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The United Arab Emirates Council of Ministers’ adoption of a schedule of fees and penalties for an incoming value-added tax regime signals its intention to ensure compliance by imposing heavy fines on businesses that don’t follow the new rules, effective Jan. 1.
The fees and fines—adopted Oct. 2 by the Council of Ministers and announced by the Federal Tax Authority—are detailed and comparatively high, said Jeremy Cape, tax and public policy partner at Squire Patton Boggs in London. Among them, a fine of 10,000 dirhams ($2,722) for a first offense in failing to keep the required records and other information specified in Tax Procedures Law and the Tax Law and 50,000 dirhams for subsequent offenses.
“The fine for failure to register on time will hit a lot of businesses. I don’t expect the FTA to go easy on them,” Cape told Bloomberg BNA Oct. 9.
Late payment penalties climb from 2 percent of the unpaid tax on the due date to 4 percent after seven days and a 1 percent daily penalty up to a limit of 300 percent on tax still unpaid one month after the deadline.
That’s “harsher than the U.K. and, I suspect, most jurisdictions,” said Cape. The maximum default penalty in the U.K. within the first 12 months is 15 percent or 30 pounds ($40), whichever is greater, he said, with an exceptional 100 percent maximum fine for tax understated or overclaimed “if you send a return that contains a careless or deliberate inaccuracy,” he said.
Lawyers who neglect their clients’ tax affairs will be subject to separate penalties to be paid “from the Legal Representative’s own funds.” Failure to inform the authority of their appointment within the specified time frame will be fined 20,000 dirhams, while they will be fined 1,000 dirhams for the first offense of failing to file a client’s tax return, and 2,000 dirhams if the offense is repeated within 24 months.
The new fees and penalties were approved the day after the UAE’s so-called “sin tax” came into effect, with excise duties raising the price of fizzy drinks by 50 percent and doubling the price of energy drinks and tobacco. Shopkeepers who fail to display prices including tax will be fined 15,000 dirhams ($4,083), the Tax Authority said.
Online tax registration and an electronic tax registration certificate are free of charge. Fees range from 500 dirhams for the issue of an attested paper tax registration certificate to 10,000 dirhams for the annual registration of a software provider with the Federal Tax Authority.
The UAE is preparing to implement VAT on Jan. 1, 2018, concurrently with Saudi Arabia. The Gulf Cooperation Council—an economic alliance of Saudi Arabia, UAE, Bahrain, Oman, Qatar, and Kuwait—agreed last year to introduce VAT for the first time at 5 percent by January 2019 as they seek to replace declining oil revenue. The price of oil has dropped to less than $56 a barrel from more than $114 a barrel in June 2014.
Cabinet Decision No. (39) of 2017 on Fees for Services Provided by the Federal Tax Authority and Cabinet Resolution No. (40) of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE, “bring an added layer of transparency to the Authority’s relationship with its customers,” Sheikh Hamdan bin Rashid Al Maktoum, deputy ruler of Dubai and UAE minister of finance, said in an Oct. 2 news release on the Federal Tax Authority’s website. “This, in turn, provides extra incentive for stakeholders and all concerned parties to abide by tax regulations.”
“All customers can refer to the official Directory of Services Fees to know what is required of them to be in compliance with tax procedures,” said Sheikh Hamdan bin Rashid. “The Directory is based on thorough studies that seek to provide the highest-quality service for the lowest cost, which resonates with the FTA’s mission and vision.”
Shiraz Khan, senior tax adviser at Al Tamimi & Company, said that the penalties have been set high, “which should have the effect of deterring noncompliance.” However, he added that in the case of voluntary disclosure of incorrect tax returns or errors in tax returns at an early stage, “the penalties are significantly reduced to encourage businesses to proactively rectify mistakes.”
The tax authority said that those fined would have the right to appeal, but Cape said there is likely to be a limited number of successful appeals and that the detailed schedule of penalties doesn’t leave room “for a huge amount of discretion.”
“My sense is that the Federal Tax Authority is going to be so overworked in those first few months that they are going to apply these pretty automatically,” he said. “I don’t think they will have the resources or ability to deal with individual cases.”
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