Deferred Tax Concepts Under UAE Corporate Tax

Introduction.

With the implementation of Corporate Tax in the UAE under Federal Decree-Law No. 47 of 2022, businesses are now required to understand not only current tax obligations but also the concept of Deferred Tax—a critical accounting and tax adjustment that impacts financial reporting and future tax liabilities.

Deferred tax ensures alignment between accounting profits and taxable income, particularly when timing differences arise.

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1. What is Deferred Tax?

Deferred tax arises due to temporary differences between:

• The carrying amount of assets and liabilities in financial statements, and

• Their tax base as per corporate tax regulations

These differences result in either:

✔ Deferred Tax Liability (DTL) – Future tax payable

✔ Deferred Tax Asset (DTA) – Future tax benefit

👉 In simple terms:

Deferred tax reflects taxes that are payable or recoverable in future periods—not today.

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2. Why Deferred Tax is Relevant in UAE

Although UAE Corporate Tax is relatively new, deferred tax becomes relevant because:

• Financial statements are prepared under International Financial Reporting Standards

• Taxable income is computed under UAE Corporate Tax Law

• Differences arise due to timing and recognition rules

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3. Temporary vs Permanent Differences

a) Temporary Differences (Create Deferred Tax)

These differences reverse over time:

✔ Depreciation differences (accounting vs tax rates)

✔ Provision expenses (allowed later for tax)

✔ Revenue recognized differently

👉 These lead to Deferred Tax Assets or Liabilities

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b) Permanent Differences (No Deferred Tax)

These do NOT reverse:

✔ Fines and penalties

✔ Disallowed expenses

✔ Exempt income

👉 These impact tax but do not create deferred tax

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4. Deferred Tax Liability (DTL)

A Deferred Tax Liability arises when:

👉 Accounting profit is lower today but taxable profit will be higher in future

Example:

• Higher depreciation allowed for tax now

• Lower taxable income today

• Higher taxable income in future

✔ Result → DTL (future tax obligation)

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5. Deferred Tax Asset (DTA)

A Deferred Tax Asset arises when:

👉 Accounting profit is higher today but taxable profit will be lower in future

Example:

• Expense recognized in accounting but not allowed for tax yet

• Tax benefit will be available later

✔ Result → DTA (future tax benefit)

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6. Deferred Tax Calculation

Deferred tax is calculated using the applicable corporate tax rate (currently 9% in UAE):

Formula:

Deferred Tax = Temporary Difference × Tax Rate

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7. Example for UAE Businesses

Assume:

• Accounting depreciation: AED 100,000

• Tax depreciation: AED 150,000

• Difference: AED 50,000

This creates a temporary difference.

Calculation:

• Deferred Tax Liability = 50,000 × 9% = AED 4,500

👉 This represents future tax payable

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8. Recognition Principles under IFRS

As per IAS 12 Income Taxes:

✔ All taxable temporary differences → Recognize DTL

✔ All deductible temporary differences → Recognize DTA (subject to recoverability)

👉 DTA is recognized only if future taxable profits are expected.

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9. Practical Challenges in UAE

Businesses commonly face:

• Difficulty in identifying temporary differences

• Misclassification between permanent and temporary differences

• Lack of proper documentation

• Incorrect application of tax rates

• Ignoring deferred tax altogether

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10. Key Compliance Considerations

✔ Maintain reconciliation between accounting profit and taxable income

✔ Document all temporary differences

✔ Ensure IFRS-compliant financial statements

✔ Align tax computations with UAE Corporate Tax Law

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11. How Sheikh Anwar Accounting & Auditing LLC Can Help

At Sheikh Anwar Accounting & Auditing LLC, we assist businesses in:

✔ Deferred Tax Computation (DTA & DTL)

✔ Corporate Tax Compliance & Filing

✔ IFRS-based Financial Reporting

✔ Tax Planning & Advisory

✔ Transfer Pricing Documentation

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📍 Contact Us

🌐 Website: www.sa-auditors.com

📧 Email: info@sa-auditors.com

📞 Phone: +971 56 591 3534

📍 Address: Dubai Creek Tower, M 35, Dubai, UAE