Since the introduction of VAT in the United Arab Emirates on 1 January 2018, there have been some differing opinions with interpretation and application of the applicable VAT laws and regulations. This has resulted in some challenges being presented to the Federal Tax Authority (“FTA”) in respect of taxes and penalties payable.
A recent landmark decision was made by the Abu Dhabi Court of First Instance, which upheld an appeal against fines and penalties in the region of AED 20 million that were imposed by the FTA relating to a voluntary disclosure made by a Dubai based company (“Company”).
A voluntary disclosure is a procedure which notifies the FTA if a company makes an error or omission in a tax return. Where a voluntary disclosure is made by a company, the FTA is permitted to impose fines and penalties on such company.
The Company made a voluntary disclosure to the FTA in respect of certain services where the VAT rate was uncertain. Therefore, the Company paid the additional tax due as part of the voluntary disclosure submission to the FTA.
Following submission, the FTA imposed (i) penalties for late payment of tax in returns submitted, as well as (ii) fines and penalties for voluntary disclosures. The Company disputed the fines for late payment of taxes.
The Company’s request to reconsider the penalties was rejected by the FTA Reconsideration Committee. Therefore, the Company followed the appeals process laid down under the law and raised an objection before the Tax Dispute Resolution Committee (“TDRC”). We understand that the objection was dismissed on procedural grounds, without the substantive issue being considered.
The Company then appealed the decision to the Abu Dhabi Federal Court of First Instance. The Company’s main argument was that the Tax Procedures Law (No. 7 of 2017) distinguishes between (i) penalties for late payment of tax in returns, compared with (ii) fines and penalties for voluntary disclosures.
In part of its reasoning, the Court stated:
“Whereas it is well established that the Plaintiff has settled the money amount as stated in the tax return, and given that the Defendant had imposed penalties on the voluntary disclosure pursuant to article 11 of the above indicated resolution No. 40 [of 2017], then the later imposition of penalties on the delayed payment of the difference of the tax for the voluntary disclosure as per article 9 of the relevant resolution [No. 40 of 2017] is considered inapposite and it violates law.”
As such, the Court held that only penalties applicable to voluntary disclosure should have been imposed, as opposed to requiring that the penalties in relation to late payment of taxes were due in addition. The FTA were therefore ordered by the Court to repay the approximate AED 20 million of late payment fines to the Company.
This Court decision is significant, because:
- it clarifies the approach towards fines relating to voluntary disclosures, which was previously unclear and not necessarily being applied to companies in accordance with the intention of the law;
- there have only been a handful of successful appeals (i) made against a decision by the TDRC and (ii) referred to Court appointed experts in the field of tax; and
- it raises questions as to whether the VAT law may be amended/clarified in the future to reflect the decisions upheld in such Court cases.