Cabinet Decision No.49 : Value Added Tax Penalties amended in the United Arab Emirates

On 28th April 2021, Cabinet decision No.49 was updated in UAE.

The update is in regards to administrative penalties on tax violations within the country. This amendment is applicable after 60 days from the date of issue.

Click here to know the Administrative penalties, which will be applicable until the date of new penalties.

Changes implemented in a nutshell:
There were quite a few amendments in the administrative penalties management. The new amendment includes concessions that may reduce the amount of penalties taxed on some taxable people.

Read more for a brief of the changes made to administrative penalties related to tax late payments and in tax return errors, tax assessments, and refund applications.

Penalties imposed for late payments
Late payment penalties are imposed on the delay of taxes, for example on VAT or Excise tax within taxes that are submitted in the tax return, voluntary disclosure, or tax assessments.

Before the penalty was 1% every day on the accruing rate on the tax amount after a month, which can quickly lead to a huge penalty. However, now it will be at 4% per month.

Below is shown how these penalties are calculated.

Moreover, in a scenario where the taxable person is needed to make an additional tax payment to the FTA due to voluntary disclosure or tax assessments that are issued by the FTA after a tax audit. Previously the taxable person would be charged for the penalty from the date of the original tax return, now the taxable person will have 20 business days to make this payment giving the person a chance to avoid the late payment penalty.

Penalties for errors
A penalty based on a particular percentage can be applied due to errors within submitted tax returns, tax assessments, or refund applications. Under the new laws, the amount of the penalty will depend on the timeline in which the taxable person informs the FTA of the errors through the way of voluntary disclosure, after the due date of submission of the original relevant tax return, tax assessment, or refund application.

The penalties will be incremental and extend from 5% (if the error is disclosed within a year) to 40% (for disclosures after 4 years) and will be applied on the difference within the tax that was calculated in a submitted tax return, tax assessment or refund application. As Such, the penalty may be implemented where, for instance, a tax return submitted by a taxable person inaccurately reports the tax that is due for payment to the FTA or which may be refunded to the taxable person.

On the contrary, where a taxable person does not submit voluntary disclosure concerning an error before being informed of an audit, the taxable person will be imposed with a 50% penalty for every month where there is an unpaid tax due to the FTA (This includes overclaimed refunds) from the date payment is due for the applicable tax periods, until the date of receipt of the tax assessment from the FTA.

Ease of existing penalties
The cabinet decision provides relief for current penalties, somehow allowing for a reduction of administrative penalties that have been imposed below the original rules of a 30% of the original penalty amounts.

To benefit from the relief, the taxpayer will require to meet certain conditions, including paying all the tax dues and 30% of the total unpaid administrative penalties by 31st December 2021.

This relief seems to apply to penalties that are still unpaid to the FTA before the effective date of the cabinet decision. Taxable people must look for guidance from the FTA or from a registered tax agency on the process of implementing this relief.

Threats and Opportunities
Cabinet Decision No.49 will provide businesses with various threats and opportunities whenever it is in effect.

This method of penalties encourages businesses to voluntarily disclose for errors by using a comparatively low percentage of penalties for disclosing submitted closer to the due date of the relevant tax return.

On another hand, businesses that do not submit a voluntary disclosure and have tax dues accumulating from the date of the tax return can be impacted. This is because bigger penalties will be applied where tax errors are found, during a tax audit (or disclosed after the taxable person or entity is informed of an impending audit) businesses and organizations must work towards finding such errors and reporting them to the FTA before it gets informed by the FTA audit.

To know if a voluntary disclosure is needed, organizations should quickly implement a review of their VAT position of past durations to find any errors, mainly within the duration where there were uncertainties relating to VAT treatments of supplies or recovery of expenses.

Even organizations that have conducted such checks before should ideally go through this again.

Moreover, if a taxable person or an entity, has already been subjected to the original administrative penalties, the taxable person must consider if this law will help them to reduce the penalties, which may be imposed on them before the effective date of the cabinet decision. Hence why organizations must see if they meet the conditions to get these concessions or not!

Future Actions to take for your company
Organizations need to understand how this updated law will affect their business. Hence organizations must speak to their tax advisors, see how this may impact them and what is their tax positions.

To get in touch with a tax advisor, email at: contact@itc-tax.com

ITC accounting and tax consulting can help conduct pre-audits to ensure that everything is in good condition.

After an organization knows its errors, it will then need to consider which penalties may be applicable and the steps that can be taken to reduce the impact of these penalties.

ITC may also be able to assist companies that have already been subjected to the penalties through the original penalties to reduce the effect of these penalties. taxable people or entities that are currently under litigation tax matters can also consider their position.

Although these new updates are in a positive direction, these are complicated and people imposed by taxes should understand the implications of these changes.