Discard intragroup transactions to arrive at group taxable profits

Once a corporate tax group is established, it is considered a single taxable person for corporate tax purposes. The parent company is responsible for combining the financial accounts prepared for the same period and in accordance with uniformed accounting standards, determining the consolidated taxable income, submitting a single tax return, and paying the applicable tax to the Federal Tax Authority (FTA). If the parent company fails to settle the tax by the due date, all members are jointly and severally liable to pay.

While consolidating the financial results of group entities for tax purposes, intra-group transactions are eliminated. This includes transactions between the parent company and its subsidiaries, or between subsidiaries within the tax group. For example, if one group company sells an asset to another, this transaction is disregarded for tax consolidation. The same applies to income, expenses where one group company provides services to another group company, adjustments in valuation, provisions related to intra-group transactions; and changes in the accounting value of assets and liabilities, where they arise because of a gain or loss from a transaction within a tax group.

The rule to cancel out transactions within the tax group only applies when the transacting parties are members of the same tax group. If the transacting parties are not members of the same tax group, their transactions will not be eliminated when determining the taxable income of the tax group.

There is an exception to the general rule when a member has recognised a deductible loss in a tax period related to those transactions before joining or forming the tax group. In such cases, the requirement to cancel out intra-group transactions does not apply to transactions for which a member has recognised a deductible loss in a tax period prior to joining or forming the tax group, until the deductible loss is fully reversed. In these situations, the transaction is not cancelled, and the income is included in the taxable income of the tax group up to the amount that was previously deducted before joining or forming the tax group.

The exemption from elimination applies only to transactions that led to a “deductible loss” before the establishment or joining of the tax group and a subsequent reversal of that loss after the establishment or joining of the tax group. Furthermore, the exemption only pertains to income that represents a reversal of the deductible loss from the same transaction. This exemption necessitates the inclusion of income related to such a transaction but does not permit a tax group to claim an additional deductible loss on the same transaction.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above article is not an official of Khaleej Times but an opinion of the writer. For any clarification, please feel free to contact him at mahar@kresscooper.com.