Here is the good news, some of the penalties and tax rules are reduced in a recent cabinet meeting to ease the business and taxpayers. The UAE Cabinet recently confirmed several updates to the administrative penalties applicable to companies violating taxes in the country.
As part of Cabinet Resolution No. 49, several incentives were introduced to ease penalties for certain taxpayers. But other rules in the legislation would allow harsher penalties for offending companies that fail to disclose wrongdoing.
How do the rules benefit taxpayers who make voluntary disclosures?
Last year, the UAE Federal Supreme Court upheld a 300% late penalty for filing voluntary returns. Companies in the UAE have understandably been concerned about the potentially huge costs of non-compliance. Some have reservations about coming forward and admitting mistakes in their tax returns.
So many of the changes announced on April 28 were designed to incentivize these companies to admit they were wrong. Measures include:
Late payment penalties apply in case of late payment of taxes such as VAT or GST. The fine for this offense is now 4% per month; it used to be a 1% per day cumulative fee that quickly led to hefty fines.
Here’s how the new rules compare to the previous penalties:
The old penalty is the new penalty a few days after the tax is due
One day late 2% 2%
Seven days late, 4% unavailable
One month delay 1% per day (up to 300%) 4% per month (up to 300%)
To further reduce fines for infringing businesses, when taxpayers need to pay an additional tax to the Federal Tax Office, they now have 20 working days to do so. This compares with the immediate application of the penalty under the original rules, which meant that the penalty was increased from the date the tax return related to the original unpaid tax was due.
Under the new rules, the amount of the fine will depend on the time it takes taxpayers to alert the Federal Tax Authority Service of the error by filing a voluntary return after the deadline for filing the original tax return, requesting an assessment or refund has been passed.
If the error is disclosed to the authorities within one year, the penalty will be 5% of the difference between the calculated and the tax that should have been calculated. The additional increase will apply up to 40% for disclosures made four years after the error.
Reduce existing penalties
Companies with existing fines to their name will benefit from an exemption of up to 30% of the original amount. VAT-registered taxpayers must meet certain conditions to guarantee corporate tax relief, including payment of all taxes due by December 31, 2021, and a 30% administrative penalty for non-payment.
What about non-compliant companies that do not provide voluntary disclosures?
While penalties for non-compliance are mitigated where the company is at fault on its own, those that are non-compliant and fail to voluntarily disclose before receiving an audit notice will face harsher penalties of up to 50% of their fault quantity.
In addition, the companies involved must pay a 4% penalty for each month of unpaid taxes due to the FTA. This includes refunds for any overcharges calculated from the payment due date for the relevant tax period to the date the tax assessment is received from FTA.
Even if a company has previously had a tax health check, it must consider that any subsequent tax period may contain non-compliance and, therefore, still be at risk of new and more severe penalties.
What does this mean for the company?
The general trend in the UAE to reduce sanctions against non-compliant businesses should be considered good news. It will encourage more companies to come forward and admit errors and omissions that lead to non-compliance, heralding a new era of accuracy and greater compliance in tax reporting across the country — and helping to generate more tax revenue for the government.
But the news should serve as a wake-up call for those unwilling to voluntarily disclose or, more worryingly, for those still unaware of their breach. Tougher penalties are coming, meaning tax increases are more significant than ever, from design to reporting.
Companies must now identify any errors in their data and report them to the FTA before being notified of an audit.
Companies already sanctioned under previous regulations must now consider whether they can take advantage of the exemption from the current penalties announced by the FTA. This will allow them to reduce the penalties not paid to tax authorities before the effective date of the new legislation, provided they meet specific criteria.
What are you going to do now?
The first step for companies that become aware of a tax return error is to file a voluntary disclosure and take advantage of the reduced penalty.
If you are unaware of any errors, you should immediately review previous VAT returns, identify any errors and notify the authorities through voluntary disclosure.
In the future, tax teams need to remember that eliminating the risk of human error is impossible if companies rely on manual processes to manage taxes; be aware of the many risks to your data and be prepared for errors and possible revisions.
The new regulations are a step in the right direction for UAE taxation, but the changes also pose risks for those businesses that still rely on manual processes. As the gap widens between the penalties imposed after a voluntary disclosure and those imposed after an audit, you may decide that allowing people to complete and file their tax returns is no longer worth the risk.
Contact us today to find out how our automated tax reporting and reporting solutions can ensure your business is 100% accurate and reliable on every transaction or how expert tax advisory and audit services can help you avoid the risk of default.