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Importance Of Accounting For

Businesses Under Tax Regimes

There are temporary and permanent differences that
arise between accounting profit and taxable profits
CA Aashna Mulgaonkar - The differences that are permanent in nature have
an effect in one period and not on the future period/
periods. Some of the elements that create difference
are dividends, capital gains, fines and penalties etc.
A perfectly prepared financial report acts as the are the elements that create permanent differences.
backbone of the business. The United Arab Emirates While some items mentioned above may be accepted
being an international business hub is introducing under IFRS but may not be considered by the
corporate taxes from June 2023, and hence the need corporate tax law and vice versa. For example, despite
for a robust accounting system is the need of the hour. being the accounting income, dividends and capital
For a tax system to operate successfully within gains are not seen as taxable income, as mentioned
the law it requires a degree of certainty that the in the press release issued by the UAE’s Ministry
accounting system followed by taxpayers is aligned of Finance. So, the period in which dividends and/or
with the Laws of the regime. The accounting profits capital gains appear in the accounting profits, for that
are based on principles and guidelines under IFRS period, accounting profits would be greater than the
which differs from the basis outlined in the corporate taxable profits.
tax and a related law in the UAE which naturally leads
to differences in the profits and their computation Temporary differences are the differences that were
methods. Accounting & Taxable Profits are different created due to some transactions in one period are
despite being called ‘profit’ for businesses. offset in the subsequent period/periods. The topic such
as rate of depreciation and/or method of depreciation
Sometimes called book profit, accounting profit is calculations that cause temporary differences are
achieved as a result of operating and non-operating embraced by both administrations. Usually, tax
activities of the company. It reflects the actual financial authorities use the straight-line depreciation method,
gain that is received after deducting total expenses and IFRS adhere to the same or reducing balance
from total revenue. It gives the picture of a Company’s method.
liquidity and solvency to the users of the financial
statement. On the other hand Taxable profit is the total Hence accounting principles which were not religiously
amount of profit which is taxable as per the tax laws followed earlier would now become the norm with the
of the country. Used to contrast between accounting introduction of Corporate Taxes.
profit and earnings, taxable profit is derived after
taking the tax incentives into account and accounting
profit acts as a base for the computation.

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