The FTA’s introduction of corporate tax in the UAE mandates certain entities to prepare their financial statements based on IFRS or IFRS SMEs for reporting, which has elevated significant difficulties for entities that do not previously adopt IFRS standards. According to ministerial decision No.82 of 2023, taxable persons with a revenue of more than AED 50 million should follow the IFRS reporting standards.
As per Ministerial-Decision-No.-114-of-2023, there are two categories for taxable persons that require the compliance of IFRS:
- Revenue more than AED 50 should apply IFRS (Full IFRS).
- Revenue more than 3 million but less than AED 50 million, should apply IFRS (SME).
- IFRS compliance does not apply for revenue below AED 3 million, and it requires the preparation of statements on a cash basis.
That being the case, entities that do not follow IFRS to prepare their accounts face fundamental issues for businesses operating in the UAE, such as paradigm shifts in the financial reporting and tax landscape. To align with the current requirements, entities must embrace strategic planning and make certain adjustments in their operations.
The two major issues in the transition of non-IFRS to IFRS standards:
IFRS Adaptation: Businesses face challenges while migrating to IFRS due to its complexity and this shift mandates certain adjustments in accounting systems, processes, and practices. To stay compliant with IFRS, Training personnel across tax, audit, finance, and management is required which is too complex and expensive.
Recasting Financial Statements: While adopting IFRS, businesses need to recast their financial statements for the year 2023 to develop into opening balances for the year 2024. This recasting procedure may entail adjustments to assets, liabilities, and equity, which potentially impact the profit margin used in transfer pricing analyses.
Key Aspects to Consider in IFRS Transitioning from non-IFRS to IFRS Standards
The strategic value of IFRS Transitioning from non-IFRS to IFRS standards instigates alteration in the key financial metrics such as a shift in revenue recognition, valuation of assets, and lease accounting. This adoption can impact the transfer pricing structures across businesses within the same multinational group.
Comparability Analysis: It is crucial for entities to conduct a comparability analysis to choose external benchmarks for transfer pricing purposes. Financial data of businesses alter during the transition to IFRS which requires the re-evaluation of the decision-making criteria and adjustments to ensure accurate comparison.
Fair Value Accounting: IFRS implementation requires fair value measurement for investment properties, financial measurements, and other assets and liabilities. To adopt fair value accounting, businesses need to implement new controls and processes, and they need the assistance of external valuation experts. It will be a challenge for businesses that operate based on historical cost accounting.
Disclosure Requirements:
IFRS requires large disclosures that provide clarity about the financial performance and position of the organization and fair value measurements to intangible assets. Entities will need to incorporate disclosures into their reporting processes such as financial risk management practices and implications of accounting adjustments. Fair value measurements for intangibles could affect royalty rates and related party transactions related to intellectual property and other intangible assets.
To positively overcome these challenges in the IFRS transition, entities must adopt the following practices:
Conduct Comprehensive Financial Analysis: Evaluate the impact of IFRS adjustments on all financial metrics that are related to transfer pricing.
Revise Transfer Pricing Policies: Review the intercompany agreements (ICA) and pricing policies to adjust with the new financial procedures, to remain compliant with the arm’s length principle.
Enhance Documentation Process: Implement a solid documentation process to reliably support the pricing of intercompany transactions.
Coordinate With Other Jurisdictions: Multinational Group Entities must ensure that transfer pricing policies adopted by their entities across all jurisdictions are consistent.
Seek Expert Consultation: To understand and navigate these new financial procedures and ensure alignment with global practices and local requirements.
Although these changes and the transition from non-IFRS to IFRS in the UAE are challenging, it is essential for businesses to stay compliant with corporate tax regulations and foster credibility and comparability of financial statements of MNEs operating across different jurisdictions. By mandating this new standard to align with global accounting practices, the UAE not only promotes credibility and transparency but also marks its position as a prominent business hub in the global market.
To understand these changes and effectively evaluate the impact of IFRS transition in transfer pricing policies, coordinate with other jurisdictions, seek guidance from our transfer pricing experts from KGRN. Our transfer pricing experts help you experience a smooth transition into IFRS accounting practices and gain practical tips & learn new strategies in navigating transfer pricing policies. Reach out to our experts today!
