It is critical for businesses to develop their tax compliance strategy to contain the rise of non-compliance

Dubai: Businesses in the UAE need regular health checks and audits to avoid tax penalties and the chance of non-compliance of the Valued Added Tax (VAT) Law or any other violation, said Nimish Goel, Partner at WTS Dhurva Consultants.

Headquartered in Dubai, WTS Dhurva Consultants is a boutique tax advisory firm with a sizeable presence in the UAE, Bahrain and Saudi Arabia.

The firm has been awarded a series of VAT mandates from major UAE businesses across the retail, real estate, hospitality, financial services and energy sectors.

“The introduction of VAT in the UAE has been a cultural and administrative shift, as the country previously had a minimal tax regime. The initiative has been a positive step for the Government as it generated AED 27 billion revenue in the first year,” Goel said.

VAT a game-changer
The VAT was introduced in the UAE in January 2018. For many organisations, it completely changed the way of doing business as some of the large family-owned groups had to bring about structural changes in their business models and corporate set-up to make them tax compliant.

Due to paucity of time and substantial cost involved, many businesses had implemented VAT without making significant changes in the way of doing business including amending the existing group structure, supply chain or IT systems, Goel said.

“In the previous year, we conducted numerous VAT health checks and could identify several issues where the businesses had taken positions that were legally incorrect, leading to the imposition of penalties. Over last two years, the companies have managed to overcome initial challenges but are hesitant to relook at their operations and explore avenues for optimisation of costs, potential tax savings or a need for upgradation to be fully compliant with the VAT law,” Goel said.

No last-minute shocks
“It is critical for businesses to develop their tax compliance strategy to contain the rise of non-compliance.”

He said that regular health checks and audits should be encouraged in an organisation to avoid any last-moment surprises.

The VAT specialist observed that it should be the chief financial officer’s priority to keep books in order for FTA audits in coming periods.

Since VAT is an indirect tax which is borne by the end consumer, generally there shouldn’t be any direct financial impact on the businesses except non-recoverability of VAT on certain blocked expenses and incurring the costs of non-compliance.

No margin of error
Talking about common mistakes, he said there are a couple of errors that include:

• Recovering VAT on invalid Tax Invoices;
• Non-reconciliation of bank accounts resulting in un-allocated receipts;
• Non-reversal of VAT if invoice not paid within six months of the due date.

In the past two years, the UAE’s Federal Tax Authority has published several guides, clarifications and conducted awareness sessions and tax clinics to spread necessary awareness about the VAT Law.

Goel appreciated the role of the Tax Dispute Resolution Committee (TDRC) for giving relief to businesses in case of administrative penalty.

A test case
He said WTS Dhurva Consultants was involved in an interesting litigation case for a large family group, which was imposed with an administrative penalty and was granted a substantial relief by the TDRC.

In the landmark ruling, the TDRC granted the relief based on the grounds that the taxpayer acted in good faith and undertook corrective steps by filing voluntary disclosures immediately from the date of realising the error.

Challenges
Regarding challenges, Goel said that the problem is not to file the VAT returns, but to file them correctly. Notable challenges could be:

• Inadequate IT systems to populate correct and exhaustive data;
• Errors in VAT filings due to manual computation
• Lack of awareness about the VAT impact on non-operational transactions
• Lack of relevant tax skillsets within the organisation leading to erroneous returns being filed
• Non-awareness of clarifications/ guides/ updates which results in continuous errors

By the end of 2019, the number of businesses registered with the FTA increased by seven per cent, with the number of companies registered for VAT — as individuals or tax groups -— reaching 320,440, while those registered for excise tax totalled 1,100, and the number of tax agents growing to 355, according to the Federal Tax Authority.