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Understanding VAT, Corporate Tax, and Excise Tax Penalties in the UAE

What is VAT?

VAT, an indirect tax based on transactions, is applied at various stages of the supply chain. The burden of VAT cost is usually borne by end consumers, while registered businesses play the role of tax collectors, responsible for collecting and reporting the tax on behalf of the Federal Tax Authority.

VAT is implemented in over 180 countries globally, with all OECD countries, except for the US, adopting VAT or its variations. Although it may seem similar to a general sales tax for end-consumers, VAT is a more sophisticated tax that addresses numerous challenges faced by general sales taxes.

 

What are the penalties in VAT?

VAT Return Penalties

  • To avoid penalties, it is essential to submit VAT Returns within the specified deadline. Failure to do so will result in a penalty of AED 1,000 for the first occurrence of a delay. For repetitive non-compliance within 24 months, the penalty will increase to AED 2,000 for each subsequent offense.
  • If you miss the specified due date for VAT Return submission, the FTA may issue a tax assessment with an estimated payable tax. In such cases, you will be required to settle any assessed payable tax, along with penalties for non-submission of the tax return and/or late payment, as applicable.
  • For late payment of payable tax, the Taxable Person will be subject to a penalty of up to a maximum of 300%. This includes a 2% penalty of the unpaid tax on the day after the due date of payment if the payment is late. Additionally, a 4% monthly penalty will be imposed starting one month after the due date and will continue on the unpaid amount until it is paid.

 

Making Payment for VAT Penalties (Late VAT Return and Late VAT Payment)

If you fail to submit your VAT return or make the VAT payment on time, penalties will be applied. To check the specific penalty amounts and make the payment, access the “My Payment Tab,” where you will find the total penalty amount listed under the “VAT & Penalty Payment” box. You can refer to the online payment guide for details on completing the payment. To view the detailed information on the penalty type and amount, scroll down to the “Transaction History” box under the “My Payment” tab and check the relevant line.

 

What is Corporate Tax in UAE?

Corporate Tax is a type of direct tax imposed on the overall earnings of corporations and other enterprises. In some jurisdictions, it is alternatively known as “Corporate Income Tax” or “Business Profits Tax.”

What are the penalties in Corporate Tax?

Penalties for Delayed Submission of Corporate Tax Returns 

Late submission of corporate tax returns can lead to substantial fines. The penalty structure for late payment of tax liability is as follows: 2% of unpaid tax is due on the day following the due date. 4% of unpaid tax is applied monthly, starting one month after the due date. 

For instance, if a business’s fiscal year ends in April and the tax return filing deadline is on the 15th day of March, failure to comply with federal decree laws or filing tax returns after the due date can result in significant financial penalties.

Penalty for Delayed Payment of Corporate Tax In the UAE

The late payment penalty for corporate tax is calculated using the following formula:

  • A fixed penalty, typically a percentage of the outstanding tax amount, is imposed for the first month of delay.
  • Each subsequent month of delay incurs an additional fixed penalty.
  • Interest is applied to the overdue tax amount, starting from the due date and continuing until the full tax amount is paid.

Punctual payment of corporate taxes is crucial for companies to avoid these fines and potential penalties. Complying with tax laws and promptly fulfilling tax responsibilities is essential to prevent financial difficulties and maintain a positive relationship with the tax authorities.

 

What is Excise Tax in UAE?


Currently, in the UAE, Excise Tax is levied on the following items:

  1. Tobacco and tobacco products.
  2. Liquids used in electronic smoking devices and tools.
  3. Electronic smoking devices and tools.
  4. Carbonated drinks (excluding sparkling water).
  5. Energy drinks.
  6. Sweetened drinks.

 

The main purpose of implementing the Excise Tax is twofold: first, to curb the consumption of these goods, and second, to generate revenue for the government that can be utilized for public services. It is important for all businesses involved in importing, producing, or distributing excise goods from designated zones to be aware of their registration obligations and ensure compliance with filing and payment of the Excise Tax.

What are the penalties in excise tax ?

  • On 28th April 2021, the UAE Cabinet issued Decision No. 49 of 2021, amending the regulations pertaining to administrative penalties for tax violations related to VAT and excise tax. These amendments came into effect on 28th June 2021 and encompass changes to penalties concerning late tax payments and errors in tax returns, assessments, and refund applications. A notable addition is the submittal of reconsideration measure that can potentially reduce penalties for certain taxpayers under the current penalties regime.
  • Regarding late payment penalties, they are applicable to delayed payments of VAT and excise tax concerning submitted tax returns, voluntary disclosures, and tax assessments. Under the previous rules, the late payment penalty was 2% on the first day the tax payment was due, followed by 4% on the seventh day, and then a daily accrual rate of 1% on unpaid amounts after one month, with a cap at 300% of the unpaid tax. Consequently, this system could result in substantial penalties over a short period.
  • The new rules will implement a late payment penalty of 2% on the first day the tax payment is overdue, followed by an additional 4% per month thereafter, with the maximum penalty capped at 300% of the unpaid tax amount.

This article was published on  14 August 2023

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