Cost of Goods Sold Calculation for UAE Traders (2026)

COGS determines your real profit. Get it wrong and your financial statements, VAT returns, and corporate tax returns are all incorrect — a cascade of errors that the FTA will eventually find.

For UAE trading companies — importers, distributors, wholesalers, and retailers — cost of goods sold is typically 60–85% of revenue. A 1% error in COGS on AED 10 million in revenue is AED 100,000, which at 9% corporate tax means AED 9,000 in over- or under-paid tax. Multiply that across years and the exposure grows fast. In 2026, the FTA is actively reviewing COGS calculations during corporate tax audits.

This guide explains how to calculate COGS correctly. For bookkeeping help, browse the FindCPA bookkeeper directory.

What Is Cost of Goods Sold?

Cost of goods sold (COGS) is the total direct cost of producing or purchasing the goods that a company sells during a period. For trading companies (which buy and resell goods without manufacturing), COGS includes the purchase price of goods, import duties, freight and shipping costs, insurance in transit, customs clearance charges, and any other costs directly attributable to bringing inventory to its current location and condition. COGS is deducted from revenue to calculate gross profit — the primary measure of trading profitability.

The basic COGS formula:

COGS vs. operating expenses:

• COGS: Costs directly tied to the goods sold (purchase price, freight, duties)
• Operating expenses: Costs of running the business (rent, salaries, utilities, marketing)

Only COGS is deducted to calculate gross profit. Operating expenses are deducted separately to calculate net profit.

How Do You Calculate Landed Cost for Imported Goods?

Landed cost is the total cost of getting a product from the supplier to your warehouse — including purchase price, international freight, insurance, customs duties, local transport, handling charges, and customs broker fees. For UAE importers, landed cost is the true cost of inventory for accounting purposes. IAS 2 requires that all costs of purchase be included in inventory cost. Excluding any component understates your inventory value and overstates COGS in the period of purchase — distorting both your balance sheet and income statement.

Landed cost components for a UAE importer:

Customs duty: The standard UAE customs duty is 5% on CIF value (Cost + Insurance + Freight). Some goods are exempt (basic foodstuffs) or subject to higher rates (tobacco — 100%). Free zone companies importing goods for storage and re-export typically defer customs duty until the goods leave the free zone.

How Does Inventory Valuation Method Affect COGS?

The inventory valuation method determines which costs are allocated to COGS and which remain in closing inventory. FIFO (First In, First Out) allocates older, typically lower costs to COGS — resulting in lower COGS and higher profit in a rising price environment. Weighted average smooths costs across all units — producing moderate COGS. The method chosen must be applied consistently and disclosed in the financial statements. Changing methods requires justification and retrospective restatement under IAS 8.

Impact comparison (rising prices scenario):

Assume: 100 units purchased at AED 10, then 100 units at AED 12, then 100 units at AED 14. You sold 150 units.

Corporate tax impact: In a rising price environment, FIFO produces higher profit and therefore higher corporate tax. Weighted average produces a moderate result. The difference can be significant for trading companies with large inventory volumes and volatile supplier prices.

How Should Import Duties Be Treated in COGS?

Import duties are part of inventory cost under IAS 2. They must be included in the landed cost of inventory and flow through COGS when the goods are sold — not expensed immediately when paid. This is a common mistake: paying AED 500,000 in customs duties in December and expensing it all in December when most of the goods have not been sold yet. The correct treatment is to capitalize the duty into inventory and release it to COGS proportionally as goods are sold. This matches the expense with the revenue it generates.

Correct vs. incorrect treatment:

Free zone duty deferral: Goods imported into UAE free zones (designated zones for VAT purposes) can defer customs duty until the goods are moved to the mainland. This affects the timing of when duty is included in inventory cost — but the principle remains the same: duty enters inventory cost when incurred.

How Does VAT Interact With COGS?

VAT-registered businesses recover input VAT on purchases — so VAT is not a cost and should not be included in COGS or inventory values. The purchase price recorded in inventory should be the net-of-VAT amount. If you pay AED 105 for goods (AED 100 + AED 5 VAT), only AED 100 goes into inventory. The AED 5 is recovered through your VAT return. Exception: if you cannot recover the VAT (because the purchase relates to exempt supplies or you are not registered), the irrecoverable VAT becomes part of the cost.

VAT treatment in COGS:

Is COGS Fully Deductible for Corporate Tax?

Yes, COGS is fully deductible for UAE corporate tax purposes as long as it relates to the business's revenue-generating activities and is calculated in accordance with IFRS. The FTA follows the accounting treatment of COGS under IFRS — there are no special corporate tax adjustments for COGS itself. However, the FTA may challenge COGS calculations that are inconsistent, incorrectly valued, or that include non-deductible items disguised as cost of goods (personal expenses, entertainment, non-business purchases).

FTA areas of scrutiny:

1. Intercompany purchases: Must be at arm's length (transfer pricing)
2. Inventory write-downs: Must be genuine (not used to manipulate taxable profit)
3. Personal expenses in COGS: Non-business purchases coded to inventory
4. Inconsistent valuation methods: Changing methods without justification
5. Missing purchase invoices: COGS not supported by documentation
6. Goods for personal use: Withdrawals from inventory not recorded as deemed supply

What Are Common COGS Mistakes in UAE Businesses?

The top mistakes are: expensing import duties and freight immediately instead of capitalizing to inventory, including VAT in inventory cost when it is recoverable, using inconsistent valuation methods, not performing regular stock counts (leading to incorrect closing inventory), failing to account for purchase returns and allowances, and mixing operating expenses with COGS. Each mistake distorts gross profit, and in 2026, each distortion has a direct corporate tax consequence.

Mistake-by-mistake impact:

How Should You Set Up COGS Tracking in Your Accounting System?

Configure your chart of accounts with separate accounts for each COGS component: purchases (by product category), import duties, freight inward, insurance in transit, and customs clearance. Set up your inventory module to calculate landed cost automatically — most modern accounting systems (Zoho Books, QuickBooks, Xero, SAP Business One) support this. Use purchase orders linked to goods received notes linked to supplier invoices for a complete audit trail. Run monthly COGS reconciliations comparing the calculated COGS to the income statement balance.

Recommended chart of accounts structure:

Frequently Asked Questions

Should warehouse rent be included in COGS? Under IAS 2, storage costs are generally excluded from inventory cost unless they are part of the production process. Warehouse rent for storing finished goods awaiting sale is an operating expense, not COGS. However, storage costs between stages of production (for manufacturers) can be included.

How do you handle foreign currency purchases in COGS? Record the purchase at the exchange rate on the transaction date (per IAS 21). If you pay the supplier later at a different rate, the exchange difference goes to a foreign exchange gain/loss account — not to COGS. The inventory cost remains at the original transaction date rate.

Can I change my inventory valuation method? Yes, but only if the new method provides more reliable and relevant information (IAS 8). The change must be applied retrospectively, and comparative financial statements must be restated. Notify your auditor before making any change.

How does COGS work for dropshipping businesses? Dropshippers never take physical possession of inventory but still have COGS — the purchase price paid to the supplier for each order fulfilled. Record the supplier cost as COGS when the sale is made. There is no opening/closing inventory since you do not hold stock.

Is shipping to customers part of COGS or operating expense? Outbound shipping (to customers) is typically a selling expense, not COGS. Inbound shipping (from suppliers to your warehouse) is part of COGS. If you offer "free shipping" to customers, the cost is a selling expense that reduces your net margin.

Keep Reading

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• Revenue Recognition Under IFRS 15 in UAE
• General Ledger Setup for UAE Businesses
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