Revised Tax Penalties for various defaults under UAE VAT Law and amendments in Executive Regulations
24/07/2021 10 Mins read
The Federal Tax Authority (FTA) has revised penalties by issuing Decision No. 49/2021 (New Resolution), amending provisions of Cabinet Decision No. 40/2017 (Old Decision) regulating tax penalties imposed for the violation of Tax Laws in the UAE. Prior to the issuance of the New Decision, taxpayers were faced with heavy penalties for non-compliance under the VAT and Excise rules and regulations. The most significant change is that taxpayers will now be given time to settle underpaid taxes before late payment penalties are imposed.
Increased penalties will now apply for voluntary disclosures made more than a year after the tax liability was declared or imposed. In addition, the variable penalties when a voluntary disclosure is not filed before an audit notification will increase. However, the overall penalties that are likely to arise under the new law should still be significantly lower than under current law because of the reduction in late payment penalties.
Taxpayers may also benefit from a waiver of 70% of penalties that are unpaid on 28 June 2021 if they meet certain conditions.
The amendments create an incentive for businesses to review their historic filing positions and to voluntarily disclose any errors before they are notified of an audit. Businesses should also review any outstanding penalties to determine if they can benefit from relief.
Detailed discussion
The changes in penalties are summarized below.
Fixed penalties
| Trigger | Previous penalty | New penalty |
| First voluntary disclosure | AED3,000 | AED1,000 |
| Subsequent voluntary disclosure | AED5,000 | AED2,000 |
Late payment penalty for failure to settle the stated VAT in the submitted VAT return
| Trigger | Previous penalty | New penalty |
| Day after due date | 2% | 2% |
| One week after due date | 4% | |
| One month after due day | 1% per day | 4% per month |
| Cap | 300% | 300% |
Late payment penalty for under-paid VAT as per the voluntary disclosure or tax assessment
Where additional VAT liabilities arise from a voluntary disclosure or a tax assessment, the new rules represent a significant change as taxpayers will now be given 20 days to settle any underpaid tax before late payment penalties will apply.
The due date for the calculation of the late payment penalties in this instance would be as follows:
- 20 business days following the submission of a voluntary disclosure
- 20 business days following the receipt of a Tax Assessment
Where taxpayers fail to pay within the 20 days, a 2% penalty will be imposed after the 20-day period lapses, followed by a further 4% monthly penalty payable at monthly intervals one month from the due date. The cap on the penalties remain at 300%.
Variable penalty where a voluntary disclosure is submitted before the taxpayer is notified of an audit by the FTA
The penalties now range from 5% to 40% depending 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 | 10% of the underpaid tax | |
| Year 3 | 20% of the underpaid tax | |
| Year 4 | 30% of the underpaid tax | |
| Year 5 or thereafter | 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
There is a significant increase in the penalties where an error is corrected 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 audit50% of the underpaid tax upon error discovered during an FTA audit | 50% of the underpaid tax along with 4% of the underpaid tax per month from the due date of the VAT return |
Other penalty reductions
- The penalty for late registration will reduce from AED20,000 to AED10,000.
- The penalty for failing to submit a deregistration application on time will reduce from AED10,000 to AED1,000 per month (capped at AED10,000).
- The penalty for failing to display prices inclusive of VAT will reduce from AED15,000 to AED5,000.
- The penalty for failing to issue a tax invoice or tax credit note will reduce from AED5,000 to AED2,500.
Redetermination of existing penalties
The new Cabinet Decision grants the FTA the right to reduce unpaid penalties by 70% subject to the following conditions:
- Administrative penalties stated in Cabinet Resolution No. (40) of 2017 were imposed on a taxpayer before 28 June 2021 and have not been paid in full by that date.
- The taxpayer, by 31 December 2021, pays all of the outstanding tax, along with 30% of the total administrative penalties due but has not paid before 28 June 2021.
The Cabinet Resolution does not apply to taxpayers if they have already settled their penalties.
Implications
The amendments create an incentive for businesses to review their historic filing positions and to voluntarily disclose any errors before they are notified of an audit. For example, if a taxpayer on 1 July 2021 voluntarily discloses an error in its June 2019 VAT return and pays the associated tax within 20 days, there will be no late payment penalty and a 10% variable penalty will apply. However, where the FTA issues an assessment on 1 July 2021, this variable penalty would increase to 146%, on the assumption that the associated tax shall be settled within 20 days of filing of the voluntary disclosures.
Businesses should also review any outstanding penalties to determine if they can benefit from relief.
VAT Voluntary Disclosure Form by FTA – Form 211
A voluntary disclosure is a form provided by Federal Tax Authority (FTA) to allow businesses and taxpayers to notify FTA about the errors/mistakes and omission/changes in a Tax return or Tax Refund. Voluntary disclosure form 211 in UAE helps a taxable person to make correction in the errors they have committed while submitting a VAT Return or applying for the VAT Refund. It gives a choice to the taxable person or business to voluntarily disclose the mistakes they have done in the previous VAT Return or VAT Refund.
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