Where minor change to wording has significant repercussions: one year into the new penalty regime and what we know so far.
Nearly a year ago, the UAE Cabinet issued an updated Cabinet Decision No. 49 on amending some provisions of Cabinet Decision No. 40 of 2017 on the Administrative Penalties for Violation of Tax Laws in the UAE (“Cabinet Decision on Penalties”) in April 2021. The amendments mentioned therein have taken effect from 28th June 2021.
While the general perception was that the penalty regime update pertained to the relaxation of penalties, the change of definitions has actually led to a very different outcome.
Impact of the wording change
When a taxable person is required to submit a VAT Voluntary Disclosure (‘VD’) pursuant to Article 10 of the Federal Decree-Law No. 7 (“UAE Tax Procedures Law”), certain fixed and percentage-based penalties become applicable as a result of such submission.
Although fixed penalties remain applicable in the same manner, the updated Cabinet Decision on Penalties has changed the nature of the percentage-based charges.
Previously, Cabinet Decision No. 40 stipulated that the percentage-based penalty applied on “the amount unpaid to the Federal Tax Authority (‘FTA’, ‘the Authority’) due to the error and resulting in a tax benefit”. The updated Cabinet Decision on Penalties mentions that the penalty should be calculated on “the difference between the tax that was calculated and that which should have been calculated”, i.e. on the error itself, notwithstanding whether the taxpayer has incurred any tax benefit. Furthermore, in an event where the VD is submitted post being notified of a tax audit, the percentage-based charge is set at 50% of the amount of such error.
The above suggests that even where the taxpayers are in a refundable position, they now become subject to the percentage-based penalties for correcting any errors via VD, notwithstanding whether the refund has been received from the Authority previously or not.
Although the above may seem unreasonable at first glance, the availability of the offset mechanism in the UAE VAT regime actually justifies the applicability of percentage-based penalties on the refund amounts that have not been claimed by the taxpayer, as theoretically, the taxpayer could have used such amounts to offset any arising tax or administrative liabilities.
As we are approaching closer to the end of the five years statute limitation period for the taxpayers registered as of 1st January 2018, we see increased levels of activity from the FTA in terms of tax audits. For the taxpayers bearing the VAT refundable positions accumulated from 2018, it is essential to review their positions and apply for cash refunds before the expiration of 5 years.
KPMG has a team of experienced tax specialists that, in light of the evolving tax landscape in the UAE, can assist you with compliance with the UAE VAT legislation, assess your current tax position, advise the appropriate tax treatment, prepare clarification or reconsideration requests, or represent you in front of the FTA as registered tax agents.
We are happy to discuss specific circumstances with you and determine the way forward should you have any questions or concerns in respect of the concept discussed above.
Please get in touch with your usual KPMG contact or any of the tax professionals below.