The UAE Federal Supreme Court issued its first decision in a case concerning VAT fraud on 3 May 2021, ruling against the taxpayer and confirming a penalty equal to five times the evaded tax amount.
In October 2020, the Federal Primary Court determined the penalty to be paid based on an expert opinion. The taxpayer contested the penalty in an appeal filed with the Federal Appeals Court, which upheld the decision of the Primary Court. The taxpayer then appealed to the Supreme Court, which held that the grounds of appeal presented are matters of fact rather than law and matters of fact are decided by the primary courts. There is no error in the application of the law, so the Supreme Court upheld the decision of the Federal Appeals Court.
The Federal Tax Procedures Law defines tax evasion as the use of illegal means to obtain a reduction of the tax due, the non-payment thereof or a refund of a tax that a person does not have the right to have refunded under the tax law. The penalties for tax evasion include imprisonment and penalties up to five times the amount of tax evaded. These penalties are separate from the administrative penalties payable for errors, late filing and other administrative violations.
The Supreme Court decision is significant as it confirms the intention of the federal courts to strictly enforce the Tax Procedures Law in cases involving tax evasion. It is part of a growing body of UAE tax case law that has emerged over the past 18 months.
Tax is relatively new to the UAE and until 2018, when VAT was introduced, there was minimal taxation of either individuals or businesses. Over the past few years, VAT in the UAE has moved through various stages of development, with the emergence of case law moving it to a more advanced stage.
The UAE’s tax dispute resolution process and court system are well developed and efficient. The first stage in any VAT dispute is to request reconsideration of the issue by the UAE’s Federal Tax Authority (FTA). If the taxpayer is not satisfied with the result of the reconsideration, an objection can be submitted to the Tax Disputes Resolution Committee (TDRC). For matters involving tax and penalties exceeding AED 100,000 (approximately USD 26,000), an appeal can be made directly to the federal courts.
There are several levels to the federal court system. The Federal Court of First Instance will hear appeals from the TDRC. Further appeals will be heard by the Federal Court of Appeal and ultimately, the Supreme Court. In principle, a case can move rapidly through the UAE appeals process, as can be seen from the recent VAT fraud case, and the process tends to be far quicker than in some jurisdictions.
A number of the recent tax cases have involved administrative penalties issued in connection with errors and omissions (as opposed to penalties for fraud or criminal tax evasion), and these cases have highlighted the size and impact of the penalties. When the administrative penalties were introduced, they included a late payment penalty, which was levied at a rate of 1% per day, up to a maximum of 300%. When combined with other automatic penalties, taxpayers could face penalties in the region of 350% for simple, innocent errors. The courts have upheld several substantial penalties of this type.
Earlier this year, the FTA reviewed the penalty system, and in a move that has been welcomed by taxpayers and advisors, reduced almost all of the administrative penalties. Most importantly, the late payment penalty has been reduced significantly, and in the future, it will not be imposed if the taxpayer identifies an error itself and corrects it by a prescribed deadline. Thus, there is an incentive for taxpayers to discover and disclose errors quickly, which hopefully will result in fewer tax penalty cases reaching the courts.
The next crop of tax cases is likely to focus more on matters of interpretation and procedure, which will enrich and sustain the continuing development of indirect taxes in the UAE.
Brian Conn
brian.conn@bdo.ae
Pranav Bagdai
pranav.bagdai@bdo.ae