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How to report non-deductible expenses?


As the clock ticks down to May 31, the first fiscal year of corporate tax will roll over into the second fiscal year. So, how should you be preparing your financials to report to the Federal Tax Authority? Will it be just the entity’s financials that you’ll be reporting? There’s a lot we don’t know, but there’s also enough information to put together a jigsaw puzzle of the different elements.

So, let’s take a step back and imagine the various streams that will make up the returns we’ll all have to file. This is possible thanks to VAT, excise tax and Economic Substance Reporting (ESR) over the past few years.

Each has its own unique characteristics, but there’s a certain identifiable approach to each. The question is, how many elements will there be?

It will likely start by confirming the entity’s details. If you are required to update your formation docs, trade licence, etc., it’s probably a good idea to do so now, in case it delays submission.

I assume this is also where you’ll be asked to declare the identity of your entity. For instance, is it domiciled in a foreign jurisdiction? Is it part of an international group? Is it an unincorporated partnership?

These initial questions will have a big impact on where you end up. For example, if you’ve thoroughly reviewed your free zone business and concluded that you can sit off corporate tax, you wouldn’t have to choose to be subject to it.

Some questions will be asked in what may seem like a back-and-forth format. Keep in mind that the law states that the free zone entity can choose to be taxed. Read the questions carefully.

Next up would be the choices. Are you eligible for small business relief, are you eligible for business restructuring relief? How do transitional rules affect your financials?

The law has been published on each of these, and while there are still questions, there is enough information in the public domain for a business to make a decision.

This will not be a simple “yes” or “no”. Answering yes will open up a series of follow-up questions and requests for additional information. It is your responsibility to back up your position. Now it’s time for the financials. The FTA might take one of two approaches.

Firstly, you use templates and upload your information, or alternatively, you enter your information line by line on the screen. I prefer the latter approach, as it is more in line with how VAT and particularly ESR works.

This suggests that your financials will be simplified, similar to what you would report regularly to your multinational parent. The details can then be filtered and audited by the regulators.

Keep in mind that, given the volume of tax returns that will be filed, it may take some time to answer any questions that may arise.

It may even take years. Keep your records on hand and have someone on hand who understands what was reported and why it was reported in the form it was reported.

You can anticipate that you will be asked if an external audit was conducted and that you will be required to submit those signed, certified, and audited financial statements.

We know that free zone entities that do not elect to pay corporate tax are required to submit audited accounts. Just because you have nothing to pay, does not mean you do not need to report.

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Most audited financial statements do not go beyond the income statement or balance sheet. There is much more that follows, and it will be addressed in the next part of your return.

These are details of any accounting adjustments, ranging from the more mundane to the more unusual, such as exempt income. Participation interest is an example of this.

The problem with special allowances or reliefs is that they come with special treatment. I would have expected to see a section for these. The big challenge here will be the uniqueness of these allowances and the high likelihood that they will have an impact over two or more tax years.

With all the other material and common distractions, will your finance function be able to manage these for that length of time? Does anything give you sleepless nights? Yes. How do we report non-deductible expenses, such as half of your entertainment expense?

Do we have a section specifically dedicated to these? I think it’s likely that the financials presented earlier in the return will add back to an external audit. Non-financial information?

Showing that related party transactions take place at arm’s length? You’ll submit your local file that supports your entity’s transfer pricing approach.

That’s just a taste of what we as business people are facing. I’ve touched lightly on it today. Do you feel ready?

Updated: May 14, 2024, 3:00 AM



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