Tax News Update    Email this document    Print this document  

June 10, 2021
2021-1152

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 Due to a number of updates to the Late Payment Penalty sections, the original Alert was retracted and the following is the updated text.

Executive summary

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.

Detailed discussion

The changes in penalties are summarized below.

Fixed penalties

Trigger

Previous penalty

New penalty

First voluntary disclosure

AED3,000

AED1,000

Subsequent voluntary disclosure

AED5,000

AED2,000

Late payment penalty for failure to settle the stated VAT in the submitted VAT return

Trigger

Previous penalty

New penalty

Day after due date

2%

2%

One week after due date

4%

One month after due day

1% per day

4% per month

Cap

300%

300%

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:

  • 20 business days following the submission of a voluntary disclosure
  • 20 business days following the receipt of a Tax Assessment

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.

Year in which error is disclosed

Previous penalty

New penalty

Year 1

5% of the underpaid tax

5% of the underpaid tax

Year 2

10% of the underpaid tax

Year 3

20% of the underpaid tax

Year 4

30% of the underpaid tax

Year 5 or thereafter

40% of the underpaid tax

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.

Previous penalty

New penalty

30% of the underpaid tax after notification of the FTA audit

50% of the underpaid tax upon error discovered during an FTA audit

50% of the underpaid tax along with 4% of the underpaid tax per month from the due date of the VAT return

Redetermination of existing penalties

The new Cabinet Decision grants the FTA the right to reduce unpaid penalties by 70% subject to the following conditions:

  • Administrative penalties stated in Cabinet Resolution No. (40) of 2017 were imposed on a taxpayer before 28 June 2021 and have not been paid in full by that date.
  • The taxpayer, by 31 December 2021, pays all of the outstanding tax, along with 30% of the total administrative penalties due but has not paid before 28 June 2021.

The Cabinet Resolution does not apply to taxpayers if they have already settled their penalties.

Other penalty reductions

  • The penalty for late registration will reduce from AED20,000 to AED10,000.
  • The penalty for failing to submit a deregistration application on time will reduce from AED10,000 to AED1,000 per month (capped at AED10,000).
  • The penalty for failing to display prices inclusive of VAT will reduce from AED15,000 to AED5,000.
  • The penalty for failing to issue a tax invoice or tax credit note will reduce from AED5,000 to AED2,500.

Implications

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

 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 1996 – 2024, Ernst & Young LLP

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

EY US Tax News Update Master Agreement | EY Privacy Statement