The United Arab Emirates (UAE) has published Cabinet Decision No. (49) Of 2021, this amends Cabinet Decision No (40) of 2017 on Administrative Penalties for Violations of Tax Law in the UAE. The amendments will be effective from 28 June 2021.
The amendments generally reduce the value-added tax (VAT) penalties for non-compliance. The most significant change is that taxpayers will now be given time to settle underpaid taxes before late payment penalties are imposed. The variable penalties for correcting filing errors through a voluntary disclosure before the Federal Tax Authority (FTA) notifies the taxpayer of an audit have also been reduced. However, the variable penalties when a voluntary disclosure is not filed before an audit notification have increased. Taxpayers may also benefit from a waiver of 70% of unpaid penalties 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 the relief.
The changes in penalties are summarized below.
|Trigger||Previous penalty||New penalty|
|First voluntary disclosure||AED3,000||AED1,000|
|Subsequent voluntary disclosure||AED5,000||AED2,000|
Late payment penalty
|Trigger||Previous penalty||New penalty|
|From the due date of the original VAT return until day 6||2% of the underpaid tax||N/A|
|From day 7 until day 30||4% of the underpaid tax||N/A|
|From day 31||1% per day of the underpaid tax||Nil provided the penalty is paid within 20 days of filing the voluntary disclosure/ receipt of tax assessment. Where this is not the case, the penalty will be 4% per month.|
|Cap||This is capped at 300%||This is capped at 300%|
Date from which the late payment penalties are calculated
Under the current penalty rules, late payment penalties are calculated from the date when the tax return was required to be filed. This resulted in penalties of up to 300% of the primary VAT liability being imposed at the time VAT was assessed.
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 following two scenarios should be considered to determine the due date from which the late payment penalties will be calculated.
A taxpayer has paid less than the amount on its VAT return
The late payment penalty will apply from the due date of the original VAT return.
Tax is assessed following submission of voluntary disclosure or a Tax Assessment
The due date for the calculation of penalties has been amended as follows:
- 20 business days following the submission of a voluntary disclosure
- 20 business days following the receipt of a Tax Assessment
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||5% of the underpaid tax||10% of the underpaid tax|
|Year 3||5% of the underpaid tax||20% of the underpaid tax|
|Year 4||5% of the underpaid tax||30% of the underpaid tax|
|Year 5 or thereafter||5% of the underpaid tax||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 audit 50% 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|
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.
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 has 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.
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 the filing of the voluntary disclosures.
Businesses should also review any outstanding penalties to determine if they can benefit from the relief.
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