By end 2022, VAT and excise tax will mark five years of their existence in the UAE. Despite one not having done anything wrong or believing their business is tax-compliant, one could find themselves slapped with an unexpected tax liability or penalty either due to a difference in opinion, or an unintentional error identified in the audit.
Should UAE businesses worry about the Federal Tax Authority (FTA) auditors coming around to ask questions about the returns filed many years ago? We discuss here the topic of Statute of Limitation, which could answer this question.
A Statute of Limitation is a legal term that sets the maximum period within which one must file a claim or commence any legal action. Any action must be taken within the prescribed limitation period. Under the UAE VAT and excise law, the statute of limitation sets out a timeframe within which tax authorities must initiate a tax audit on the taxpayer. If not commenced within the given deadline, FTA’s claim for undertaking a tax audit or raising a tax demand on the taxpayer becomes time-barred, i.e., inadmissible.
UAE VAT and excise audits
The tax procedures law provides an expiry of five years from the end of the tax period for conducting the audit. The timeframe can be extended to 15 years only if the FTA can prove a case of tax evasion. This means for the FTA to issue notice and initiate an audit for the VAT/excise tax return filed for the tax period January 2018 is on or before January 2023. If no notice is issued before January 2023, the FTA cannot audit the taxpayer for January 2018 period in the future, unless a case of tax evasion is proved.
Purpose of Statute of Limitation
The purpose of having the SoL in any legal statute is to bring the element of time certainty to legal proceedings. If there is no set time, uncertainty will prevail eternally, leaving the taxpayers exposed forever. Apart from having the deadline for audit closure, the SoL also provides protection of rights for both the FTA and the taxpayer. Further, it coincides with the record-keeping requirement for the taxpayer (except in the real estate sector) to maintain its books of accounts for five years for tax purposes.
Type of audits
Recognizing the statutory limitation period, there has been a spike in audit notices issued in the past year and still continuing. In our experience, two types of audits are being initiated, one where a limited review is undertaken for large enterprises with one sample tax period selected for each year. Another is a more comprehensive review where SMEs are subject to review for the entire period starting from January 2018 to date.
To summarise, unaudited companies need to brace for a VAT/excise tax audit that could potentially arrive in the coming months. Consequently, it is important for businesses to review their past workings and plan a strategy to resolve any tax issues or errors through a self-rectification voluntary disclosure process rather than waiting and hoping the FTA doesn’t initiate any audit.
One must also remember that penalties would be higher when audited, instead of when the errors are rectified suo moto.
