June 10, 2021
UAE amends VAT penalty rules
Note: This Alert was originally published on 3 June. Due to a number of updates to the Late Payment Penalty sections, the original Alert was retracted and the following is the updated text.
The United Arab Emirates (UAE) has published Cabinet Decision No. (49) of 2021, which amends Cabinet Decision No. (40) of 2017 on Administrative Penalties for Violations of Tax Law in the UAE. The amendments will be effective from 28 June 2021.
The amendments generally reduce the value added tax (VAT) penalties for non-compliance. The most significant change is that taxpayers will now be given time to settle underpaid taxes before late payment penalties are imposed.
Increased penalties will now apply for voluntary disclosures made more than a year after the tax liability was declared or imposed. In addition, the variable penalties when a voluntary disclosure is not filed before an audit notification will increase. However, the overall penalties that are likely to arise under the new law should still be significantly lower than under current law because of the reduction in late payment penalties.
Taxpayers may also benefit from a waiver of 70% of penalties that are unpaid on 28 June 2021 if they meet certain conditions.
The amendments create an incentive for businesses to review their historic filing positions and to voluntarily disclose any errors before they are notified of an audit. Businesses should also review any outstanding penalties to determine if they can benefit from relief.
The changes in penalties are summarized below.
Late payment penalty for failure to settle the stated VAT in the submitted VAT return
Late payment penalty for under-paid VAT as per the voluntary disclosure or tax assessment
Where additional VAT liabilities arise from a voluntary disclosure or a tax assessment, the new rules represent a significant change as taxpayers will now be given 20 days to settle any underpaid tax before late payment penalties will apply.
The due date for the calculation of the late payment penalties in this instance would be as follows:
Where taxpayers fail to pay within the 20 days, a 2% penalty will be imposed after the 20-day period lapses, followed by a further 4% monthly penalty payable at monthly intervals one month from the due date. The cap on the penalties remain at 300%.
Variable penalty where a voluntary disclosure is submitted before the taxpayer is notified of an audit by the FTA
The penalties now range from 5% to 40% depending on when the taxpayer submits the voluntary disclosure.
Variable penalty where a voluntary disclosure is submitted/ tax assessment is received after the taxpayer is notified of an audit by the FTA
There is a significant increase in the penalties where an error is corrected after the taxpayer is notified of an audit by the FTA.
Redetermination of existing penalties
The new Cabinet Decision grants the FTA the right to reduce unpaid penalties by 70% subject to the following conditions:
The Cabinet Resolution does not apply to taxpayers if they have already settled their penalties.
Other penalty reductions
The amendments create an incentive for businesses to review their historic filing positions and to voluntarily disclose any errors before they are notified of an audit. For example, if a taxpayer on 1 July 2021 voluntarily discloses an error in its June 2019 VAT return and pays the associated tax within 20 days, there will be no late payment penalty and a 10% variable penalty will apply. However, where the FTA issues an assessment on 1 July 2021, this variable penalty would increase to 146%, on the assumption that the associated tax shall be settled within 20 days of filing of the voluntary disclosures.
Businesses should also review any outstanding penalties to determine if they can benefit from relief.
For additional information with respect to this Alert, please contact the following:
EY Consulting LLC, Dubai
Ernst & Young Middle East, Abu Dhabi Branch
Ernst & Young LLP (United States), Middle East Tax Desk, New York