Indirect Tax News - March 2021

Landmark judgments and the introduction of a new Tax Evasion Court

Some significant judgements have been handed down recently from the United Arab Emirates Federal Courts. Among the tax-related judgments was a landmark ruling from the Federal Supreme Court on the levy of late payment penalties, and a Federal Court judgment on time limits for reconsideration requests.

In addition, the Emirate of Abu Dhabi has introduced a new court that will specialise in tax avoidance and money laundering cases. 

These are all discussed below, along with a round-up of the latest COVID-19 reliefs and a summary of new clarifications from the Federal Tax Authority (FTA).

Judgment of the Federal Supreme Court on voluntary disclosure penalties

The Federal Supreme Court of the UAE has ruled that late payment penalties are applicable where a voluntary disclosure is filed by a taxpayer. This holding overrules earlier judgments from the lower courts.

The Supreme Court’s judgment, which has been subsequently followed by the Federal Primary Court, has significant impact for taxpayers. It confirms that errors will attract a late payment penalty, calculated at a maximum of 300% of the error, even where the taxpayer corrects the error in full accordance with the VAT legislation.

Judgement of the Federal Courts on time limits for the FTA to respond to reconsideration requests

The Federal Courts have ruled that if the FTA does not decide on a reconsideration request filed by a taxpayer within twenty-five weekdays, the taxpayer can appeal the matter to the Tax Dispute Resolution Committee (TDRC) on expiry of the twenty-five days.

This provides a respite for taxpayers, since a delay in response from the FTA on the reconsideration requests could effectively extend the appeal process.

Special Court established for money laundering and tax evasion

The Abu Dhabi Judicial Department has issued a resolution to establish a court specialising in money laundering and tax evasion. 

The establishment of this Abu Dhabi Special Court will support the UAE’s efforts to combat such crimes and prosecute perpetrators, and it will reinforce the country’s competitiveness both regionally and internationally.

The Special Court will function under the Abu Dhabi Criminal Court and its jurisdiction will be limited to businesses registered in Abu Dhabi. Absent any change in the current provisions, tax evasion and money laundering concerning businesses registered in other Emirates are expected to be covered under the existing judicial system, as they are federal crimes.

The Federal Tax Procedures Law defines tax evasion as the use of illegal means resulting in reduction of the amount of the tax due, non-payment of tax due, or a refund of a tax that a person does not have the right to have refunded under any tax law.

The penalty for tax evasion is a prison sentence and/or a monetary penalty not exceeding five times the amount of tax evaded.

Please read the detailed update on Tax Evasion and key takeaways here.

COVID-19 relief: temporary zero-rating of certain medical equipment

To combat the spread of COVID-19, the FTA has released a Cabinet Decision for the temporary application of VAT at the 0% rate on certain supplies and imports of medical equipment with effect from 1 September 2020 through 28 February 2021. This includes medical face masks, half filtered face masks, non-medical ‘community’ face masks made from textiles, single-use gloves, and chemical disinfectants and antiseptics intended for use on the human body, but excluding detergents, cosmetics, and personal care products.

Tax clarifications issued by the FTA

VAT-Free Special offers

The FTA has clarified that special offers referring to goods or services being “VAT-free” are misleading and contrary to the basic principles set out in the VAT legislation.

Businesses take a commercial decision to absorb VAT in order to make the price of promotional goods more attractive to potential buyers under “VAT-on-us” or “VAT-free” promotions.

The FTA has clarified that VAT is payable on taxable goods promoted under these schemes and the total value should be treated as inclusive of VAT.

VAT registration of ‘Sole Establishments’

A natural person that owns multiple sole establishments is only required to obtain one VAT registration for all the establishments they own. The value of supplies made by the person under all their establishments should be considered when assessing their VAT registration liability.

The FTA has clarified that VAT registrations for sole establishments made in the past are not required to be amended until specific instructions are received from the FTA. The FTA will review the registrations of sole establishments and inform them of any corrective steps.

Verona Hoh

Amrita Chandwani