UAE Tax Updates: New Resolutions on Tax Procedures and Penalty Rates

On Friday, July 28, the UAE Ministry of Finance issued two new resolutions:

Cabinet Resolution No. 74 of 2023 introduces a new Executive Regulation on “Tax Procedures,” which will come into effect on August 1, 2023, regarding corporate income tax, VAT, and excise taxes (excluding Article 12(2) concerning the conditions for inclusion in the tax agent registry, which will be effective from December 1, 2023). Additionally, the UAE Tax Authority released explanatory provisions TAXP006 related to this resolution.
Cabinet Resolution No. 75 of 2023 sets the penalty rates for violations of the Corporate Income Tax Law.
Thoughts on Penalties:

The maximum amount of administrative penalty is established under Article 24(4) of Federal Law No. 28 of 2022 on Tax Procedures, effective from March 1, 2023. Any administrative penalty for non-compliance with tax laws cannot exceed 200% of the unpaid taxes, whether it be VAT or corporate income tax. The minimum threshold for penalties (AED 500) has been removed. The maximum penalty for tax evasion cases is set by Article 25 of the same Law.

Regarding VAT, as per Clause 12 of Cabinet Decision No. 49 of 2021, if a taxpayer fails to apply the Voluntary Disclosure (VD) procedure before being notified of a tax audit, they will face a penalty of 50% of the error amount in the tax return and 4% of the unpaid tax amount per month from the date the tax was due until the date of receiving the tax notification.

For example, if hypothetically, VD was not done in time, and a tax notification was received on July 1, 2023, regarding the June 2021 tax return, the potential penalty would be 50% + 96% (4% * 24) = 146% (within the 200% limit).

Previously, the maximum administrative penalty was set at 300% of the unpaid tax amount (Article 25(3) of the repealed Federal Law No. 7 of 2017), even concerning VD (Supreme Court ruling in 2020). Afterward, in response to business concerns, Cabinet Decision No. 49 of 2021 introduced some relaxations, aiming to encourage VD submissions (reviewing past returns). The amnesty, offering a 70% discount on penalties imposed before June 28, 2021 (under Cabinet Decision No. 40 of 2017), was extended until the end of 2022.

It’s also worth noting an interesting judicial decision related to VD for unintentional tax errors.

Regarding VD, it is noteworthy that starting from March 1, 2023 (Article 10(5) of Federal Law No. 28 of 2022), taxpayers must submit a VD for errors in their tax returns, even if it doesn’t lead to any change in the net amount of tax payable. For instance, when a taxpayer fails to report specific transactions that are exempt, zero-rated, or import of goods/services subject to reverse charge rules.

For corporate income tax, according to Clause 11 of Cabinet Decision No. 75 of 2023, if a taxpayer fails to apply the VD procedure before being notified of a tax audit, they will face a penalty of 15% of the unpaid tax amount plus 1% for each month (or part thereof) in the following manner: when conducting the VD procedure after the tax audit notification, it is calculated from the day following the tax return (or tax refund application) submission date to the VD submission date. If VD is not performed, the penalty is calculated from the day following the tax return (or tax refund application) submission date to the tax notification date.

In Saudi Arabia, the amnesty related to certain penalties and fines associated with corporate income tax, withholding tax, VAT, excise tax, and real estate transactions tax has been extended once again from June 1, 2023, until December 31, 2023. This amnesty does not apply to cases of tax evasion.

For more detailed information on penalties, please refer to Article 24 and Article 25 of Federal Law No. 28 of 2022, including Cabinet Decision No. 75 (corporate income tax) and Cabinet Decision No. 49 (VAT).