September 9, 2022
UAE Federal Tax Authority publishes Public Clarification on financial guarantee calculation for excise tax designated zones
- A Public Clarification was published on 31 August 2022 by the FTA that rewards compliant warehouse keepers by reducing the amount of required financial guarantee for excise tax designated zones.
- The Public Clarification came into effect on 1 September 2022.
- Excise tax warehouse keepers must evaluate the impact of the new financial guarantee calculation methodology.
On 31 August 2022, the United Arab Emirates (UAE) Federal Tax Authority (FTA) published Public Clarification EXTP008 related to the methodology used in the calculation of the financial guarantee for excise tax designated zones (the Public Clarification).
The new calculation method of financial guarantee will consist of a risk-based approach aimed at rewarding compliant Designated Zones warehouse keepers by reducing the amount of the required financial guarantee applicable to each excise tax designated zone. The Public Clarification was published on the FTA's website on 31 August 2022 and came into effect on 1 September 2022.
Prior to the Public Clarification, the FTA methodology to calculate the financial guarantee did not take into consideration the compliance history of the warehouse keeper or taxable person due to the lack of sufficient data on the history of compliance.
The new basis of calculation of the financial guarantee as per the Public Clarification consists of the steps listed below:
- Step 1: Determine the guarantee base (the Guarantee Base) for an excise tax designated zone according to the average excise tax due on month-end stock of excise goods for the past 12 months
- Step 2: Determine the financial guarantee percentage i.e., the preliminary financial guarantee percentage based on the residence status, compliance history, financial status, and the number of years during which the warehouse keeper operated in the designated zones. Based on these criteria, the preliminary financial guarantee percentage is substituted with a specific guarantee percentage in the following cases:
- No excise tax assessments resulting in an excise tax difference exceeding 5% of the total excise tax due according to tax returns submitted in a year were issued during the five years preceding the date when the FTA requested the financial guarantee.
- The warehouse keeper or its key employees were found to be accomplices in tax evasion.
Applying these criteria leads to the determination of the final financial guarantee percentage.
- Step 3: Determine the preliminary financial guarantee amount by applying the final financial guarantee percentage to the Guarantee Base.
- Step 4: The minimum financial guarantee amount is set at AED175,000. The required financial guarantee amount will be capped at AED25m, provided that the following conditions are met cumulatively:
- No excise tax assessment by the FTA resulted in an excise tax difference exceeding 5% of the total excise tax due according to tax returns submitted in a year during the past five years.
- No financial guarantees previously submitted by the warehouse keeper were liquidated by the FTA during the past five years.
- Neither the warehouse keeper nor any of its key employees were found to be accomplices in tax evasion.
This Public Clarification does not create new regulatory positions and is published for the purpose of clarifying existing regulations; hence, it is effective from the date of effectiveness of the regulations it aims to clarify.
Excise tax warehouse keepers must evaluate the impact of the new financial guarantee calculation methodology on their business and must comply with the excise tax laws to benefit from the reduction in financial guarantee requirements, as applicable.
For additional information with respect to this alert, please contact the following:
EY Consulting LLC, Dubai
Ernst & Young LLP (United States), Middle East Tax Desk, New York