UAE FTA Tax Audits – What Should You Expect?
April 28th, 2021 / Haroon Juma / VAT Blog
Your UAE VAT Returns form a legally binding statement of your UAE tax liabilities as a self-declared assessment, this means the preparation and accuracy are the responsibility of the taxable person.
As the UAE VAT system settles in the UAE, FTA Tax Audits are likely to increase. In this blog, we discuss the key questions that better answer the key questions surrounding an FTA Tax audit.
What Is A UAE Tax Audit?
Under the Organization for Economic Co-operation and Development (OECD) guidelines, an audit is defined as:
“Examination of whether the taxpayer has correctly assessed and reported their tax liability and fulfilled other obligations.”
Under a self-assessment system, audits are considered essential to promote voluntary compliance and:
• Identify non-compliance to the Legislation
• Gather intelligence on the state of the tax system.
• Gather supply chain information (an audit on any business could trigger an audit on another business)
• Educate businesses and assist in the implementation of the law and identify areas that require may require clarification.
The UAE Tax Authority will require access to accounting records, documentation, and personnel to conduct their audit.
Your UAE business may have filed your UAE VAT Returns and in some cases received refunds without any audit procedure.
This does not necessarily mean the UAE FTA has accepted any non-tax audited business as compliant. They reserve the right to tax audit any business for up to 5 years, hence it should be your responsibility to remain compliant and proactive to any changes to the UAE VAT Legislation.
When & What Triggers A UAE Tax Audit?
A Tax Audit can be triggered by a variety of factors and may not be solely determined by the size of the business. The timing for any UAE Tax Audit cannot be predicted, nevertheless, several criteria most likely lead to an audit:
What Factors Increase Risk Of Audit?
The FTA system can flag a range of exceptions and anomalies. This could be based on:
– Payment position and owed taxes
– Comparison to peers in your sector
– Variations across your returns
|Type Of Business|
Cash based businesses
Businesses subject to customs and duty processes
Businesses subject to refund claims such as exporters, healthcare and education
|Supply Chain||If a customer or supplier has been subject to an audit|
|Size of Business||Volume of business and scale of operations|
|Public Referrals||Notification to the FTA by the public|
What Are The UAE Legislative Powers?
The UAE Legislation grants the FTA wide-ranging powers to ensure compliance is met. These powers (set out across six documents issued under the UAE VAT Legislation) grant the FTA powers to compel businesses to full disclosure and also subject penalties for non-compliance. In terms of the specific audit procedures, the law grants:
Federal Decree-Law No. (13) of 2016 On the Establishment of the Federal Tax Authority
Inspect taxpayers’ records and documents
Review tax returns and reports submitted to the FTA, audit them, decide on approving or amending the same, or request additional information or documents
Demand access to any information or data available with any third party who may possess information about a person being subjected to a tax audit which may be necessary for the tax audit process
Demand from any person having dealings with a person subject to a tax audit to provide information about such transactions
|Cabinet Decision No. (36) of 2017 on the Executive Regulation of Federal Law No. (7) of 2017 on Tax Procedures|
Accounting records and commercial books including
Accounting books, which include records of payments and receipts, purchases and sales, revenues and expenditures, and any business, and any matters as required under any tax law or any other applicable law, including:
Balance sheet and profit and loss accounts
Records of wages and salaries
Records of fixed assets
Inventory records and statements (including quantities and values) and the end of any tax period, and all records of stock-counts related to inventory statements
The FTA may require any other information in order to confirm through an audit trail the person’s tax obligation including any liability to register for tax purposes
What are The Audit Procedures?
It is likely the FTA will conduct an audit in the following manner. At each stage, the penalty assessments increase for any disclosures affecting underpaid taxes or non-compliance.
Initially, the emphasis may be on remote, desk-based audits where system data and documentation provided is the primary assessment model. If this is considered unsatisfactory, an onsite audit may occur which will require further preparation.
Notice of Audit
Respond within specified time to FTA
5 days’ notice of onsite audit
|Voluntary disclosure penalty increases to 30%|
Provide ledger data and documents which may include
UAE VAT return calculations
System generated FTA Audit File or equivalent
Follow up questions to be responded to in specified timescale
Penalty for voluntary disclosure submitted increases to 50%
On Site Audit
|The FTA will expect full cooperation to facilitate and assist the audit and would inspect documents, assets and premises||They can enforce removal of documents and asset if required and require open access to people to interview|
How Should You Prepare?
It is incumbent on the UAE business to demonstrate compliance under audit. Nothing should be presumed, and comprehensive preparation is the key.
Under a UAE Tax Audit the FTA will seek to establish:
- Summary understanding of your business and how it operates
- The accuracy of recording and rating your sales & purchase transactions
- How do you manage your sector risks e.g. customs processes, cash risks
- Management of your supply chain and the completeness of data
- Governance, process, and controls implemented across your business
Ensuring comprehensive documentation furnished on time is advised to demonstrate sufficient controls are implemented to internal processes, systems, and personnel.
Ideally, you should test your test returns for accuracy and target areas that are easy wins under an audit. Some easy wins include:
Over recovery for VAT on purchases including blocked input claims
- Tax invoice & credit note formats
- Inaccurately accounting for foreign exchange
- Reverse charge and imports
- Deemed supplies
- Transitional supplies spanning 2017 and 2018
- Accounting reconciliations and system compliance
If you believe these errors have occurred, correcting them before any audit under voluntary disclosure will be more economical than finding out under audit. The law grants reduced penalties under self-disclosure of errors the sooner they are declared.
What Could Result From A Tax Audit?
An audit could lead to several outcomes that range from:
- Assessment and penalties for non-compliance and underpaid taxes
- The further thorough process if additional issues are identified
If you prepare well and undertake a thorough review of your returns, your ability to manage a Tax Audit will be greatly enhanced.
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