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New VAT Fines and Penalties in UAE

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As the United Arab Emirates (UAE) has published Cabinet Decision No. (49) of 2021, many measures are taken to reduce the severity of penalties imposed on taxpayers. These amendments will be effective from 28th June 2021.

The amendments help in reducing the VAT penalties for non-compliance. The most noteworthy change is that taxpayers will now have time to settle low paid taxes before late payment penalties are imposed.

Voluntary disclosures that were filed more than a year after the tax liability was declared will now be subject to increased penalties. Furthermore, the variable penalties for failing to file a voluntary disclosure before an audit notification will be increased. However, due to the reduction in late payment penalties, the overall fines that are expected to occur as per the new law will still be much lower than under existing law.

Taxpayers will also benefit from a waiver of 70% of penalties that are unpaid on 28th June 2021 if they meet specific criteria.

The amendments give the businesses an incentive to go back and review their historic filing positions and willingly reveal any errors before they are informed of an audit. Businesses must also review any unresolved penalties to decide if they can benefit from the relief.

Here is the details of the changes in penalties.

Fixed Penalties

Trigger	Previous Penalty	New Penalty
First Voluntary disclosure	AED 3,000	AED 1,000
Subsequent voluntary disclosure	AED 5,000	AED 2,000

Late Payment Penalty upon failure to settle stated VAT in the submitted VAT return

Trigger	Previous Penalty	New Penalty
Day after due date	2%	2%
One week after due date	4%	2%
One month after due date	1% per day	4% per day
Cap	300%	300%

Late payment penalty for underpaid VAT as per the voluntary disclosure or tax assessment

As per the new rules, when additional VAT liabilities arise from a voluntary disclosure or a tax assessment, taxpayers will be given 20 days to settle any underpaid tax before the late payment penalties apply.

Here is the due date to calculate the late payment penalties.

20 business days upon submission of a voluntary disclosure
20 business days upon receipt of a Tax Assessment

A 2% penalty will be imposed if the taxpayers fail to pay within 20 days. A 4% monthly further penalty will be charged at monthly intervals one month from the due date. The cap on the penalties remains at 300%.

Variable penalty where the voluntary disclosure is submitted before the taxpayer is notified of an audit by the FTA

The penalties range currently from 5% to 40?sed 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	5% of the underpaid tax	10% of the underpaid tax
Year 3	5% of the underpaid tax	20% of the underpaid tax
Year 4	5% of the underpaid tax	30% of the underpaid tax
Year 5 of thereafter	5% of the underpaid tax	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

Penalties will rise where the error is fixed 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 along with 4% of the underpaid tax per month from the due date of the VAT return
50% of the underpaid tax upon error discovered during an FTA audit	SAME AS ABOVE

Redetermination of existing penalties

The new Cabinet decision gives the FTA the authority to lower overdue penalty charges by 70% if the following requirements are met:

Administrative penalties specified in Cabinet Resolution No. (40) of 2017 were levied on a taxpayer before June 28, 2021, and were not fully paid by that date.
The taxpayer pays all unpaid taxes, as well as 30% of the total administrative penalties payable, by December 31, 2021, but not before June 28, 2021.

The Cabinet Resolution is not applicable for taxpayers if they have already settled their penalties.

Other penalty reductions

Late registration penalties will be reduced from AED 20,000 to AED 10,000.
The penalty upon failing to submit a deregistration application on time is reduced from a penalty of AED 10,000 to AED 1,000 per month (capped at AED 10,000).
The penalty for not displaying VAT-inclusive prices is reduced from AED 15,000 to AED 5,000.
The penalty upon failure to produce a tax invoice/tax credit note is reduced to AED 2,500 from AED 5,000.

Implications

Before being notified of an audit, firms are encouraged to review their historical filing positions and voluntarily disclose any errors. If a taxpayer voluntarily discloses an error in its June 2019 VAT return on July 1, 2021, and pays the corresponding tax within 20 days, he will be exempted from any late payment penalty but only a 10% variable penalty will be applied. On the other hand, if the FTA assesses on July 1, 2021, this variable penalty will go up to 146%, assuming that the corresponding tax will be within 20 days upon the filing of the voluntary disclosures.

Firms must also review any unresolved penalties to decide if they can benefit from the relief.

In the future, tax departments must remember that if a firm relies on manual processes to handle tax, it is hard to eliminate the danger of human error; be aware of the numerous risks your data is exposed to, and be ready for the mistakes and possibly an audit.

We feel the new guidelines are a positive step forward towards taxation in the UAE, but change brings some risk factors for firms that rely on manual operations. With the penalty gap between voluntary disclosure and audit penalties increasing, you may feel it's not worth the risk of allowing other people to fill and submit your tax forms.

Get in touch with us and find how our automated tax solutions can help your business grow while providing 100?curacy and reliability in every transaction. Also, learn how tax advice and auditing services from experts can protect your firm against the threat of non-compliance.