The United Arab Emirates (UAE) Federal Tax Authority (FTA) has made substantial efforts in amending some of its provisions relating to violation of the tax laws by taxpayers, which have been appreciated by the business community especially during the Covid-19 pandemic. The purpose of this article is to examine the salient features of the new UAE penalty laws.
Before we start to analyze the provisions of the new penalty laws, it is useful to reiterate that there are, generally, two types of penalties.
- Firstly, a fixed penalty: Fixed penalties usually have a lower imposition for a first-time violation, and a higher imposition for a repeated violation.
- Secondly, a percentage-based penalty: Percentage based penalties can be calculated either daily (for example, penalty amounting to 1% of unpaid tax, calculated every day), or monthly (for example, penalty amounting to 4% of unpaid tax, calculated every month), or even be based on a percentage of unpaid tax. Percentage-based penalties sometimes have an upper ceiling on the amount of penalty that can be imposed (for example a provision may state that the maximum penalty that can be imposed is 300% of unpaid tax). Some provisions may also have both a fixed penalty and a percentage-based penalty.
Background of New Penalty Provisions
On April 28, 2021, the UAE government issued Cabinet Resolution No. 49 of 2021 Amending some Provisions of Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violation of Tax Laws in the UAE (Cabinet Resolution No. 49 of 2021) (New Law), effective from June 28, 2021 (Effective Date). In the majority of cases, the New Law led to a substantial reduction in penalties as compared to the previous regime under Cabinet Resolution No. (40) of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE (Old Law).
The New Law contains among others two important provisions, Article 1 and Article 3, which primarily deal with penalties covering two periods (before June 28, 2021, and after June 28, 2021).
Article 1 relates to penalties that would replace the tables under the Old Law and is effective from June 28, 2021. Article 3 refers to those penalties that have already been imposed before June 28, 2021.
Structure of Article 1 of New Law
Article 1 of the New Law contains three tables:
- Table 1 covers Administrative Violations and Penalties related to the application of Federal Law No. 7 of 2017 on Tax Procedures.
- Table 2 covers Administrative Violations and Penalties related to the application of Federal Decree-Law No 7 of 2017 on Excise Tax.
- Table 3 covers Administrative Violations and Penalties related the application of Federal Decree-Law No. 8 of 2017 on Value-Added Tax. We will discuss these three tables below.
Clauses 1 through 8 of Table 1 are not that significant and may not require an in-depth explanation. Clause 9 of Table 1 covers a situation where the taxable person fails to pay the tax (as shown as a tax payable in return/voluntary declaration/assessment). This late payment penalty has been reduced from 1% per day to 4% per month (up to 300%), which is a substantial reduction in penalty liability. This penalty also mirrors the penalty mentioned in Clause 14 of Table 1 of Article 1 (Clause 14 of Table 1: The registrant has failed to calculate tax on behalf of another person when the registered taxable person is obligated to do so in accordance with tax law).
An important aspect to note here is that just like the Old Law, the New Law in Clause 9 of Table 1 specifically covers a situation where a tax that has been declared has not been paid. It does not cover a situation where the tax return submitted is, in the opinion of the FTA, incorrect. That is covered specifically in Clause 10 of Table 1 to Article 1.
The penalty under Clause 10 has a lower threshold of a fixed penalty 1,000 Emirati Dirham ($272) for a first-time violation, and 2,000 Emirati Dirham for a repeat violation (which has been reduced from 3,000 Dirham/5,000 Dirham respectively under the Old Law).
Interestingly, the percentage-based penalty levied under the Old Law (between 5% and 50%, depending on certain circumstances) has been removed. Hence, this is also a major reduction in the penalty liability under the Old Law. This is another welcome step for the taxpayer.
Next, we will consider the penalty imposed under Clause 11 of Table 1 (which is without prejudice to that mentioned in Clause 10). This penalty provision ought to be interpreted to cover a situation where the taxpayer makes a voluntary declaration to fix errors in the tax return or the tax refund application, in accordance with Clauses (1) and (2) of Article 10 of Federal Law No. (7) of 2017 (Tax Procedures Law).
The event which triggers imposition of the penalty is the act of filing a voluntary declaration rectifying an error in a tax return/refund application. The penalty here is a percentage-based penalty, between 5% and 40% depending on how long after the due date of the tax return/refund application the voluntary declaration was filed. This is in sharp contrast to Clause 11 to Table 1 in the Old Law, which has a fixed penalty (3,000 Dirham for the first time, and 5,000 Dirham for repeat offenses), and an increasing slope of penalties, depending on the circumstances surrounding the initiation of audit, if any.
It is noticeable here that Clause 11 of the New Law does not determine the penalty with respect to the act of initiation of the tax audit, as in the case of the Old Law. Instead, it determines penalty with respect to the time limit from when the tax return/refund application took place. Here, it is rather challenging to determine, just by comparatively reading the provisions of the Old Law and the New Law, which of them would be more beneficial for a taxpayer. Any conclusions may be drawn by considering the individual facts and circumstances of the taxpayer’s case.
Clause 12 of Cabinet Resolution No. 49 of 2021 deals with a situation of a failure to make a voluntary declaration before being notified of a tax audit. Under the Old Law, there is a fixed penalty and a 50% unpaid-tax penalty.
The New Law, on the other hand, no longer imposes a fixed penalty. It retains the 50% unpaid-tax penalty, and in addition, it envisages a 4% monthly penalty from the due date of payment/refund until the date of receipt of the assessment.
Also, it is to be noted that the penalty in Clause 12 does not cover a situation where a voluntary declaration has indeed been filed before notification of the audit. The intention of the New Law is to give benefit for taxpayers. However, at a first glance at the New Law, it may be challenging to determine the exact quantum of the benefit available to a business. Businesses would have to look at their current situation and apply the New Law accordingly.
Tables 2 and 3
Having discussed the major penalty provisions in Table 1, we will now proceed to the penalties in Tables 2 and 3.
Of these penalties, the most stringent provisions are Clause 2 of Table 2 and Clause 3 of Table 3. The former covers a situation involving failure to comply with the conditions and procedures for transporting excise goods from one designated zone to another, and the mechanism of preserving, storing, and processing them in it. The latter covers a situation of failure to comply with the necessary conditions and procedures for storing goods in a designated zone or moving them to another designated zone.
The penalty in both cases shall be the higher of 50,000 Dirham, or 50% of the tax, which was the same as the Old Law (i.e., no changes in this regard in the penalty regime).
The other penalties under Article 1 are of smaller amounts and may not require an in-depth discussion.
The FTA has also issued Tax Procedures Public Clarification—Amendment to the Penalties Regime for penalties mentioned in Article 1 in TAXP001 which largely reiterates the provisions in Article 1 of Cabinet Resolution No. 49 of 2021, referring to some very useful examples.
Structure of Article 3 of New Law
Perhaps the most interesting article in the New Law is Article 3. This Article reads that for those penalties that have been imposed before the Effective Date and are not paid, the taxpayer is required to pay only 30% of the total unpaid penalties, subject to the following conditions:
- the penalties ought to have been imposed prior to the Effective Date;
- such penalties imposed ought to have not been (fully) paid by the Effective Date;
- tax due has been paid by December 31, 2021; and
- 30% of the penalties payable (and which are unpaid) until the Effective Date, is actually paid by December 31, 2021.
One important factor to reiterate here is that the penalties covered under this provision are only the penalties that have already been imposed before June 28, 2021, and not those penalties that have not been imposed by then.
With respect to Article 3, the FTA had issued clarifications in TAXP002. TAXP002 also provides some interesting examples. Two sample calculations of the application of Article 3 based on the principles enunciated in the examples in TAXP002 are given below.
At the start of May 2021, a penalty of 15,000 Dirham was imposed on a registrant as per the Old Law. The registrant paid a penalty amounting to 3,000 Dirham on June 1, 2021. As on June 28, 2021, penalties amounting to 12,000 Dirham remained unpaid. The registrant paid all tax due including that relating to the last return due in 2021 and 30% of the penalties (i.e., 3,600 Dirham) by December 31, 2021.
In this case, the registrant qualified for redetermination under Article 3 of the New Law. Consequently, the registrant will no longer be required to pay the remaining 8,400 of the administrative penalties, and the administrative penalty imposed before June 28, 2021 shall equal 3,600 Dirham that was already paid by the registrant. A summary is provided in the table below:
At the start of May 2021, a penalty of 15,000 Dirham was imposed on a registrant as per the Old Law. The registrant paid a penalty amounting to 3,000 Dirham on June 1, 2021. On June 28, 2021, penalties amounting to 12,000 Dirham remained unpaid. The registrant paid only 30% of the penalties (i.e., 3,600 Dirham) but did not settle all the outstanding tax by December 31, 2021.
In this case, the registrant does not qualify for redetermination as there is still outstanding tax to be paid as on December 31, 2021. Consequently, the registrant is still required to pay the remaining 8,400 Dirham of the administrative penalties and will not be eligible for the benefit under Article 3 of the New Law.
TAXP002 also provides for procedures relating to redetermination of administrative penalties. In this regard, it states as follows “To facilitate the procedures for registrants, the FTA will link the redetermination process and the relevant data to the registrants’ e-Services accounts. The registrants will be able to view further information relating to the process as of 28 June 2021.”
Since June 28, 2021, the FTA portal has shown the implementation of the penalty reduction under Article 3, as shown in a sample calculation below. It is quite similar to Example 1 in TAXP002 discussed above. It captures the penalties imposed before the Effective Date, penalties reversed after the Effective Date, as well as the penalty payable, paid and outstanding under the New Law. An example of the description captured in the FTA portal is as follows:
Example of an Extract on FTA Portal
In our experience in dealing with cases involving penalties (cases including penalties imposed and penalties not imposed before June 28, 2021), we find that sometimes that the provisions of Article 1 may be more beneficial to businesses than those of Article 3, and vice versa. One would need to consider all facts and circumstances of the businesses to compare the benefits of each of these two provisions.
For those businesses that have had a penalty imposed by June 28, 2021, the requirement to pay the outstanding taxes due by December 31, 2021, is one of the key conditions that need to be satisfied for the Article 3 benefit of the New Law; otherwise, these businesses could run the risk of being denied this benefit. It is important for businesses to take the necessary steps in managing their tax risks on an ongoing basis.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
The comments in this article are for general information and are not intended as advice. Readers should seek professional advice where relevant.
Parwin Dina is Tax Leader, Global Tax Services (GTS UAE) and Varun Chablani is Tax Researcher, Global Tax Services, Africa (GTS Africa).