The UAE Federal Supreme Court issued first judgment involving applicability of late payment penalties on filing Voluntary Disclosures (VDs), i.e. revising original VAT returns. The Federal Supreme Court reversing the judgment issued by the lower Court (i.e. Federal Court of Appeals) adjudicated the following:
- Filing VDs would replace the original VAT returns submitted and would be considered as a branch of original VAT return
- The late payment penalties applicable (i.e. upto 300% depending upon the number of days delay) on short payment of VAT would be applicable considering original VAT return due date and not the date of filing of VDs
- The case is to be referred to Abu Dhabi Federal Court of Cassation for fresh adjudication
The Federal Supreme Court further held that filing VDs had led to delay in payment of VAT to the Federal Tax Authority (FTA) and had caused loss to the FTA. To compensate for the delay, levying late payment penalty from the due date of filing original VAT return is justified.
The immediate impact of the Federal Supreme Court judgment would be on on-going cases at Tax Dispute Resolution Committee (TDRC), Federal Primary Courts and Federal Court of Appeals. As the judgment of the Federal Supreme Court is binding upon the lower Courts, the lower Courts would not be in a position to issue a favorable ruling (i.e. reversing the late payment penalties charged on filing VDs).
On a different perspective, there could be certain exceptions (illustrated as below) wherein the late payment penalties may still not attract (i.e. could be reversed):
- The Abu Dhabi Federal Court of Cassation rules contrary to the ruling given by the Federal Supreme Court
- If the State Disputes Committee (appointed by the FTA) does not file an appeal against a favorable ruling issued recently by the lower Courts (applicable for pending cases)
- If the FTA amends the Tax Procedures Law and specifies the circumstances under which the late payment penalties can be waived
- If A bench consisting of larger number of judges may take a different opinion
On reading the decision delivered, there are different thoughts on how the businesses can perceive the ruling.
Considering that the VAT Law is fairly new (three years not yet completed), businesses have still not understood / mapped the tax treatment appropriately (or entirely) due to lack of awareness / interpretation issues / incorrect advise by the tax consultants, etc. and it was presumed that relaxed approach would be adopted by the Courts for levy of penalties. The taxpayer’s expectation on waiver of late payment penalties was based on the UAE lower Courts judgments, relying on the judgments from matured tax jurisdictions and considering the current economic situation due to pandemic.
Here it is worthwhile to note that there is no discretionary power available with the Courts to waive / reduce penalties under the governing Laws. If the offence is confirmed (i.e. filing VDs would lead to replacing original return and due to this there is a delay in payment of VAT), then the levy of late payment penalties would become automatic and may not be reversed by the Courts. While the powers to reduce / waive penalties are granted to the Penalty Exemption Committee (formed within the FTA framework), it would be important to see the circumstances under which such waivers / reversals are granted.
The fact that tax authorities are strictly applying the penal provisions, businesses may need to develop the strategy on managing the tax risks. While three GCC countries implemented VAT and the fourth one to follow, the penal provisions on account of late payment appears to be maximum in the UAE (i.e. 1% per day upto maximum of 300%). Late payment penalties in the neighboring countries (KSA and Bahrain) appears to be far less (i.e. 5% per month approx.) while in Oman it is likely to be 1% per month.
Have specified following aspects which businesses may consider for managing tax risk and adopt over a period:
- Regular validation of the tax positions including revisiting the previous positions considering that the Law is evolving should be undertaken by the businesses as a part of Internal Audit / review program.
- The focus of the review should be on identifying different transaction scenarios and evaluating if the tax position is appropriate including documentation.
- The review should place due emphasis on documentation as there could be penalty implications if the tax position is not support through documents.
- The outcome of the review should be applied on previous tax periods and the future transactions.
Businesses may need to use technology extensively to ensure that the VAT returns involving multiple divisions / businesses is appropriately prepared. Use of tax engine and tax automation tool could be implemented over a period.
Businesses may aspire to achieve error-free VAT return and may need to work on different aspects involving respective stakeholders within the organization. This may not be achieved overnight considering vast number of transactions, different transaction scenarios, accounting systems used, etc. Businesses may need to be develop a plan to achieve this.
Lastly, a thorough review of documentation is critical and often due importance is not given by the businesses. Particularly transactions wherein businesses have adopted zero-rating position needs to be supported through documentation. Documentation review should be undertaken on a regular basis and not towards the end of the year.
In cases where the businesses are aware that there is a possibility of different view due to interpretation / lack of clarity, then the businesses should proactively approach the tax authorities and seek a ruling. Ruling would assist the businesses in adopting appropriate tax position and helps in validating the previous position including managing task risk.
It is possible that certain businesses could be aware of the errors and may yet not prefer to file VDs. Despite knowing the error in the VAT returns and not undertaking due measures for rectification may amount to fraud / tax evasion. It is possible that in such cases, the tax authorities may levy penalty upto five times of the tax amount in addition to the late payment penalties (i.e. upto 300%).
Considering the stringent penalty provisions, it is recommended that the businesses place due emphasis on the tax function. Possibility of severe financial implications including cost of litigation and reputation risk cannot be ruled out if the businesses are not tax focused.
Contribution by Sunny Kachalia (Chartered Accountant)
