A Guidance towards Corporate Tax Compliance: Election to recognize gains and losses on a realization basis for Corporate Tax Law
Case Study 1: Adjustment of Accounting Income when the taxpayer elects realization basis only for assets held on capital account
Background:
Company X operates in the retail sector, selling home appliances. Due to market developments, Company X anticipates the need to discount certain products to facilitate sales. Consequently, it records a write-down of AED 100,000 at the end of its tax period. At this point, Company X still retains ownership of the inventory, and thus, the loss recorded in its income statement is deemed unrealized.
Election made for Corporate Tax purpose:
Company X has elected to account for gains and losses on a realization basis concerning all assets and liabilities held on capital account. However, the inventory, being an asset item held on revenue account, falls outside the scope of this election.
Analysis:
Given the election made by Company X and the nature of the inventory as an asset held on revenue account, the unrealized loss of AED 100,000 resulting from inventory impairment should not be adjusted in computing the taxable income. Instead, the unrealized loss must be included in the taxable income calculation.
Conclusion:
This case highlights the significance of comprehending the consequences of accounting treatments and elections for corporate tax purposes, especially regarding unrealized gains or losses. According to the realization principle, the Taxable Income for each Tax Period would exclude unrealized gains and losses related to assets or liabilities subject to fair value or impairment accounting or held on the capital account, contingent upon the election made by the Taxable Person. It is worth noting that the election made by the taxable person to utilize the realization basis method will be deemed irrevocable, barring exceptional circumstances and subject to approval by the Federal Tax Authority.
Disclaimer:
The content provided in this document offers general guidance and should not be construed as legal, financial, or tax advice. It is recommended to consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for interpreting and taking actions based on this information, at their own risk.
Case Study 2: Adjustment of Accounting Income for Unrealized Gain
Background:
Company A acquires land for AED 100,000, which it records on its balance sheet under non-current assets at a net book value of AED 100,000. Subsequently, due to increased market demand in the location of the land, Company A revalues the land to AED 120,000 in the following tax period. However, Company A does not intend to sell the land.
Accounting Treatment:
As per accounting standards and the company’s business model, the AED 20,000 increase in the value of the land is recorded in the statement of other comprehensive income. According to accounting standards, Company A is not required to subsequently include this gain in its income statement.
Tax Treatment:
Despite not intending to recognize the unrealized gain in its income statement and not electing for the realization basis, Company A must adjust its accounting income to include the unrealized gain of AED 20,000 when calculating its taxable income.
Conclusion:
This case illustrates the adjustment of accounting income for unrealized gains not recognized in the income statement but required to be included in taxable income calculation. Even though the company does not intend to sell the land and the gain is recognized in other comprehensive income, tax regulations mandate the inclusion of such gains in taxable income. This ensures consistency and compliance with tax laws while reflecting the economic realities of the business.
Disclaimer:
The content provided in this document offers general guidance and should not be construed as legal, financial, or tax advice. It is recommended to consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for interpreting and taking actions based on this information, at their own risk.