Decision of the Tax Dispute Resolution Committee and other developments
In this issue we report on one of the first decisions by the United Arab Emirates' (UAE’s) Tax Dispute Resolution Committee and summarise some new developments affecting partly exempt businesses.
Decision of the Tax Dispute Resolution Committee
The Tax Dispute Resolution Committee was recently established to provide an independent review of VAT disputes.
The Committee’s decisions are not published. However, there have been informal reports that one of the Committee’s first decisions found in favour of a taxpayer that appealed against an assessment for late payment penalties. It is understood that the Committee ruled that where a taxpayer can clearly demonstrate that it has acted in good faith and made a voluntary disclosure within the statutory timeframe of 20 business days from the date of identifying the error, only the voluntary disclosure penalties – and not late payment penalties – will apply. This would be a significant benefit to the taxpayer as late payment penalties can rise to over 300% of the tax involved.
We understand the Committee’s ruling is in line with earlier decisions by UAE Courts, on non-VAT matters, where the Court ruled that unintentional error is not punishable if the person acted in good faith, after becoming aware of a mistake.
Despite the lack of formal reporting, the decision gives some useful pointers for taxpayers. The most significant takeaway is the need to correct the error within the statutory 20-day period and to keep written evidence to demonstrate the action taken. This could take the form of internal communications, records of management decisions, and a note of any interaction with the Federal Tax Authority (FTA).
It’s a very positive sign for UAE VAT that the Tax Dispute Resolution Committee has started hearing cases and we expect it to become an important part of the tax infrastructure in the UAE in the future.
Input tax apportionment
The rules on input tax recovery in the UAE follow the same principles as in most VAT systems around the world: businesses can claim a deduction of input tax against output tax if the expense relates to taxable supplies but not if it relates to exempt supplies. Input tax that relates to both taxable and exempt supplies, such as input tax incurred on overheads, must be apportioned.
Guidance issued by the FTA in early 2019 indicated that companies should make applications to apply for special apportionment methods where the standard input-based method does not provide a fair and reasonable reflection of the actual use of goods and services acquired.
The FTA recently issued notices to certain banks stating that if they consider the standard methods is not appropriate, an application for a special method should be made on or before 31 December 2019. Taxpayers failing to submit applications within the deadline could be prioritized for a full VAT Audit in 2020.
Even though the notices were issued to only a small group of businesses, other partly exempt businesses may also be impacted in due course.
Mechanism for obtaining VAT exceptions or concessions
The FTA recently announced a mechanism to allow taxpayers to apply for the following concessions or exceptions to the VAT law:
- Omission of certain details from tax invoices and credit notes or non-issuance of such documents in certain cases.
- Change of the length of the Tax Period to half yearly for individual registrants, businesses in constant refund position, small-to-medium enterprises (SMEs) with government funding, and SMEs without government funding making taxable supplies less than AED 9 million.
- Change VAT return periods to coincide with the financial reporting year.
- Extension of time for the export of goods beyond 90 days, provided valid reasons for the delay can be explained.