Understanding UAE VAT Litigation
The Federal Tax Authority (“FTA”) in the UAE rolled out a Value Added Tax (“VAT”) for businesses on January 1, 2018 vide Federal Law No. 8 of 2017 (“VAT Law”). The provisions pertaining to the procedures under the VAT Law are set out under the UAE Federal Law No. 7 of 2017 on Tax Procedures (“TP Law”) and the Executive Regulations on Tax Procedures Law issued under Cabinet Resolution No. 36 of 2017 (“Regulations”).
The VAT Law includes a self-assessment feature whereby the person or business paying taxes will be required to submit a tax return. This was a welcome move to many businesses in the UAE since it enables businesses to determine its own taxability.
The TP Law and the Regulations makes it the responsibility of the taxpayer to identify and report any mistakes made in past filings and sets out the procedures for the same.
If company, while filing previous tax returns, finds a mistake or an omission concerning payable tax of more than AED 10,000 is found, is required to notify the FTA. This process is called the Voluntary Disclosure Form 211 (“VD”), whereby the taxpaying party reports the problem voluntarily and waits for FTA clarification on the issue.
When should a VD be filed?
Filing of VD by each entity is important in eyes of law. There are several conditions which may lead to discrepancy VAT returns and hence the laws require entities and/or individuals to promptly report such discrepancies to the FTA. According to the Regulations, the concerned entity/individual is required to report the discrepancy by filing the VD within 20 business days from the date when such entity/individual becomes aware of the discrepancy.
Despite such obligation, some taxpayers are still wary about coming forward due to several reasons. This includes the concern about raising their risk for future audits. Further, there can also be substantial penalties for any errors reported.
When the taxpayer is concerned about coming forward to disclose a previous error on a tax return, VAT litigation is an alternative.
What is VAT Litigation?
The VAT Law offers a multilevel litigative process for handling tax disputes. This 4-tiered approach to resolution was developed to give taxpaying parties (whether individuals or businesses) less fear or trepidation about coming forward and reporting errors regarding their taxes.
The VAT Law read with the TP Law and Regulations enables the reporting party (the taxpayer) the right to file for fair consideration concerning a discrepancy/ error in previously filed tax return. If the taxpayer believes penalties or fines are excessive or incorrectly applied in their case, they can file an application for reconsideration before the FTA within 20 days from the notification of the FTA’s decision. Following this, the taxpayer may then file an objection over the reconsidered FTA decision with the Tax Disputes Resolution Committee (“TDRC”).
Finally, if the taxpayer is still not pleased with the outcome, an appeal can be made with the Federal Court of Appeals.
How Often Does VAT Litigation Result in a Favorable Outcome for the Taxpayer?
Even though the VAT Law is merely two years old, this law has sometimes worked favorably for the taxpayers. Large fines (which can be up to 300% the size of the error) are sometimes substantially reduced.
In most cases, the FTA has only offered such relief where the monetary levels were small. If the case is simple and straightforward, a taxpayer has a much better chance of having penalties waived. Examples of basic errors include transposition of numbers involving small transactions or where a business could show there was a software or system error which caused the problem.
Additionally, if a business can illustrate that it took steps to correct a problem but an error was still the result, the FTA may reduce or entirely waive a penalty.
So far in the history of the VAT Law, most cases involving larger sums of money have not gone in favor of the taxpaying party. At this stage, a taxpayer can apply to the FTA for reconsideration of the decision, failing which; file an objection with the TDRC.
It bears noting that the VAT Law is still in its infancy stage and there may be further legislation which changes the process in the future. At present, the FTA and TDRC are understandably particular about clarity and details. A taxpayer hoping for a reduction in fines or penalties should make his case very clear and straightforward.
What is the Time Limit for TDRC Appeal?
When filing an appeal, taxpayers usually have 20 business days to do so. A late filing may be the simple reason an otherwise positive outcome becomes negative for a taxpayer.
All relevant financial information should accompany the application for appeal. Reasons for delayed payment of taxes must be brought forth voluntarily rather than being revealed in a discovery phase.
With UAE VAT litigation being relatively new, changes will no doubt be made. For the time being, taxpayers making voluntary disclosures of errors or moving through the VAT litigation process should do so with absolute transparency and with the disclosure of all applicable financial information.
Adv. Sruthi Konnangath
Corporate & Commercial – Intellectual Property