How to manage tax disputes effectively and avoid penalties in the UAE

As of September 2021, there have been more than 315,000 value-added tax registrations and over 1,300 excise tax registrations since the UAE’s tax legislation came into effect in early 2018. As the UAE’s VAT regime has moved along the maturity curve, the volume of tax disputes and enforcement cases has increased.  

Keeping up to date on changes to tax legislation and informed of relevant tax disputes and decisions through legal research platforms can help organizations to better ensure tax compliance in the Middle East. The UAE has a relatively new tax landscape, which results in many issues requiring clarification from the Federal Tax Authority or interpretation by the Federal Courts. Non-compliance can lead to penalties of as much as five times the amount of the evaded tax, as a recent court case showed.

Below is a snapshot of the current tax disputes landscape in the UAE:

• The number of tax disputes being heard before the tax dispute resolution committees has increased five-fold between 2019 and 2021.
• The amount of tax disputes heard before the Federal Primary and Appeals Courts also nearly quadrupled during this period.
• The Federal Supreme Court has heard almost 60 tax disputes to date.
  
• Tax enforcement cases increased from only two in 2019 to almost twenty in 2021.
  
• In May 2021, the Federal Supreme Court issued its first judgment penalizing a taxpayer for tax evasion, sentencing that taxpayer to five times the amount of the evaded tax.
  

Simultaneously, a number of other tax evasion criminal complaints have been filed against taxpayers by the Federal Tax Authority before the State Funds Department of the Federal Public Prosecution.

Taxpayers are generally found non-compliant for two types of issues:

1. Procedural issues, such as late tax return filing, incorrect filings and late registrations
   
2. Substantive issues, such as misinterpretation of the law and reliance on incorrect professional advice
   

Either of these bases for non-compliance generally result in penalties being applied to the taxpayer. These penalties may be fixed fines or percentage-based fines that can equate to a fraction or a multitude of the disputed taxes.

Taxpayer non-compliance arising out of procedural issues generally involves acts or omissions by a taxpayer that fail to comply with operative requirements and timeframes in the Tax Procedures Law, the VAT Law, and the Excise Tax Law (and their respective governing Executive Regulations).

It is important to consider the grounds for those acts or omissions and whether they arise out of the inconsideration of the taxpayer or due to external factors. These concerns are used to weigh the burden of fault on the taxpayer and to assess potential penalties that may arise.

Taxpayers that look to avoid penalties for non-compliance should ensure that their tax compliance activities are meticulously recorded and continuously audited by third parties.

Moreover, there is indirect tax automation software available in the market that can assist taxpayers in improving the speed and accuracy of their tax returns and filings, to ensure timely and continuous compliance.

These platforms provide regulatory intelligence, such as the latest tax rates and rules, and automation capabilities that allow taxpayers to generate correct and compliant tax returns in a few simple steps using raw data from existing enterprise systems. This level of technology support mitigates the risk of procedural issues such as late or incorrect filings, as well as substantive issues such as misinterpretation of the law.

Additionally, automated records and logs of tax compliance procedures provide much needed evidence should an issue of non-compliance require documented proof of compliance. This is important because, if a dispute arises over non-compliance (or alleged non-compliance), the taxpayer will need to substantiate its activities with supportive evidence.

For example, in early 2021 the Federal Supreme Court ordered the non-taxability of stockpiled goods because the taxpayer was able to evidence that the stockpiling had occurred during a non-taxable period.

In order to substantiate this argument, the taxpayer needed to provide detailed records of its tax obligations and submissions, and records vis-à-vis the Authority, and equally provide substantive information regarding its logistics and stockpiling records.

The dispute was not in respect to the interpretation or reading of the law, but as to whether the taxpayer had failed to comply with registration and filing requirements. The taxpayer was able to evidence otherwise and subsequently cancel the taxes that the Authority had applied.

Compared to procedural issues, substantive issues are usually more complex and arise out of taxpayers’ differential reading or understanding of the law vis-à-vis the Authority’s interpretation of it. As a general matter, the Authority as the agency empowered with implementing the tax legislation is naturally the agency empowered with interpreting the legislation.

Notwithstanding, some taxpayers in the UAE are accustomed to dealing with tax issues in other jurisdictions or to receiving advice from tax professionals experienced in other jurisdictions. As the tax legislative landscape in the UAE is relatively new, many issues require either clarification from the Authority or interpretation by the Federal Courts.

This necessity is evident with the number of public and private clarifications that the FTA issues. Since the implementation of the tax legislation in early 2018, the Authority has issued over 100 public clarifications on various issues, providing guidance on the reading of the law. This is in addition to countless private clarifications that the Authority has issued privately to taxpayers.

Another noteworthy issue is the reliance of taxpayers on unofficial English translations of tax legislation rather than the original Arabic text. For example, the unofficial English translation of the VAT Law Executive Regulations uses the term “technology resources” whilst the Arabic official version uses the term “technical resources”.

Non-compliance over substantive issues is very complex and professionals familiar with tax matters in other jurisdictions should be familiar with the nuances of UAE law to avoid potential compliance breaches. .

One example is the recognition of the supply of digital goods, which are intangible goods sold online or through a digital platform. This acknowledgment can be seen in the OECD’s publication titled ‘The Role of Digital Platforms in the Collection of VAT/GST on Online Sales’. For online sales in the United States for example, New York taxes software but does not tax digital goods, whilst Colorado taxes digital goods but does not tax software.

The UAE’s Federal Supreme Court took a position on this matter in the summer of 2021 and ordered that any digital transaction should be considered a service, meaning the taxation rules of services apply to it and such transactions are not to be considered a supply of digital goods.

Generally, there are methods to decipher the meaning of tax laws in line with general principles of legislation interpretation in the UAE.

Alternatively, taxpayers may request a private clarification from the Authority regarding a particular transaction, to which the Authority would provide their reading of the law in respect of that transaction.

There are also issues that have been addressed by the UAE’s tax dispute resolution committees and Federal Courts that taxpayers can rely on as interpretations of complex issues such as stockpiling, offshore supplies, turnkey construction projects, transitional contracts and obligations, manufacturing waste, insurance issues, intra-company transactions, hotel and serviced apartment sales and purchases, and so on.

Taxpayers can always obtain advice from technical tax professionals and/or lawyers who have recent experience in litigating tax disputes and understand the judicial perspective on tax-related matters. Additionally, taxpayers can leverage tax technology solutions that provide trusted, relevant content from local tax authorities and tax experts to ensure that their ongoing knowledge of tax legislation, guides, case law, and otherwise is comprehensive, accurate and up to date.