TAX PENALTY AMNESTY

Redetermination of existing penalties
​The new Cabinet Decision grants the FTA the right to reduce unpaid penalties by 70% subject to the following conditions:

• Administrative penalties stated in Cabinet Resolution No. (40) of 2017 were imposed on a taxpayer before 28 June 2021 and have not been paid in full by that date.
• The taxpayer, by 31 December 2021, pays all of the outstanding tax, along with 30% of the total administrative penalties due but has not paid before 28 June 2021.

The Cabinet Resolution does not apply to taxpayers if they have already settled their penalties.
Other penalty reductions

• The penalty for late registration will reduce from AED20,000 to AED10,000.
• The penalty for failing to submit a deregistration application on time will reduce from AED10,000 to AED1,000 per month (capped at AED10,000).
• The penalty for failing to display prices inclusive of VAT will reduce from AED15,000 to AED5,000.
• The penalty for failing to issue a tax invoice or tax credit note will reduce from AED5,000 to AED2,500.

Implications 
The amendments create an incentive for businesses to review their historic filing positions and to voluntarily disclose any errors before they are notified of an audit. For example, if a taxpayer on 1 July 2021 voluntarily discloses an error in its June 2019 VAT return and pays the associated tax within 20 days, there will be no late payment penalty and a 10% variable penalty will apply. However, where the FTA issues an assessment on 1 July 2021, this variable penalty would increase to 146%, on the assumption that the associated tax shall be settled within 20 days of filing of the voluntary disclosures.  
Businesses should also review any outstanding penalties to determine if they can benefit from relief

The changes in penalties are summarized below

Fixed penalties                                                 REGULAR PENALTY     PENALTY UPTO
        Trigger                                                                                              31/12/2021

• First voluntary disclosure                            AED 3,000                       AED 1,000
• Subsequent voluntary disclosure                AED 5,000                       AED  2,000
  
  Late payment penalty for failure to settle the stated VAT in the submitted VAT return 
•                                                              REGULAR PENALTY     PENALTY UPTO                                                                                                                    31/12/2021

​       Trigger                                                                                            

• Day after due date                                        2%                                   2%
• One week after due date                              4%                                   2%
• One month after due day                              1%                                  4%
• Cap                                                                300%                              300%                                                      ​​                                                                                                                                                                                                                                                                                                                                                     
• Late payment penalty for under-paid VAT as per the voluntary disclosure or tax assessment

Where additional VAT liabilities arise from a voluntary disclosure or a tax assessment, the new rules represent a significant change as taxpayers will now be given 20 days to settle any underpaid tax before late payment penalties will apply.
The due date for the calculation of the late payment penalties in this instance would be as follows:

• 20 business days following the submission of a voluntary disclosure
• 20 business days following the receipt of a Tax Assessment

Where taxpayers fail to pay within the 20 days, a 2% penalty will be imposed after the 20-day period lapses, followed by a further 4% monthly penalty payable at monthly intervals one month from the due date. The cap on the penalties remain at 300%.

Variable penalty where a voluntary disclosure is submitted before the taxpayer is notified of an audit by the FTA 
The penalties now range from 5% to 40% depending on when the taxpayer submits the voluntary disclosure.
                                            REGULAR PENALTY                    PENALTY UPTO 
Year in which error                                                                 31/12/2021
is disclosed

• ​Year  1                       5% of the underpaid tax                5% of the underpaid tax    
• Year  2                       5% of the underpaid tax                10% of the underpaid tax
• Year  3                       5% of the underpaid tax                20% of the underpaid tax
• Year  4                       5% of the underpaid tax                30% of the underpaid tax
• Year   5 & onwards   5% of the underpaid tax                40% of the underpaid tax

Variable penalty where a voluntary disclosure is submitted/tax assessment is received after the taxpayer is notified of an audit by the FTA
There is a significant increase in the penalties where an error is corrected after the taxpayer is notified of an audit by the FTA.


Previous penalty     ( REGULAR PENALTY)                                                                                                                                

• 30% of the underpaid tax after notification of the FTA audit                          
• 50% of the underpaid tax upon error discovered during the FTA audit      

 New Penalty  (UPTO 31/12/2021)

•  50% of the underpaid tax along with 4% of underpaid tax per month from the due date of the VAT return 

The Regulations apply to all UAE onshore and free zone companies that carry on a “Relevant Activity”. It is yet to be confirmed whether the Regulations will also apply to sole proprietorship and branches, but we expect entities incorporated under offshore (free zone) companies regulations that carry on a “Relevant Activity” to be within the scope of the Regulations. Entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations. On this basis, UAE sovereign investment funds and other UAE government related entities would not need to meet the UAE economic substance requirements. The following are considered as “Relevant Activities” under the Regulations:
● Banking ● Insurance ● Fund management ● Lease-finance ● Headquarters ● Shipping ● Holding company ● Intellectual property (IP) ● Distribution and service centre

​To satisfy the economic substance requirements in relation to a Relevant Activity, a Relevant Entity must:
● Conduct the relevant “core income generating activities” in the UAE;
● Be “directed and managed” in the UAE; and
● With reference to the level of activities performed in the UAE: ○ Have adequate number of qualified full-time employees in the UAE
○ Incur an adequate amount of operating expenditure in the UAE
○ Have adequate physical assets in the UAE.
A Relevant Entity that only undertakes a Holding Company Business will be subject to less stringent economic substance requirements. Additional requirements apply if a Relevant Entity carries out “high risk IP related activities”. If a Relevant Entity carries out more than one Relevant Activity, the economic substance requirements must be met for each of the Relevant Activities.