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Overview: Value Added Tax Penalties in the United Arab Emirates

Published on : 17 Dec 2019
Author(s):Several

Value Added Tax Penalties in the United Arab Emirates

Abstract: Value Added Tax (VAT) is an indirect tax levied on consumption or the use of goods and services at each stage in the chain of its production and distribution; from raw material to its final sale based on the price (value) added at each stage incrementally. It is pertinent to note that it is not a cost that the distribution or production chain members incur, but the end consumer bears its full brunt. VAT saw its inception in the United Arab Emirates (UAE) on 1 January 2018.

Why did the UAE implement VAT?

The UAE provides its nationals and residents with an array of high-quality public services, including but not limited to, roads, parks, hospitals, civil services and public schools; these services are paid for by the government. Indubitably, levy of indirect taxes on most goods and services provides the country with a new source of income which ensures the continued provision of such public services. additionally, it assists the government in achieving its vision of reduced dependence on oil, thereby building a sustainable economy for the future.

Legal Framework of VAT in the UAE

Federal Decree-Law Number (13) of 2016 on the Establishment of the Federal Tax Authority (FTA): FTA has an independent legal personality; the essential legal capacity to act, and the administrative and financial independence. In accordance with Article 4 of Federal Decree-Law Number (13) of 2016, FTA has jurisdiction over the administration, enforcement and collection of Federal Taxes and Relevant Penalties.

Federal Law Number (7) of 2017 on Tax Procedures (the Tax Procedures Law) aimed at regulating the mutual rights and obligations between FTA and the taxpayer as well as any other person dealing with the FTA, and also aimed at regulating standard procedures and rules that apply to all tax laws in the UAE.

Federal Decree-Law Number (8) of 2017 on Value Added Tax (the VAT Law) was published in the Official Gazette and came into effect on 1 January 2018. Article 2 of the VAT Law clearly states that tax shall be imposed on:

  • Every deemed supply and taxable supply made by the taxable person;
  • Import of concerned goods; apart from goods specified in the Executive Regulations of the VAT Law vide Cabinet Decision 52 of 2017.

UAE Cabinet Decision (52) of 2017 on the executive regulations of the VAT Law defines the mandatory and optional tax registration coupled with those liable to exceptions, tax group, and also deregistration. These regulations set out the rules with regards to supplies, taxes due as of the date of purchase as well as the place of supply of such goods including transport services, real estate services, electronic services, telecommunication services. It also includes profit margins, its calculation and charging tax based on such profit margin earned.

Cabinet Resolution Number (40) of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE imposes administrative penalties on the violations that are categorised into three tables as under:

Violations and Administrative Penalties with regards to the implementation of the Tax Procedures Law:

Description

Penalty (in AED)

1

The failure of an individual conducting business to maintain the required records and information

  • 10,000 (First time)
  • 50,000 (Repetition)

2

The failure of an individual conducting business in submitting records, documents or data when requested

20,000

3

The failure of a taxable person to timely submit a registration application

20,000

4

The failure of a registrant to timely submit its deregistration application

10,000

5

Failure of the registrant to inform FTA of any circumstance which requires the amendment of information with regards to his tax record

  • 5,000 (First time)
  • 15,000 (Repetition)

6

Failure of a person who is appointed as a legal representative of a taxable person to inform FTA for his appointment within the stipulated time period

20,000

7

Failure of a person appointed as a legal representative to file a tax return within a particular period

  • 1,000 (First time)
  • 2,000 (Repetition within 24 months)

8

Failure of a registrant to submit a tax return within the particular period

  • 1,000 (First time)
  • 2,000 (Repetition within 24 months)

9

Failure of the taxable person to settle any payable tax in the submitted tax assessment or tax return within the specified period

Obligated to pay late penalty consisting of:

  • 2 per cent of the unpaid tax is immediately due;
  • 4 per cent on the seventh day post the deadline of payment;
  • 1 per cent every day of any amount which remains unpaid one month post the deadline with the upper limit of 300 per cent.

10

Submission of an incorrect tax return by the registrant

  1. Fixed penalty:
  • 3,000 (First Time)
  • 5,000 (Repetitive)
  1. Percentage based:
  • 50 per cent in case the registrant does not voluntarily disclose;
  • 30 per cent in case the registrant discloses post notification of the tax audit;
  • 5 per cent in case registrant voluntarily discloses before the notification of tax audit.

11

Voluntary disclosure by taxpayer/person of error in tax assessment/refund or tax return

  1. Fixed penalty:
  • 3,000 (First Time)
  • 5,000 (Repetitive)
  1. Percentage based:
  • 50 per cent in case the registrant does not voluntarily disclose;
  • 30 per cent in case the registrant discloses post notification of the tax audit;
  • 5 per cent in case registrant voluntarily discloses before the notification of tax audit.

12

Failure of the taxable person involuntarily disclosing error in tax assessment/refund or tax return

  1. Fixed penalty:
  • 3,000 (First Time)
  • 5,000 (Repetitive)
  1. 50 per cent of the unpaid amount to FTA for error resulting in a tax benefit.

13

Failure of person conduction business in facilitating the work of the auditor

20,000

14

Failure of a registrant to calculate relevant tax on behalf of another in cases where the registered taxable person is obligated to

Obligated to pay late penalty consisting of:

  • 2 per cent of the unpaid tax is immediately due;
  • 4 per cent on the seventh day post the deadline of payment;
  • 1 per cent every day of any amount which remains unpaid one month post the deadline with the upper limit of 300 per cent.

15

A person not accounting for any tax which may be due on importation of goods

50 per cent of the undeclared or unpaid tax.

 

 

Violations and Administrative Penalties related to Implementation of Federal Decree-Law Number (7) of 2017 with regards to Excise Tax:

Description

Penalty (in AED)

Failure of the taxable person to display the prices which is inclusive of tax

15,000

Failure to comply with procedures and conditions with regards to the transfer of excise goods between two designated zones, and the mechanism of storing and processing such goods

Higher of 50,000 of 50 per cent of the tax, in case chargeable with regards to goods as a result of such violation

Failure of the taxable person in providing FTA with price lists for goods sold, imported or produces thereby.

  • 5,000 (First time)
  • 20,000 (Repetition)

 

Violations and Administrative Penalties with regards to the implementation of VAT Tax:

Description

Penalty (in AED)

Failure by a taxable person to displace the prices which are inclusive of tax

15,000

Failure by a taxable person in notifying FTA of applying tax based on margin

2,500

Failure to comply with procedures and conditions to keeps goods in designated zones or moving them to another

Higher of 50,000 of 50 per cent of the tax, in case chargeable with regards to goods as a result of such violation

Failure by a taxable person in issuing a tax invoice/alternative document when making any supple

5,000 each

Failure by a taxable person in issuing tax credit note/alternative document

5,000 each

Failure by a taxable person in complying with procedures and conditions with regards to issuing electronic tax invoices/credit notes

5,000 each

 

Tax Assessment and Administrative Penalties Assessment

In accordance with Article 24 of the Tax Procedures Law, the FTA can issue a Tax Assessment in order to determine the payable tax and notify the taxable person within five (5) business days of such issuance in circumstances as mentioned above. Based on any new information, the Tax Assessment can be amended by the FTA. In accordance with Article 25 of the Tax Procedures Law, the FTA may issue an Administrative Tax Assessment for a person, and such person must be notified within five (5) business days.

Article 26 of the Tax Procedures Laws states that “without prejudice to a more severe penalty that may be applicable under any other law, a prison sentence and penalty of maximum of five (5) times the amount of evaded tax (or either of the two)” may be imposed on a taxable person as mentioned in the tables above.

Tax Penalties Redressal Procedures

  1. Application for Reconsideration: In accordance with Article 27 of the Tax Procedures Law, any person may submit a request to the FTA to reconsider its decision which has been issued connected to him, wholly or partially, on the condition that the reasons are included. The same must be filed within twenty (20) business days of notification of such decision. Further, FTA reviews and issues a justified decision within twenty (20) business days from the receipt of such application.
  2. Objections to Tax Disputes Resolution Committee (TDRC) (the Committee): the Committee is chaired one member of the judicial authority assisted by two experts who are registered in the ‘Register of tax Experts’ that are appointed by a decision of the Ministry of Justice along with the Minister. In accordance with Article 29 of the Tax Procedures Law, the Committee decides the objections that submitted with regards to the decision of FTA on applications fr reconsideration.
  1. Procedure for Submitting Tax Disputes Objections: In accordance with Article 31 of the Tax Procedures Law, the Committee reviews such objections and provides a decision within twenty (20) business days of receiving the objection, subject to extension to a maximum of another twenty (20) business days. It is pertinent to note that, in no case may any tax dispute be taken before a competent court in case an objection has not been filed with the Committee first.
  2. Enforcement of Decision: The Committee’s decisions which do not exceed AED 100,000 in value are deemed executory instruments under the Tax Procedures Law. Decisions wherein the value of the decision exceeds AED 100,000 shall be deemed the same if it has not been challenged before the competent courts within twenty (20) business days.
  1. Challenge before Courts: In Accordance with Article 33 of the Tax Procedures Law, the Committee's decision may be challenged (appealed) before the competent courts within twenty (20) business days from the date of objection’s notification. There are two instances where challenges may be made:
  1. If it is an objection in whole or in part of the decision of the Committee.
  2. If a decision is not issued by the Committee in accordance with the provisions of the Tax Procedures Law.

 

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