was introduced in the United Arab Emirates (UAE) on January 1, 2018, at a standard rate of 5%, under the canopy of the Gulf Cooperation Council’s (GCC) unified Value Added Tax (VAT) framework. VAT is a tax implied on final consumption and applies to most goods and services, with zero-rated categories for sectors like healthcare and education. Businesses operating across the UAE must adhere compliance with VAT regulations to avoid the possibility of penalties and optimize financial operations.
VAT Audit Readiness : Understanding VAT Audit
VAT audits, conducted by the Federal Tax Authority (FTA), reinforce compliance with tax obligations, ensuring accurate reporting and payment of VAT. Primarily audits set out to:
• Detect non-compliance or discrepancies in VAT filings.
• Gather intelligence on the tax system’s effectiveness.
• Collect supply chain data, potentially triggering audits for related businesses.
• Educate businesses on VAT law implementation.
In some scenarios audits may be required due to the following factors:
• System-generated flags (e.g., discrepancies in FTA VAT return filings, sector comparisons).
• Business type (e.g., cash-based businesses, exporters, or sectors like healthcare).
• Supply chain connections, where an audit of a customer or supplier prompts further scrutiny.
• Business size - with larger entities facing higher audit likelihood.
• Public referrals or complaints to the FTA.
Under Federal Decree-Law No. (13) of 2016 and Cabinet Decision No. (36) of 2017, the FTA can inspect records, review returns, request third-party information, and access accounting documents. Audits may cover up to five years, extendable to four additional years, if notified before the statute of limitations expires (Article 79, Federal Decree Law No. 18 of 2022).
Preparing for a VAT Audit : To ensure readiness, businesses should
1. Maintain Accurate Records: Keep detailed documentation, including:
o Tax invoices for sales and purchases.
o Export/import documents (e.g., customs declarations, exit certificates).
o Tax credit notes.
o Transaction lists in FTA format.
o Revenue and VAT ledger reconciliations.
2. Review Systems Regularly: Ensure accounting software and invoicing systems are aligned with VAT regulations. Conduct periodic internal reviews to identify discrepancies.
3. Verify VAT Returns: Double-check FTA VAT return filings for accuracy before submitting VAT returns online, preferably with an external consultant, in case the reviews are prepared in-house.
4. Monitor Closely & Stay Updated: Monitor FTA updates at tax.gov.ae to adjust systems accordingly.
5. Respond Promptly: Address FTA audit notices within five working days to avoid penalties, such as % based penalty for delayed voluntary disclosures.
6. Cooperate Fully: Provide requested information promptly during remote or onsite audits, ensuring access to documents and assets.
What are Key Documents Requested During Audits
The FTA may request within five working days:
• Transaction lists in FTA format.
• Revenue and VAT ledger reconciliations.
• Audited or management financial statements.
• Sample transaction documents.
• Tax invoice and credit note formats.
• Stock movement reports.
Common Audit Focus Areas
The FTA typically examines:
• Accuracy of FTA VAT return filings.
• Validity of input tax claims, supported by tax invoices.
• Correct reporting of output tax on taxable supplies.
• Proper identification of exempt and zero-rated supplies.
• VAT treatment of import/export transactions.
• Application of the reverse charge mechanism.
Penalties for Non-Compliance
Non-compliance can lead to significant penalties:
|
Non-Compliance Issue |
Penalty |
|
Late VAT Return Submission |
Delay in submission of VAT returns could lead to penalties of AED 1,000 (first offense), AED 2,000 (repetitive within 24 months) |
|
Late Payment of VAT |
2% of unpaid tax (day after due date), 4% monthly thereafter, up to 300% |
|
Delayed Voluntary Disclosure |
Up to 40% penalty for late submission of voluntary disclosure |
|
Non submission of Voluntary Disclosure |
50% penalty for non-submission of Voluntary disclosure and additional 4% penalty per month from the due date of the relevant tax period |
|
Incorrect Filing |
AED 1,000 (first), AED 2,000 (repeat) |
|
Record Keeping Failure |
AED 10,000 (first), AED 20,000 (repeat) |
|
Arabic Document Submission Failure |
AED 20,000 |
|
FTA Audit Non-Facilitation |
AED 20,000 |
VAT Refund Readiness
Eligibility factors for Business VAT Refunds
Businesses can claim a business VAT refund when input tax exceeds output tax, as indicated in Box 14 of their FTA VAT return (Form VAT201).
Foreign businesses are particularly eligible under the VAT Refund Scheme for Foreign Businesses, provided they meet these criteria:
• No fixed establishment in the UAE or any GCC Implementing State.
• Not registered as a taxable entity or conducting regular business in the UAE.
• Registered with a competent authority in their home country.
• From a country with a mutual VAT refund agreement with the UAE (e.g., Austria, Bahrain, Belgium, Denmark, Finland, France, Germany, Iceland, Kuwait, Luxembourg, Netherlands, Norway, Oman, Qatar, Saudi Arabia, South Korea, Sweden, Switzerland, UK).
• Minimum claim amount of AED 2,000, with claims allowed once per 12-month period.
Resident businesses may carry forward excess input tax to offset future liabilities but can apply for refunds in specific cases, such as upon deregistration, accounting for output tax on unsold assets.
Qualifying Expenses
It is important to note eligible expenses for a business VAT refund include:
• Meals and accommodation.
• Fuel and car rental.
• Expenses related to exhibitions and conferences.
Non-eligible expenses include:
• Personal use items (e.g., stationery, computers).
• VAT-exempt products or services.
• Business entertainment.
• Second-hand goods.
• Expenses related to tour operator activities (for non-resident tour operators).
What is the Refund Claim Process
The process for claiming a business VAT refund involves:
1. Login to FTA e-Services Portal or EmaraTax:
o Use existing credentials or UAE Pass. New users must create an account at eservices.tax.gov.ae.
2. Access the VAT Refund Form:
o Select “Taxable Person” as the user type.
o Navigate to the VAT Module and select “New Refund Request.”
3. Complete the Form:
o Enter the refund amount (up to the “Excess Refundable VAT Amount” in Box 14 of the FTA VAT return).
o Provide supporting details and upload required documents.
o Include bank details, ensuring accuracy for foreign accounts (e.g., bank name, address, SWIFT/BIC, IBAN).
4. Submit and Track:
o Submit the form via Form VAT311, noting the application number.
o Monitor status (processing, rejected, or refunded) in the VAT Module.
For hard copy submissions (if required), documents can be sent to FTA, P.O. Box 2440, Dubai, or emailed to
[email protected], with an original Tax Compliance Certificate.
List of Required Documents for VAT Refund
Businesses must submit:
• Proof of Payment and Tax Invoices: Original invoices with a valid Tax Registration Number (TRN), validated by the UAE Embassy, if required.
• Tax Compliance Document: Certificate of business activities or status.
• Passport Copy: Of the authorized signatory, with proof of authority.
• Bank Account Validation: For foreign banks, a letter with account holder’s name, bank name, address, SWIFT/BIC, and IBAN.
• Supporting Evidence: Proof of payment, transfer from another TRN, top 5 tax bills for standard-rated purchases, top 5 invoices for non-taxed sales, and export evidence.
Key Timelines and Deadlines
• Filing Deadline: Within 12 months from the end of the tax period, except for GCC-based businesses with different rules.
• Minimum Claim Value: AED 2,000.
• Processing Time: FTA reviews within 20 business days, with refunds credited within 5 business days post-approval. Hard copy submissions may take up to 4 months from receipt of original documents.
Given the complexity of navigating VAT compliance, many businesses opt for professional assistance. VAT return services provided by trusted FTA-registered tax agencies in the UAE, such as UHY James Chartered Accountants LLC (www.uhy-ae.com), can ensure that VAT returns are submitted correctly and on time, minimizing the risk of penalties. These services include preparing and submitting VAT returns, as well as advising on VAT optimization strategies.
