GILS Tax law: UAE
TAX CONTROL AND APPEALING ITS OUTCOME IN THE UAE
Taxation is a critical aspect of any country's economic framework. The tax regime in the United Arab Emirates offers a distinctive framework for businesses, highlighted by various appealing tax incentives. In the United Arab Emirates (UAE), a region traditionally known for its tax-friendly environment, the introduction of value-added tax (VAT) and other fiscal measures has marked a significant shift in the economic landscape. This article explores the mechanisms of tax control in the UAE, focusing on the processes and legal frameworks that govern tax assessments and dispute resolution. It also delves into the procedural aspects and legal avenues available for appealing tax decisions, providing a comprehensive overview of the rights and obligations of taxpayers within this evolving regulatory environment. By examining the intricacies of tax control and the appeal process, this Article aims to shed light on the challenges and opportunities faced by businesses and individuals in navigating the UAE's tax system.
Central to the corporate tax landscape is the newly implemented 9% corporate tax for taxable income above AED 375 000 marking a significant shift in the UAE's fiscal strategy. As is quite popular, the UAE does not levy income tax on individuals, which distinguishes it from many other jurisdictions. Instead, the focus is on Corporate Taxes, indirect taxes, such as VAT and excise taxes. A bird’s eye view of the United Arab Emirates’ Tax Rates may include Corporate Income Tax - 9%, Value Added Tax (VAT) - 5% Excise Tax - 50% on carbonated beverages and 100% on tobacco products and energy drinks.
Federal Decree-Law No. 47 of 2022 (“the Decree Law”) on the Taxation of Corporations and Businesses was enacted on October 3, 2022, establishes the legal framework for the imposition of a federal tax on corporate and business profits within the UAE, with its provisions set to take effect for tax periods starting on or after June 1, 2023.
It's pertinent to mention that despite the absence of income taxes in the UAE, the country's tax legislation imposes corporate tax on both individuals and legal entities. According to Article 11 – Taxable Person, corporate tax shall be imposed on a Taxable Person at the rates determined under the Decree-Law. The term "Taxable Person" is defined as any person subject to corporate tax in the UAE under this law. And the term ‘Person’ is defined as “any natural person or juridical person.” Additionally, Article 2 clarifies that a Taxable Person can either be a resident or a non-resident Person. Notably, Section 3(c) stipulates that any natural person engaged in a Business or Business Activity in the UAE meets the threshold for corporate tax liability. However, corporate tax does not apply to various categories of income received by individuals. This includes interest and other earnings from bank deposits or savings schemes, income from dividends, capital gains, interest, royalties, and other returns on investments made by foreign investors. Personal investments in real estate and income generated from owning shares or securities in a personal capacity are also not subject to corporate tax.
Regulatory Authority
The Federal Tax Authority (FTA), instituted by Federal Decree-Law No. 13 of 2016, is the regulatory authority which aids in diversifying the UAE's economy and enhancing non-oil revenues. The FTA's mandate includes the administration and collection of federal taxes, aligning with international best practices and standards. Since its operational commencement in 2017, the FTA has collaborated with relevant authorities to develop a comprehensive and balanced tax system. This system aims to position the UAE as a leader in implementing a fully electronic tax infrastructure, fostering voluntary compliance through straightforward procedures grounded in high standards of transparency and accuracy. These processes encompass everything from taxpayer registration and the filing of tax returns to the payment of due taxes.
Legal Framework for Tax Audits
A tax audit, conducted by the FTA, is essentially an evaluation of a company's compliance with its tax obligations. This audit ensures that all liabilities are settled and all due taxes are collected and remitted to the government within the prescribed deadlines. Additionally, the audit assesses whether businesses are adhering to their responsibilities under various tax laws, including the VAT Law and the Excise Tax Law.
Cabinet Decision No. (74) of 2022 on the Executive Regulation of Federal Decree-Law No. (28) of 2022 on Tax Procedures provides comprehensive legal provisions for tax audits conducted by the Federal Tax Authority (FTA). As per Article 15, before deciding to conduct a tax audit, the Authority must evaluate several important factors. First, it must determine if the audit is necessary to protect the integrity of the tax system. Ensuring that the system remains fair and reliable is a primary consideration. Second, the Authority needs to assess whether the individual or entity in question, or anyone associated with them, has a responsibility to comply with the Tax Law and Decree-Law. Third, the expected amount of tax revenue to be collected from the audit should be taken into account. Lastly, the Authority must consider the compliance and administrative burdens that the audit will impose on both the taxpayer and the Authority itself. These factors help ensure that the decision to conduct a tax audit is justified and balanced.
As per Article 16, the Authority must notify the person of a tax audit at least 10 business days before the audit begins. This notification will include information about the potential consequences of obstructing the Tax Auditor in performing their duties. According to Article 17, for the purposes of conducting a tax audit, the Authority is allowed to inspect various elements related to the person being audited. This includes examining the premises, documents, and assets available at the premises, as well as data and records stored electronically, and the accounting systems used by the person. As outlined in Article 18, the Tax Auditor, while carrying out their functions, has the authority to take certain actions. These actions include making copies of documents, marking original documents and assets to show they have been inspected, seizing documents and assets, and obtaining and recording information related to the premises, assets, documents, and accounting systems that have been inspected. Finally, Article 19 stipulates that the person subject to the tax audit must be informed of the audit results within ten business days from the conclusion of the audit.
An FTA VAT audit can result in various outcomes depending on the thoroughness and accuracy of the audit findings. These outcomes may include:
- assessment and penalties imposed for non-compliance or underpayment of taxes.
- initiation of further procedures and additional penalties if new issues are discovered during the audit process.
These consequences underscore the importance of thorough preparation and compliance with VAT regulations to mitigate risks associated with audits conducted by the Federal Tax Authority.
APPEAL-DISPUTE RESOLUTION
Reconsideration: The FTA allows individuals to request the authority to reconsider any decision related to them. To do this, they must submit their request, detailing the reasons, within 40 business days from when they were notified of the decision. Once the authority receives the reconsideration request, they are required to review it and issue a decision, complete with reasons, within 40 to 60 business days. The authority must then inform the applicant of this decision within five business days from the date the decision was issued.
Objection: There are specific procedures and conditions for submitting an objection to the Authority’s decision on a reconsideration request. First, any objection must be submitted within 40 business days from the date the person was notified of the Authority's decision.
However, there are situations where an objection will not be accepted by the Committee. These include instances where a reconsideration request was not previously submitted to the Authority, where the tax related to the objection has not been fully paid, and where the objection is not submitted within the specified forty-day period.
The committee’s decision on the objection shall be deemed as final if the total amount of the due tax and administrative penalties determined accordingly does not exceed 100 000 Dirhams. For the penalties above this threshold, the applicants may file a case before the competent courts within 40 business days commencing from the date of the committee’s decision.
Other Key Tax Control Regulations in the UAE
General Anti-Abuse Rules (GAAR)
In the UAE, General Anti-Abuse Rules (GAAR) are crucial to preventing tax avoidance. Chapter 15 – Anti-Abuse Rules, Article 50 of the Decree Law, introduces a general anti-abuse rule. These rules stop companies from creating deals just to get tax benefits that go against the purpose of the tax laws. GAAR allows tax authorities to ignore or change such deals, ensuring tax benefits are only for real business activities. This promotes fairness and transparency in the tax system.
Transfer Pricing Rules
The UAE’s transfer pricing rules ensure that transactions between related companies are priced as if they were between independent parties. This prevents companies from setting prices to lower their tax bills. These rules help maintain fair competition and ensure that profits are taxed where the business activities happen, protecting the country’s tax revenues. Chapter Ten – Transactions with Related Parties and Connected Persons, Article 34 – Arm’s Length Principle, of the Decree Law, stipulates that transactions between related parties must adhere to the arm’s length standard. This means such transactions should yield results comparable to those between unrelated parties under similar conditions. The arm’s length result is determined using methods like the comparable uncontrolled price method, resale price method, cost-plus method, transactional net margin method, or transactional profit split method
Economic Substance Rules
The UAE's Economic Substance Rules (ESR) ensure companies have substantial activities within the country, aligning with OECD standards to prevent harmful tax practices. ESR applies to specific sectors like banking, insurance, and shipping, requiring adequate employees, operating expenditures, physical premises, and core income-generating activities within the UAE. Resolution No. 57 of 2020, issued by the Cabinet of Ministers outlines these Economic Substance Regulations, specifying requirements for entities operating within the UAE. Following the issuance of Resolution 57, the concerned ministry issued new Guidance by way of Ministerial Decision No. 100 of 2020, which also includes an updated Relevant Activities Guide. As per the regulations companies carrying out the relevant activities must file annual reports demonstrating compliance. Non-compliance can result in fines, information disclosure to foreign authorities, and licence revocation. These rules prevent companies from setting up just to take advantage of tax benefits without actually doing significant business in the UAE, aligning the country with international standards.
Whistleblower Programme-Raqeeb
The 'Raqeeb' whistleblower program encourages individuals to report tax violations and evasion, aiming to enhance tax compliance and decrease instances of tax evasion within the UAE.
The program invites anyone to report irregularities or non-compliances to the Federal Tax Authority (FTA). Upon receipt of reports, the FTA thoroughly investigates each case and provides financial rewards to informants, where appropriate, as a gesture of appreciation for their contribution to maintaining tax integrity.
These initiatives not only strengthen market controls but also contribute to a fair and transparent tax environment in the UAE, reinforcing its position as a responsible global financial hub committed to regulatory excellence.
The FTA Report 2020 highlights the UAE's robust efforts in enhancing tax compliance and enforcement through rigorous audits and inspection campaigns. With over 14 000 field inspections conducted to safeguard consumer rights and combat tax evasion, the authority's proactive measures underscore its commitment to upholding tax legislation and procedures across local markets.
As the country continues to refine its tax policies and enforcement mechanisms, businesses and individuals navigating the UAE's tax regime can expect a framework that promotes accountability and sustains its role as a global commercial hub.
Our expert team from GRATA International, UAE (the law firm of Mai Alfalsai Advocates & Legal Consultancy) well-versed in UAE tax laws, provides strategic counsel tailored to meet client needs. With a global presence and deep local expertise, we ensure thorough representation, advice, and effective advocacy for favourable resolutions in tax disputes. Partner with GRATA International, UAE for comprehensive support in navigating the complexities of UAE tax jurisdiction.
Author: Sarah Rizwan, Associate