Staying Tax compliant in UAE; the easier way out to run your business smoothly without escalating costs.

December 07, 2021
Staying Tax compliant in UAE; the easier way out to run your business smoothly without escalating costs.
The UAE is committed in its mission to create a regulated economic environment and it is expected of businesses to adhere to the regulated framework. The introduction of Value Added Tax (VAT), Excise Tax, Economic Substance Regulations (ESR), Country by Country Reporting and Declaration of Ultimate Beneficial Owner (UBO) have been implemented in the UAE with a vision to streamline the UAE economy in line with international regulations. 
 
Background
In a recent judgment the UAE Supreme Court has upheld the provision of maximum penalty of 300% for delay in payment of Tax liability (VAT) on submission of Voluntary Disclosure (VD) in an appeal filed by Federal Tax Authority (FTA) against the judgement by the Court of Appeal’s. 
 
The Court of Appeal's decision had followed the established position (since the beginning of 2019) that the UAE Tax Procedures Law distinguishes penalties for late payment of tax as shown in submitted returns or notified assessments, from fines and penalties applicable to voluntary disclosures. But the UAE Supreme Court took a different position and ruled the following:
 
i. Late payment penalties should also apply to voluntary disclosures (up to 300 percent of the tax due)
ii. Late payment penalties apply from the due date of the tax return and not from the date of the voluntary disclosure; and
iii. The voluntary disclosure penalties specified under Item 11 of the Schedule of Penalties attached to the Cabinet Resolution No. 40 of 2017, apply to voluntary disclosures (in addition to late payment penalties: 50 percent or 30 percent, or 5 percent of the tax due (depending on the timing of the submission of the voluntary disclosure).
 
Through this article we will try to elaborate on what is Voluntary Disclosure, the penalties for Voluntary disclosure and discuss matters related to different VAT penalties.
 
What is Voluntary Disclosure
A voluntary disclosure as the term suggests is a scenario when the Taxpayer notifies the Federal Tax Authority (FTA) of an error or omission in a previous tax return. 
 
What is the penalty provision for Voluntary Disclosure
On Submission of Voluntary Disclosure due to error in Original Tax Return, Tax Assessment or Refund the penalties include -
o Fixed penalty of AED 3,000 for the first time and AED 5,000 in case of repetition
o Percentage based penalty shall be applied on the amount unpaid to the Authority due to the error and resulting in a tax benefit as follows:
50 percent if the Registrant does not make a voluntary disclosure or he made the voluntary disclosure after being notified of the tax audit and the Authority has started the tax audit process, or after being asked for information relating to the tax audit, whichever takes place first.
30 percent if the Registrant makes the voluntary disclosure after being notified of the tax audit and before the Authority starts the tax audit.
5 percent if the Registrant makes a voluntary disclosure before being notified of the tax audit by the Authority.
In case there is any Tax liability that arises out of the Voluntary disclosure (Tax liability increases than reported in the Original Tax return), then along with this voluntary disclosure penalty a late payment penalty will also be added from the due date of Original Tax return. Failure to pay or settle the Tax liability as reported in the Tax Return will result in a Penalty of (on unpaid tax due)
 
- 2 percent  from 1st to 6th day
- 4 percent  from 7th to 30th day
- 1 percent per day after one month up to maximum 300 percent 
So, after adding both the penalties together only the penalty amount will be huge apart from the Tax liability and it will create financial hiccups for the Company. 
 
List of major VAT penalties in UAE
While we are discussing about the penalty on Voluntary Disclosure, it would also be useful to let you know about some of the VAT penalties in UAE that are listed below for your reference
 
Failure to keep Proper records & information - AED 10,000 for the first time and AED 50,000 in case of repetition
Failure to submit the Tax registration application within the timeline - AED 20,000
Failure to submit the Tax de-registration application within the timeline - AED 10,000
Failure inform the Authority of any circumstance
that requires the amendment of the information pertaining to his tax record - AED 5,000 for the first time and AED 15,000 in case of repetition
Failure to Submit the Tax return timely - AED 1000 for the 1st time and AED 2000 in case of repetition within 24 months.
Failure to report/declare Tax on Imports under reverse charge mechanism (RCM): 50 percent of unpaid or undeclared Tax
On Submission of Voluntary Disclosure due to error in Original Tax Return, Tax Assessment or Refund the penalties include: 
Fixed penalty of AED 3,000 for the first time and AED 5,000 in case of repetition
Percentage based penalty shall be applied on the amount unpaid to the Authority due to the error and resulting in a tax benefit as follows:
 
i. 50 percent if the Registrant does not make a voluntary disclosure or he made the voluntary disclosure after being notified of the tax audit and the Authority has started the tax audit process, or after being asked for information relating to the tax audit, whichever takes place first.
ii. 30 percent if the Registrant makes the voluntary disclosure after being notified of the tax audit and before the Authority starts the tax audit.
iii. 5 percent if the Registrant makes a voluntary disclosure before being notified of the tax audit by the Authority
 
Failure to issue Tax Invoice or Tax Credit Note when making any supply 5,000 for each tax invoice
Failure to display prices inclusive of Tax 15,000
 
Recommended way forward for businesses in UAE
As regulations become more stringent it becomes imperative for taxpayers to be clear about the Tax positions taken by them so that they can avoid any hefty penalties later. As seasoned players in the advisory business we have a word of caution for all our readers  - Being Tax compliant in the UAE is not a choice rather it is a mandate for all, and it is non-negotiable because the consequence of non-compliance will end up being a far more costlier affair than the cost of leveraging the expertise of tax professionals and ensuring your business is fully tax compliant.
Email us at taxagency@uhy-ae.com for more assistance in tax related matters.
 
 

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