In October last year, the UAE Federal Supreme Court upheld the imposition of a 300 per cent late payment penalty on submission of Voluntary Disclosures (VD) – a mechanism that rectified an omission identified in past VAT (Value Added Tax) filings.
The impact of the decision was wide-ranging and made businesses jittery about the cost of non-compliance. It led to businesses having second thoughts on whether they should voluntarily come forward and admit an error. Many, since inception, were always apprehensive to undertake any corrective steps simply due to the quantum of penalties and the fear of being noticed by the Federal Tax Authority (FTA) that would trigger an audit or assessment.
To discourage delay in payment of taxes, the UAE Government had earlier kept severe penalties ranging from 6 per cent of the unpaid tax for the first month of delay and up to 1 per cent per day, with an upward ceiling limit of 300 per cent. While the intent to impose penalty was in good spirit, it unfortunately also applied to cases where businesses came forward suo moto (by submitting VD) to admit a genuine mistake of an error or omission in their past tax filings.
Cognizant of this, the UAE Government on April 28, 2021 issued Cabinet Decision No. 49 of 2021 significantly reducing the quantum of penalties across various categories of violations. The three key changes were (i) reduction in late payment penalty from 1 per cent per day to 4 per cent per month (ii) no late payment penalty on voluntary disclosure if tax is paid within 20 days of its submission; and (iii) introduction of amnesty scheme enabling a reduction in unpaid past penalties by 70 per cent.
With the new decision, the late payment penalties have been lowered to 2 per cent for the first month of delay and 4 per cent monthly with the maximum ceiling as is. However, the most relieving change, which will make every business cheer, is the fact that the late payment penalties would not be applied on VD if the differential tax is paid within 20 days of its filing.
In cases where a taxpayer fails to submit a VD before being notified of the tax audit, the court’s decision prescribes a 50 per cent penalty of the unpaid tax and 4 per cent per month to be calculated from the due date of the tax until the date of receipt of the tax assessment. This suggests that if a tax audit is initiated on any business for a period related to the year 2018, it could be subject to a penalty as high as 200 per cent of the unpaid tax.
Considering the higher quantum of penalty post-tax audit notice, businesses should become cautious and immediately start assessing their past VAT and excise filings and rectify the errors voluntarily at the earliest.
The UAE Government has also introduced an amnesty scheme through this, where unpaid penalties that were levied under the previous Cabinet Decision No. 40/2017 can be reduced by 70 per cent provided the taxpayer discharges the unpaid tax and 30 per cent of total penalties by December 31, 2021. While further details are awaited about the scheme and its application, it also needs to be seen whether it could apply to cases pending under litigation.
The reduction in penalties is a step in the right direction as it should result in significantly higher compliance among businesses, consequently leading to increased tax collections for the Government. It surely is the best Eid Gift for business taxpayers…