Tax Audit is one of the compliance checks to verify a person’s VAT liability is correct by way of examining various records which are maintained by the taxpayer. A tax audit may be carried out at the taxable person’s business premises known as ‘field tax audit’ or in the offices of the FTA. Generally, prior notification of an audit will be given to the taxpayer.

In this article, let us understand Why Tax Audit in UAE? and the process involved in the Tax Audit.

Why Tax Audit?

VAT is a self-assessment tax, meaning the taxpayer himself assess the amount of tax payable and recoverable input tax based on the supplies done during the period and reports it to the FTA through VAT returns. In order to assess the self-assessed declaration is correct or not, the tax audit procedure is used by the FTA.

During the audit, if there are some discrepancies resulting into underpayment of the VAT or over claiming the input VAT deduction, the FTA will issue a notice in the form of assessment asking the taxpayer to pay the VAT along with penalties.

What is the timeline for Tax Audit?

All the VAT registered businesses will not be audited and also there is no fixed frequency in which the tax audit will be conducted. From time to time, the FTA will be select the businesses who are required to be audited. The decision to audit the businesses completely is at FTA’s discretion. The following are some of the factors which are considered in selecting the business for tax audit.

• How large or complex the business
• Past compliance history of the business
• The tendency of late submission of returns
• Instances of incorrect return filing and so on.

For example, a large business selling a high volume of goods and having a poor compliance record is more likely to be subject to a tax audit than a small business with a strong compliance record, as the risk to the tax revenue is greater.

Tax Audit Procedure

The FTA will usually inform the taxable person in the question of tax audit 5 business days in advance. However, in certain exceptional cases like suspected tax evasion, or if there is a reason to believe that notifying would hinder the conduct of the audit, no notice of tax audit will be given.

Tax Audit will be conducted at the taxable person’s place of businesses or in some cases at FTA’s office. If the audit takes place at the taxable person’s place of business, it will usually be during the FTA’s normal business hours.

The businesses which are subject to an audit (including their tax agent, or legal representative), must facilitate and provide the required assistance to the tax auditor to carry out the audit in a smoother manner. The following are some of the actions that the taxpayer should ensure on receiving the tax audit notice.

• Relevant premises are accessible;
• Tax records such as books of accounts, Tax invoices etc. are accessible for examination
• Relevant staff are present (for example the person responsible for compiling the tax return
• Original copies of documents or invoices

In the event of failure to provide the required records or assistance in conducting the tax audit, applicable penalties may be levied on the taxpayer.

On completion of the audit, the FTA will communicate the results of the audit to the taxable person. If the conclusion of the audit leads to the determination of any of the following cases, then tax assessment will be issued.

• Failing to apply for registration within the timeframe specified by the VAT Law.
• Failing to submit a Tax return within the timeframe specified by the VAT Law.
• Failing to settle the payable tax stated as such on the Vax return that was submitted within the time limit specified by the Tax Law.
• Submitting an incorrect VAT return.
• The Registrant failing to account for Tax on behalf of another person when he is obligated to do so under the Tax Law
• The shortfall in VAT payable as a result of a tax evasion

Also, there could also be administrative penalties levied on the taxpayers if the findings lead to those instances specified in the law

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The Profit Margin Scheme is a scheme whereby a Taxable Person has an option to calculate Tax on the profit margin earned on the supply of goods, instead of the sale value. VAT under profit margin scheme can be calculated only when the conditions prescribed in UAE VAT law are fulfilled.

To know more on the profit margin scheme conditions and the VAT calculation, please read our article Profit Margin Scheme under VAT in UAE and How to calculate VAT under Profit Margin Scheme.

In this article, we will understand the goods eligible under the profit margin scheme and the treatment of goods purchased prior to the introduction of the VAT.

Goods under the Profit Margin Scheme

Only notified goods can be supplied under the profit margin scheme. The following are the goods which are eligible under the profit margin scheme.

• Second-hand goods, meaning tangible moveable property that is suitable for further use as it is or after repair.
• Antiques i.e. goods that are over 50 years old.
• Collectors’ items i.e. stamps, coins, currency and other pieces of scientific, historical or archaeological interest.

The above-mentioned goods can be supplied under the profit margin scheme only when they were subject to VAT before the supply. In simple words, these goods should have suffered VAT before supplying it under the Profit margin scheme.

Now, you might be wondering what if these notified goods were purchased before 1st January, 2018 when VAT was not implemented?

Let us understand this in detail.

Treatment of goods purchased prior to the introduction of VAT under the Profit margin scheme

As discussed above, the goods which are eligible to be sold under the profit margin scheme are those which have previously been subject to VAT. As a result, the notified goods which are eligible to be supplied under profit margin scheme but since they were purchased during a period in which they would not have been subject to VAT, are not eligible for the profit margin scheme.

In simple words, the notified goods which are purchased prior to 1st January, 2018 are not eligible to be supplied under the profit margin scheme. On supply of such goods, VAT is due on the full selling price.

In the following table, we have considered two scenarios to understand the eligibility of supplies under the profit margin scheme

Evidence that goods were subject to tax previously

As discussed above, a supplier should know in advance that the goods were previously been subject to VAT in order to apply the profit margin scheme. The following are some of the instances which will evidence that goods were subject to VAT previously.

• Information relating to the date the good was first manufactured, sold or brought in to use. For example, in the case of a car, the date the car was first registered would indicate its sale would have been subject to VAT if it was registered on a date after 1 January 2018
• Evidence that the supplier paid VAT on their original purchase. For example, you may ask the supplier for a copy of the tax invoice relating to their purchase of the goods.

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The UAE has scrapped the need to have UAE nationals as sponsors, thus allowing expatriate investors 100 per cent ownership with effect from December 1, 2020. The move is in line with a federal law issued by President His Highness Sheikh Khalifa Bin Zayed Al Nahyan and which amends Law No. 2 of 2015 on companies and their shareholding.

The long-awaited 100 per cent ownership by foreign nationals of companies licensed and registered in the UAE is allowed as per Cabinet Resolution No. 16 of 2020. In recent years, individual emirates allowed foreign national owned companies to acquire the remaining stakes on a case by case basis. The latest amendment thus extends the scope of that significantly.

The new law amended 51 articles and added new ones, mostly focusing on the regulation of provisions of establishing companies with limited liability shareholding. The amendments exempt expatriate investors from the minimum percentage ownership of UAE nationals.

His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, announced the amendments to the law, noting that the UAE now enjoys a fertile legislative environment for the establishment of businesses in order to enhance the UAE’s competitiveness.

A key update

As per the Commercial Companies Law, Law No. 2 of 2015, foreign shareholders were limited to owning a maximum 49 per cent in a ‘limited liability company’ (LLC) operating as an onshore UAE business. This requires an Emirati individual or 100 per cent Emirati-owned company to hold the balance 51 per cent share as a local sponsor.

The amended law allows natural and legal persons to establish companies without the need for a specific nationality. The law, however, will not apply to some companies that are excluded based on decisions by the Cabinet and those that are either wholly-owned by federal or local governments or their subsidiaries. 

Minister welcomes move

Abdullah bin Touq Al Marri, UAE Minister of Economy, said the new decree is an additional step in a series of efforts that the UAE is taking to raise the readiness of the national economy and prepare for the future by developing commercial and investment opportunities and increasing the competitiveness of the business environment, in line with the rapid economic changes and developments taking place in the global economy.

News Courtesy : Gulf News

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Under VAT in UAE, all businesses which have a place of residence in UAE, and whose value of supplies in the GCC member States in the previous 12 months exceeds AED 375,000, should mandatorily register under UAE VAT. Further, businesses in UAE which do not have a place of residence in UAE will have to compulsorily register under VAT, irrespective of their turnover.

For registered businesses which deal with other registered businesses, it is of great importance to issue a valid document evidencing that a supply has taken place. On the other hand, this document is of even greater importance to recipients who are registered under VAT, as it will serve as the basis for their input tax recovery on this transaction. To understand more about the eligibility and conditions to recover input tax on a supply, you can refer our blog ‘Input tax recovery’.

The document to be issued by all suppliers registered under VAT to registered recipients is called ‘Tax Invoice’. A Tax Invoice is the document which evidences that a supply has taken place and serves as the basis for a recipient to recover input tax on a supply. Hence, a Tax Invoice is of great importance under VAT in UAE. The VAT Law has also laid down the details that are mandatorily required in a Tax Invoice.

Let us understand how a registered supplier can issue a Tax Invoice under VAT. For example: Ahmad & Co., a registered apparel supplier in Dubai, supplies 1,000 T-Shirts @ AED 100 to a registered customer, Jumeira Apparels, in Sharjah. VAT @ 5%, amounting to AED 5,000 is charged. The Tax Invoice to be issued by Ahmad & Co. is shown below:

Businesses registered under VAT in UAE should take note of these details that are mandatorily required in a Tax Invoice. It is of utmost importance that none of the required details in a Tax Invoice are omitted. Registered businesses can explore the option of using a software that will automate the capturing of these details and generate Tax invoices accordingly. This will assist such businesses to save the time and effort required to record and generate Tax Invoices manually. Let us now answer some FAQs which businesses have, with respect to Tax Invoices.

FAQ 1: Is there a standard format for a Tax Invoice as per the VAT Law?

Answer: The VAT Law has not prescribed any standard format for a Tax Invoice. However, it has laid down the details that are mandatorily required in a Tax Invoice. These details must be given in every Tax Invoice issued by a registered supplier.

FAQ 2: Is a Tax Invoice a valid document for Input Tax Recovery?

Answer: Yes, a Tax Invoice is a valid document for Input Tax Recovery. However, a registered recipient should ensure that his/her Tax Registration Number is mentioned on the Tax Invoice issued by the supplier. Note that recovery of input tax is subject to certain conditions and eligibility. You can read more about the conditions and eligibility for input tax recovery in our articles ‘Input Tax Recovery’ and ‘Supplies not eligible for input tax recovery’.

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The UAE is the fifth largest market in the world in terms of global retail. Many businesses in UAE solely or mostly supply goods and services to recipients who are not registered under VAT.

For example: Supermarkets, retail outlets, restaurants, etc. There are also many businesses which mostly supply goods and services to registrants and once in a while, supply to persons who are not registered under VAT in UAE.

In these cases, should such businesses issue the detailed Tax Invoice for such supplies, containing all the mandatory details that are required in a Tax Invoice? For businesses which deal mostly with customers who are not registered under VAT in UAE, it is a difficult task to provide all the details required in a VAT Tax Invoice, such as the address of the recipient. At the same time, issue of an invoice evidencing that a supply has taken place is of utmost importance.

To solve this dilemma, the VAT Law provides for the facility to issue ‘Simplified Tax Invoices’ when a person registered under VAT makes supplies to persons who are not registered under VAT. Here, the recipients could be retail customers as well as businesses whose turnover does not exceed the threshold limit to register under VAT. You can visit our blog ‘Registration under VAT’ for more details of the requirements to register under VAT in UAE.

Let us take an example to understand how a registrant can issue simplified Tax Invoices under VAT.

Example: Jehan & Co., a registrant in Abu Dhabi, supplies 2 keyboards to a consumer, Mr. Ali, in Dubai. The simplified Tax Invoice to be issued by Jehan & Co. appears as shown below:

As you can observe, the details mandatorily required in a simplified Tax Invoice are lesser than the details required in a Tax Invoice. A key benefit of a simplified Tax Invoice is that the recipient’s name and address are not required. This becomes very useful for businesses which regularly deal with consumers or unregistered businesses. Such businesses can now easily configure the software they are using in their business for billing and for processing quicker invoices.

Finally, let us answer some FAQs that businesses have, with regard to simplified Tax Invoices.

FAQ 1: Should the title of simplified Tax Invoice be ‘Simplified Tax Invoice’?

Answer: No, the title of a simplified Tax Invoice’ should be ‘Tax Invoice’.

FAQ 2: What is the key difference between a Tax Invoice and a simplified Tax Invoice?

Answer: The key difference between a Tax Invoice and a simplified Tax Invoice is that in a simplified Tax Invoice, the recipient’s details, i.e. name and address are not required.

FAQ 3: Should VAT be charged on supplies for which simplified Tax Invoice is issued?

Answer: Yes, VAT at the standard rate of 5% should be charged in a simplified Tax Invoice.

FAQ 4: Is a simplified Tax Invoice a valid document for input tax recovery?

Answer: No, a simplified Tax Invoice is not a valid document for input tax recovery, as the recipient’s TRN details are not mentioned therein. Hence, if you are a registered business, ensure that a Tax Invoice containing your TRN is issued by the supplier to you.

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Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister, Minister of Presidential Affairs and Chairman of the Abu Dhabi Judicial Department (ADJD), issued a resolution to establish a court specializing in money laundering and tax evasion crimes.

The court will be set up under the framework of the judicial department’s strategic priority to improve the litigation process and create a fair and just judicial system.

Youssef Saeed Al Abri, under-Secretary of the ADJD, explained that the establishment of a specialist court will support the continuous development of Abu Dhabi’s judicial system, as well as play a major role in ensuring the timely adjudication of relevant cases and enhance the expertise of relevant judges, which will be reflected by the quality and consistency of legal judgements.

“The establishment of the court will also support the UAE’s efforts to combat such crimes and persecute perpetrators, through undertaking a series of steps and procedures, in coordination with relevant authorities and in light of an updated legislative infrastructure, which will reinforce the country’s competitiveness both regionally and internationally,” he added.

The court’s establishment highlights the ADJD’s keenness to support the specialisation of judicial work, to raise performance and achieve excellence and leadership, he further added, noting that the department will organise training courses for judges and prosecutors specialising in money laundering and tax evasion.

News Courtesy : Khaleej Times

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