UAE Supreme Court’s ruling puts an end to tax loophole

BUSINESSES CAN NO LONGER USE VOLUNTARY DISCLOSURES TO EVADE FINES

Each voluntary disclosure made by UAE businesses on their taxes may cost them dearly — a federal court ruling has set penalties of up to 300 per cent of the amounts disclosed.

“The judgement — delivered on October 14 — will result in exposing a number of companies to penalties,” said Mohammad El Baghdady, Senior Associate at Baker McKenzie Habib Al Mulla. “We are seeing some tax payers having an exposure of Dh1 billion and Dh500 million in administrative penalties.”

An essential tool

The Federal Supreme Court in its judgement had indicated that voluntary disclosures are an essential tool for tax payers to “evade potential criminal claims for tax evasion”. “Hence, voluntary disclosures must be made by tax payers by reporting any errors to be found in their tax returns to avoid criminal prosecution,” said El Baghdady.

“The judgement by the Federal Supreme Court is deemed to be the first final and conclusive judgement to be issued on applicable penalties for voluntary disclosure. This will set

a precedent to be followed by lower courts and Tax Dispute Resolution Committee.”

Sure, businesses could desist from making such disclosures, fearing that any penalties will be too burdensome on their cash flows. Joanne Clarke, Tax Director at Pinsent Masons Middle East, can understand where those sentiments are coming from, but issues a stark warning.

“Many tax payers may be reluctant to proactively— and voluntarily — disclose prior period errors to the FTA ( Federal Tax Authority) … although obliged to do so,” said Clarke. “They may seek to rely on the 5- year statute of limitations for the FTA audit.

“However, this is a risky approach to VAT Compliance Governance in the region — businesses instead should concentrate on implementing improved processes, controls and automation into their compliance cycle to minimise or even eradicate the risk of error upfront.”