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:
Other penalty reductions
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
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:
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
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)
New Penalty (UPTO 31/12/2021)
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Economic Substance Requirements In UAEEconomic Substance requirement Regulations issued On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”), requiring all in-scope UAE entities (“Relevant Entities”) that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019. WHO IS SUBJECT TO THE REGULATIONS?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 WHAT ARE THE ECONOMIC SUBSTANCE REQUIREMENTS?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. Outsourcing to third-party service providersThe Regulations allow a company to outsource some or all of its activity to third-party service providers; however, these service providers must in their own right have adequate presence in the UAE and the company must be able to demonstrate that it has adequate supervision of the outsourced activities. Support from service providers cannot be ‘double counted’ if the services are provided to more than one Relevant Entity.
Non-Compliance Non-compliance with the Regulations may lead to fines and sanctions which include:
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