The UAE Decides on Tax non-compliance charges 

In a public message released earlier this month, the UAE government has made it clear that the UAE businesses not complying with the new tax policies will have to face adequate punishments, normally in the form of financial penalties in the range of Dh1,000 to Dh50,000.

The decision, which was made by the UAE Council of Ministers recently, is expected to bring more transparency to the relationship that exists between the FTA (Federal tax Authority) and UAE businesses, a tax expert said.

The penalties will be charged from businesses who fail to comply with the new tax laws being introduced in the country, including excise duty and VAT. The normal cases of tax non-compliance will attract fines in the range between Dh1,000 to Dh50,000, while other more specific tax violations may incur penalties as much as half of the unpaid tax amount.

As one can understand, any tax system in any legislation is meaningless without proper penalties in place. A tax expert, said, “Those who do not comply with the tax provisions are bound to face penal consequences … Fines and penalties are the key drivers for a person to be more compliant with the law.”

Excise duty and VAT are the two newly launched or upcoming taxes. Excise tax has already been introduced on October 1 and will be levied as a duty on tobacco products, some energy drinks, and carbonated drinks. VAT (Value Added Tax) is expected to be officially launched on January 1, 2018.

The UAE government and FTA have officially published the list of penalties to assure the businesses that the authorities are serious about tax laws compliance throughout the country. It may mobilize business owners to think more seriously about the potential costs of non-compliance. Hopefully it will convince everyone to take the tax implementation issues seriously and drop the notion of VAT being delayed in UAE or not implemented at all.

Khalid Ali Al Bustani, Director General, FTA, denied the claims of VAT being delayed and confirmed that the new tax system (VAT) is on schedule to launch on January 1.

The new UAE tax penalties are in line with the tax laws in other countries. However, there are some exceptions. “it was quite some time ago when such a major tax implementation was taking place in a whole region, almost simultaneously. The penalties must take the broader context into account,” he added.

Shah also supported Nawrot’s statement by saying that the UAE is introducing a consumption-based tax (VAT) for the first time, and it is not fair to expect the same level of non-compliance penalties as other tax matured countries.

Most countries around the world already have a proper tax system in place. The UAE was one of the few last tax-free countries. However, if the news is to be believed, the penalties applied by the UAE are even harsher as compared to the ones announced by Saudi Arabia. “Late payment penalties are higher — for Saudi it is 5 per cent to 20 per cent of the tax amount due, while in the UAE it ranges from 2 per cent of unpaid tax to 300 per cent, depending upon period of delay,” said Amit Chib. “The penalties seem to be on the higher side to act as deterrent for non-compliance.”

The penalties being charged by the UAE seem even higher when compared to other countries like India (Dh11 per day tax penalty) and German (1% per month of due tax amount).

Tax experts, while in agreement regarding the tax evasion policies, believe that there will not be many tax evasion cases after the implementation of VAT in the country, except the ones appearing due to the lack of awareness and preparedness among businesses.

Nawrot also said that his firm believes that most of UAE businesses and people will comply with the new tax laws. “In my opinion, the ‘real’ fraudsters and criminals will be outliers among the taxpayers due to the diligent and procedural approach the FTA is applying (for example with the excise tax registration). I predict, however, that some taxpayers may simply not prepare in time,” he said.

Nawrot further added that the purpose of the publication of the penalty list is to remind the UAE based businesses that they still have three months to get ready for the VAT system. It is expected to drop the non-compliance statistics.

Tax expert Amit Chib assured that tax evasions are not expected to be very high. However, there might be an issue related to the “capabilities of business whether in terms of accounting and bookkeeping, training or the resources available to be VAT compliant,” he said. “Businesses may find it challenging to maintain necessary records and systems and thus may end up incurring administrative penalties.”