tax generic
Make sure to include all... UAE's Supreme Court ruling rearranges how penalties are imposed on later voluntary disclosures related to a business' tax obligations. Image Credit: Pixabay

Dubai: Each voluntary disclosure made by UAE businesses on their taxes will now cost them dearly – a federal court ruling has set penalties of 300 per cent of the amounts disclosed.

“The judgement – delivered on October 14 - will result in exposing a number of companies to penalties,” said Mohamed El Baghdady, Senior Associate at Baker McKenzie Habib Al Mulla. “We are seeing some tax payers having an exposure of Dh1 billion and Dh500 million in administrative penalties.”

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A deterrent to disclosures?

The Federal Supreme Court in its judgement had indicated that voluntary disclosures are an essential tool for tax payers to “evade potential criminal claims for tax evasion”. “Hence, voluntary disclosures must be made by tax payers by reporting any errors to be found in their tax returns to avoid criminal prosecution,” said El Baghdady.

“The judgement by the Federal Supreme Court is deemed to be the first final and conclusive judgment to be issued on applicable penalties for voluntary disclosure. This will set a precedent to be followed by lower courts and Tax Dispute Resolution Committee.”

A high-risk gamble

Sure, businesses could desist from making such disclosures, fearing that any penalties will be too burdensome on their cashflows. Joanne Clarke, Tax Director at Pinsent Masons Middle East, can understand where those sentiments are coming from, but issues a stark warning.

“Many tax payers may be reluctant to proactively - and voluntarily - disclose prior period errors to the FTA (Federal Tax Authority)… although obliged to do so,” said Clarke. “They may seek to reply on the 5-year statute of limitations for the FTA audit.

“However, this is a risky approach to VAT Compliance Governance in the region - businesses instead should concentrate on implementing improved processes, controls and automation into their compliance cycle to minimise or even eradicate the risk of error upfront.

“The submission of a voluntary disclosure is obligatory within 20 business days of the tax payer identifying an error and, therefore, is technically not a “commercial option” for businesses, although sometimes treated that way in the region.”

What brought on the Court judgement?

The Federal Supreme Court issued its verdict on an appeal lodged by the FTA. The FTA move was in response to earlier judgements passed by the lower courts that the UAE Tax Procedures Law “distinguishes penalties for late payment of tax as shown in submitted returns or notified assessments from fines and penalties applicable to voluntary disclosures”.

In effect, what this meant was that, earlier, penalties on voluntary disclosures would be treated as admin fines… and not carry the heavier penalties for late payments. This was the status since 2019. But with the Federal Supreme Court weighing in, that difference has been wiped out.

The Supreme Court decision has fixed that a 'late payment penalty' is due in addition to the fixed penalty and tax benefit penalty. It becomes applicable from the date of the original VAT return in which the error was made to the date of receipt of payment of the VAT by the tax authority. And that there is no way to mitigate or reduce the penalty by means of a voluntary disclosure.

With the new UAE Supreme Court ruling, voluntary disclosures will not be charged as administrative fines, but as late payments and which carry a stiffer percentage. Image Credit: Gulf News Archive

How frequently are voluntary disclosures made?

UAE tax payers have to resort to such disclosures when they find that there was an error from their side in reporting their tax returns to the FTA. “When the error or omission in respect to the VAT is found, than the entity would need to file the disclosure by enumerating the reasons for the error,” said Atik Munshi, Senior Partner at the consultancy Crowe UAE. “Such disclosures have to be filed within the prescribed time limit and manner.

“If the error resulting the calculation of VAT payable is more than Dh10,000, than the tax payer shall file a voluntary disclosure.”

How penalties will be calculated
The percentage based 'late payment penalty' will be calculated on the number of days for which the payment remains outstanding at 2%, 4% and 1% (charged progressively in this order as the time increases). There is an upper cap of 300 per cent of the under-paid VAT, according to Joanna Clarke of Pinsent Masons.

Standard operating procedure

The current threshold for VAT is Dh375,000. When the taxable turnover of a business reaches this level, it has to apply to the FTA for VAT registration. The FTA will examine the application and either accept/reject it.

If accepted, FTA will grant a TRN (tax registration number), which the entity has to disclose on its invoices. In certain cases, the entity can apply for VAT registration voluntarily.

The FTA has the authority to do audits on the documents provided by the tax payer regarding the returns, and can seek access to their premises to conduct an audit.

No more maneuver space

“The judgement by the Federal Supreme Court is deemed to be the first final and conclusive judgment to be issued on applicable penalties for voluntary disclosure. This will set a precedent to be followed by lower courts and Tax Dispute Resolution Committee,” said El Baghdady.