Since the commencement of the era of taxation in the United Arab Emirates (“UAE”) with the introduction of Excise Tax as the first applicable federal tax, the UAE’s legislator adopted the concept of voluntary disclosures.
In 2023, the voluntary disclosure regime has undergone a new and significant change, with the newly introduced Article 10(5) of the Federal Decree-Law No. 28 of 2022 on Tax Procedures (“Tax Procedures Law”) requiring taxable persons to submit a nil-result voluntary disclosure.
This article explores the scenario where a taxable person is required to submit a voluntary disclosure to rectify an error or omission in the tax return submitted to the UAE’s Federal Tax Authority (“FTA”) that does not result in a difference in due tax.
New Provisions
The new provisions discussed in this article relate to the applicable tax procedures legislations. Specifically:
- Article 10(5) of the Tax Procedures Law states that “If the Taxpayer discovers an error or omission in the Tax Return submitted to the [FTA], where there is no difference in the amount of Due Tax, the Taxpayer must correct such return by submitting a Voluntary Disclosure”.
- Based on the reference within Article 10(6) of the Tax Procedures Law, Article 10(3) of Cabinet Decision No. 74 of 2023 on the Executive Regulation of the Federal Decree-Law No. 28 of 2022 on Tax Procedures (“Tax Procedures Executive Regulation”) states that “If a Taxpayer becomes aware of an error or omission in the Tax Return submitted to the [FTA] without there being a difference in Due Tax, the Taxpayer shall correct the error or submit a Voluntary Disclosure to the [FTA] as may be specified by the [FTA]”.
For the purposes of this paper, the above provisions are collectively referred to as the “VD Provisions”.
A taxpayer or a taxable person?
Across both the Tax Procedures Law and the Tax Procedures Executive Regulation, the VD provisions use the term “Taxpayer” instead of a “Taxable Person” or a “Tax Registrant”.
Article 1 of the Tax Procedures Law defines the three terms as follows:
- Taxpayer: Any Person who is obligated to pay Tax in the State under the Tax Law whether a Taxable Person or an end consumer.
- Taxable person: Any Person registered or obligated to register for the purposes of the Tax Law.
- Registrant: The Taxable Person who has been issued a Tax Registration Number.
With the VD provisions being limited to errors or omissions in a “tax return”, the tax legislator did not yet clarify why the term “taxpayer” is used rather than a “registrant” or a “taxable person”, noting that practically, we are not aware of any instances where a non-registrant can submit a tax return. We understand that further clarity might be provided at a later stage.
Is a Voluntary Disclosure Required to be Submitted?
The short answer is, maybe and maybe not. On a prima facie view of the provisions of Article 10(5) of the Tax Procedures Law, a voluntary disclosure is required to be submitted to correct errors or omissions in the tax return where there is no difference in the amount of due tax. However, Article 10(6) of the Tax Procedures Law states that the detailed provisions in relation to submitting a voluntary disclosure to the FTA are to be determined within the Tax Procedures Executive Regulation.
Upon reviewing the text of Article 10(3) of the Tax Procedures Executive Regulation, it is noted that there are two potential ways to implement Article 10(6) of the Tax Procedures Law. Specifically, Article 10(3) of the Tax Procedures Executive Regulation states that “the Taxpayer shall correct the error or submit a Voluntary Disclosure to the [FTA] as may be specified by the [FTA]”.
Therefore, the two possible options are:
- Correct the error.
- Submit a voluntary disclosure.
In Article 10(6) of the Tax Procedures Law, the two options are connected, meaning that the error should be corrected through a voluntary disclosure. Yet, in light of Article 10(3) of the Tax Procedures Executive Regulation, it appears that it is possible to correct the error without submitting a voluntary disclosure.
It is likely that “correct the error” refers to the period within which a tax return remains editable, i.e., before the expiry of the period within which the tax return must be filed after the end of the relevant tax period, while a voluntary disclosure is required to be submitted after the end of such period.
In this regard, Article 10(3) of the Tax Procedures Executive Regulation mandates the FTA to specify the particulars regulating the above two possible options. However, no detailed guidance or decision has yet been published by the FTA in relation to the submission of voluntary disclosures in light of Article 10(6) of the Tax Procedures Law and Article 10(3) of the Tax Procedures Executive Regulation.
Some may assume that “correcting the error” would follow the same mechanism provided for in Article 10(1) of the Tax Procedures Executive Regulation, i.e., correct the error within the tax return for the same period within which the error occurred, or the subsequent tax return, as the case may be, if the amount of error does not exceed AED 10,000.
However, we note that this assumption might not be applicable, as some of the cases resulting in nil difference in due tax are not likely fit with such an assumption. Therefore, it is probable that the provisions of Article 10(1) of the Tax Procedures Executive Regulation only apply to amounts higher than zero (nil) and not more than AED 10,000.
Cases Where an Error Amounts to no Difference in the Due Tax
For the purposes of Article 10(6) of the Tax Procedures Law and Article 10(3) of the Tax Procedures Executive Regulation, an error or omission in a tax return that results in no difference in the amount of due tax must be corrected (manually or through a voluntary disclosure). Therefore, it is pertinent to determine the cases where such an error or omission could occur.
At the outset, it is important to take into consideration the definition of “due tax” under the UAE’s tax procedures legislation.
According to Article 1 of the Tax Procedures Law, due tax is “Tax that is calculated and imposed under the provisions of the Tax Law”. For completeness, Article 1 of the Tax Procedures Law further defines the term “payable tax” as “Tax that has become due for payment to the [FTA]”. Based on the legal provisions referring to the two terms, it appears that the two terms are used interchangeably with no material difference. Although, it could be argued that “due tax” is a term restricted to the calculated amount of tax that must be paid to the FTA, while the term “payable tax” includes an element of time (i.e., when the tax should be paid). Other arguments have also been floating, considering due tax as ‘output tax’ only and payable tax as the ‘net’ tax to be paid to the FTA after deducting recoverable or refundable tax. Nevertheless, for the purposes of this paper, the two terms are assumed to be similar and interchangeable, which is in line with the implied assumptions resulting from the scenarios to be discussed.
Most errors or omissions made by tax registrants in their tax returns result in a difference in the amount of tax due to the FTA. For example, a tax registrant may have accidentally excluded a taxable supply subject to VAT at the standard rate of 5% from its total standard-rated taxable supplies as reported within the tax return submitted to the FTA. This, in turn, results in the tax registrant having paid less tax than it should have, thereby being required to submit a voluntary disclosure to rectify the error.
However, instances where an error or omission made by tax registrants in their tax returns results in nil difference in the amount of tax due to the FTA are rare and less common. Having conducted high-level research in this regard, the following potential categories of errors and omissions have been determined which could result in a nil difference in the amount of due tax:
- Failure to report imported services for VAT purposes, where the business is entitled to full input tax recovery in respect of the supply, as stated within the FTA’s Public Clarification TAXP006 – Issuance of a New Tax Procedures Executive Regulation. For category, it is assumed that the relevant input tax was not claimed within the relevant tax return.
- Reporting supplies in Box 1 of the VAT return against an Emirate other than the Emirate in which supplies should have been recorded, as stated within the FTA’s Public Clarification TAXP006 – Issuance of a New Tax Procedures Executive Regulation.
- Failure to report – or accurately report – a VAT-exempt supply (without addressing potential complications arising from instances that relate to the apportionment of input tax due to conducting a mix of taxable and exempt supplies).
- Failure to report – or accurately report – any of the non-tax-related particulars that are required to be included in a tax return.
- Failure to report due Excise Tax that is deductible under Article 16 of the Excise Tax Decree-Law, without claiming such deduction.
Potential Administrative Penalties
Errors and omissions in tax returns submitted to the FTA – on the assumption that they are no longer editable due to the expiry of the period within which the tax return should be submitted – are likely to result in administrative penalties imposed on the tax registrant. The two potential administrative penalties that could be imposed by the FTA on tax registrants are as follows:
- The submittal of an incorrect tax return to the FTA: Likely to apply regardless of whether or not the tax registrant informs the FTA of the error/omission or not. A penalty of AED 500 would apply to the tax registrant in this case (for each tax return) under the UAE’s administrative penalty regimes of both direct and indirect taxes. This penalty would not apply to tax registrants that correct their tax return before the expiry of the deadline for the submission of the tax return.
- Failure of the tax registrant to inform the FTA of any case that requires, or may require, the amendment of the information pertaining to his tax record kept by the FTA: Although not very likely to be imposed by the FTA, if imposed, it would probably only apply if the tax registrant failed to inform the FTA of the error/omission. The amount of administrative penalty varies depending on whether the faulty tax return relates to direct taxes or indirect taxes, as follows:
- For tax returns relating to indirect taxes (i.e., VAT and Excise Tax), a penalty of AED 5,000 would apply for the first time, and AED 10,000 in case of repetition.
- For tax returns relating to direct taxes (i.e., Corporate Tax), a penalty of AED 1,000 would apply for each violation, and AED 5,000 in case of repetition within 24 months from the date of latest violation.
Next Steps
In the near future, the FTA is expected to issue further guidance (or decisions) regulating the submission of voluntary disclosures with a nil difference in due tax. However, until then, tax registrants who discover an error or omission in their submitted non-editable tax return are encouraged to contact the FTA informing them of the same, thereby safeguarding themselves against potential administrative penalties resulting from the failure to inform the FTA of any case that requires, or may require, the amendment of the information pertaining to the registrant’s tax record kept by the FTA.
Conclusion
With the rapid developments in the UAE’s taxation regime, it becomes critical for businesses operating in the UAE to seek legal advice in relation to their tax rights and obligations for the purposes of ensuring business continuity and growth.
It is noted that many of the disputes that have arisen so far between taxpayers and the FTA related in one way or another to submitted voluntary disclosures, with a material impact for such voluntary disclosures on the outcomes of the dispute resolution process.
Due to the myriad of uncertainties arising from the rapid, significant, and detailed developments in the UAE’s tax laws and guidance documents published by the FTA and the Ministry of Finance, businesses are encouraged to engage legal experts even before a dispute arises between the business and the FTA.
This Article is prepared by Mohamed El Baghdady, Head of Tax and Financial Crimes, and Marwan Alnooryani, Senior Tax Associate, at Habib Al Mulla & Partners Law Firm.
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