As of June 1, 2023, the UAE Corporate Tax System mandates that all individuals subject to taxation must create and uphold financial statements following the accounting standards outlined by the Ministry of Finance.
Financial statements are obligated to precisely and fairly depict the taxable income and tax liability of individuals subject to taxation for each designated tax period. The Federal Tax Authority (FTA) possesses the right to demand that a taxable individual submit their financial statements for a given tax period. The FTA will guide the taxable person regarding the submission method and deadline for the financial statements. Additionally, the FTA has the authority to request additional information or documents about the financial statements from the taxable individual.
An audit report is a comprehensive document offering an impartial assessment of the accuracy and completeness of a business's financial statements. In the context of the CT system, an audit report holds crucial importance as it verifies the accurate calculation and reporting of a business's taxable income and tax liability. Moreover, it plays a pivotal role in elevating the credibility and transparency of a business's financial information, thereby mitigating the risks associated with tax evasion and avoidance.
The primary objective of an audit report is to offer assurance to the Federal Tax Authority (FTA) and other stakeholders that the taxable individual has adhered to CT laws and accurately and fairly reported their income and expenses. Additionally, an audit report serves as a valuable tool for the taxable person to identify and rectify any errors, omissions, or discrepancies present in its financial statements, contributing to the enhancement of internal controls and governance processes. Some of the benefits derived by the taxable person from an audit report include:
Calculating taxable income in the UAE Corporate Tax System involves the following steps:
Certain Taxable Persons are obligated to have their Financial Statements verified by an external licensed auditor. This mandate is outlined in Ministerial Decision No. 82 of 2023, specifying the categories of Taxable Persons required to prepare and maintain audited financial statements under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. As per this decision, the following Taxable Persons are obliged to prepare and maintain audited financial statements:
In certain cases, the Minister of Finance has the authority to mandate specific types of taxable individuals to prepare and retain financial statements subject to audit or certification by a third party. The UAE Corporate Tax System extends its applicability to partners involved in an Unincorporated Partnership. The Federal Tax Authority (FTA) has the prerogative to request partners within such partnerships to furnish financial statements, delineating the following details:
Partners are obliged to prepare and maintain these financial statements in alignment with the accounting standards specified by the Ministry of Finance. Additionally, when requested, partners must submit these financial statements to the FTA.
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Executing an audit report for Corporate Tax (CT) purposes involves a structured process:
Appointment of Auditor:
The taxable person is obligated to appoint and compensate an auditor who holds valid licensing and registration from the competent authorities in the UAE. The chosen auditor must maintain independence from the taxable person and its associated parties.
Provision of Information to the Auditor:
The taxable person must furnish the auditor with comprehensive information, documents, and records related to their business activities, encompassing income, expenses, assets, liabilities, transactions, financial statements, and the CT return.
Audit Standards and Procedures:
The auditor is required to conduct the audit in strict adherence to the auditing standards stipulated by the Ministry of Finance in the UAE (IFRS or IFRS for SMEs). Additionally, the relevant accounting standards and the CT law must be applied to scrutinize the financial statements and CT returns of the taxable person.
Audit Report and Opinion:
The auditor assumes the responsibility of preparing and signing the audit report. An opinion is expressed on whether the financial statements and the CT return align with the applicable accounting standards and CT law, and if they present an accurate and equitable representation of the financial position and performance of the taxable person.
Submission of Audit Report:
Upon request, a taxable person may be mandated to submit the financial statements utilized in determining taxable income for a specific tax period. The submission should adhere to the format, method, and timeline prescribed by the Federal Tax Authority (FTA).
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To create a compelling audit report for the Corporate Tax (CT) system, consider the following best practices and tips:
Select a qualified and reputable auditor:
Opt for an auditor with a proven track record, possessing expertise in the UAE tax environment, and familiarity with the business's industry.
Maintain accurate accounting records:
Ensure that accounting records and supporting documents align consistently with both the prescribed accounting standards and the CT system.
Regular communication with the auditor:
Establish open lines of communication with the auditor, providing timely and comprehensive information and explanations as requested throughout the audit process.
Review and discuss the draft report:
Collaborate with the auditor to review the initial draft of the audit report. Discuss any findings or recommendations, fostering a thorough understanding before finalizing the report.
Timely and accurate submission to the FTA:
Submit the completed audit report to the Federal Tax Authority (FTA) promptly and accurately, adhering to prescribed timelines. Retain a copy of the report for future reference and documentation.
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