity before taxes are AED 1,000,000 (including unrealized gain on an asset). Assuming that for the purposes of tax, the gains are taxed only upon actual realization. This will result in lower tax that will be required to be paid. This will also give rise to deferred tax liability that will materialize in the future.

Impact of the implementation of the UAE corporate tax law

IAS 12 requires entities to measure deferred tax assets and liabilities at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Following the issuance of Cabinet Decision no. 116 of 2022 specifying the tax threshold, the UAE corporate tax law stands enacted effective 16 January 2023.
Entities have to evaluate and assess the deferred tax implications and calculate the estimated deferred tax (deferred tax assets / deferred tax liabilities) for reporting periods ending on or after 16 January 2023, including interim reporting.
The computation of deferred tax is contingent upon the basis – accrual or realization – adopted by an entity for corporate tax purposes, considering the election option available to recognize unrealized gains and losses under the UAE corporate tax law.
A non-exhaustive list of items requiring review from deferred tax perspective include (i) general and specific provisions including the expected credit loss provision; (ii) impairment provisions for inventories, property plant and equipment and other provisions recognized as per the requirements of the IFRS; (iii) fair value unrealized gains / losses and foreign exchange gains / losses being recognized; (iv) interest-related deductions (general interest deduction limitation rule); and (v) carry-forward tax losses.