UAE Administrative Penalties For Violation Of Tax Laws Reduced
The Federal Tax Authority (‘FTA’) issued a new Cabinet Resolution No. 49/2021 on the 28 April 2021 which amends the previous Cabinet Resolution No. 40/2017 on administrative penalties. Through these amendments, the administrative penalties have been substantially reduced and should encourage taxpayers to voluntarily rectify any errors by disclosing the appropriate tax position to the FTA.
The new Resolution will become effective from 60 days of its issuance, it also provides for relief (i.e. only 30% of unpaid penalties is to be paid) in cases where the penalties were already imposed by the FTA. Retrospective application of the Resolution could provide huge relief to taxpayers who have not been able to settle penalties due to the impact of COVID-19 or other factors on the business.
We have summarised the key reductions in the tax penalties as below:
- The VAT late payment penalties, which were 6% of unpaid tax for delay up to 30 days and 1% per day post 30 days, is now amended as follows:
- 2% of the unpaid tax is due immediately on the day following the due date
- 4% per month due after one month from the date on which payment is due
The upper ceiling of 300% penalty would continue to apply.
- Tax due date in case of filing Voluntary Disclosures (‘VD’) and Tax assessment is clarified as below:
- Tax due date would be 20 business days from the date of submission of VDs
- Tax due date would be 20 business days from the date of receipt of tax assessments
Previously, it was interpretated that tax due date in case of VDs and tax assessments could be the due date of original tax returns. While the applicability of the due date of tax payments was challenged in the past, however the Federal Supreme Court in one case had taken a view that tax due date in case of VDs would be the due date of original tax returns and not the date of filing of VDs. It would be interesting to see how the provisions are applied to the on-going cases at Tax Dispute Resolution Committees (‘TDRC’) and at the Federal Courts.
- The percentage-based penalties applicable on filing VDs have been amended to as below:
- 5% if VD submitted within 1 year of due date
- 10% if VD submitted between 1-2 years of due date
- 20% if VD submitted between 2-3 years of due date
- 30% if VD submitted between 3-4 years of due date
- 40% if VD submitted after 4 years of due date
The incremental increase in penalties would encourage taxpayers to identify any errors at the earliest and undertake due measures to rectify the returns by filing VDs.
- For taxpayers who have been imposed penalties under the earlier Cabinet Resolution no. 40/2017 prior to the effective date of the new Cabinet Resolution and the penalties are yet to be settled, they can now avail the benefit of paying only 30% of the total outstanding penalties provided all the taxes and 30% of the penalties are settled by 31 December 2021. The exact procedure for availing the concession is yet to be published by the FTA.
An immediate benefit can be claimed by taxpayers who have outstanding penalties and who may have filed a Reconsideration application with the FTA.
Whereas the taxpayers who had filed appeals at TDRC and Federal Courts and have paid the entire due penalties at the time of filing the appeal. It would be important to see the benefit which FTA would provide for such matters, i.e. whether 70% of the penalties would be refunded or adjusted against future tax liabilities.
- Penalties for non-issuance tax invoice or alternative document have been reduced from AED 5,000 per tax invoice or alternative document to AED 2,500 for each case discovered.
- Penalties for delay in VAT registration has been reduced from AED 20,000 to AED 10,000.
In addition to above, penalties for other violations and errors have also been reduced in the new Cabinet Resolution.
On comparison with the previous Resolution, 305% percentage-based penalty would have applied in case of filing VDs pertaining to tax periods prior to 1 year. However, as per the amended Resolution the applicable percentage-based penalties would range from 10% to 40% depending upon the delay (assuming differential VAT is paid within 20 business days of filing the VD). On the contrary, if the taxpayers do not file the VDs to rectify the errors then the likely penalties would be 50% + 4% per month (from the original return due date). For example – if errors pertaining to tax period December 2018 are not rectified then the FTA may levy penalty of around 160%, whereas self-correction would lead to a penalty of 20% or 30% of the unpaid tax. Revamping the penalty provisions is expected to lead to an increased focus on compliance.
Since it is more than three years of VAT and Excise tax implementation it is prudent that businesses adopt adequate measures to ensure appropriate tax compliance. We would recommend businesses to evaluate whether the previous tax filings are correct and whether there is a need to file VDs to rectify any errors discovered. Also, as certain benefits are based on documentation, for example – official and commercial evidence in case of export of goods; it is important that businesses maintain such documents.