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FTA audit framework: Mitigating risk with timely amends
Be proactive, not reactive, as MBG experts lay down the rules and regulations of a tax audit to keep you away from worries and legal complications
Value added tax (VAT) is not a new phenomenon for companies in the UAE. However, the likelihood of a federal tax authority (FTA) tax audit is high. The provisions of the federal law on taxation have mandated the FTA with the legal right to perform a tax audit on any person to determine their compliance with the provisions of the relevant laws.
Mahmood Badri and Vipin Kumar Ahuja
Definition of a tax audit
A tax audit by the FTA in the UAE is an in-depth review of a business’ financial information, accounting records and VAT return filings maintained by the taxpayer, ensuring that the taxpayer has correctly assessed and reported their tax liability, complying with relevant laws and regulations and have fulfilled other obligations. There need not be a specific reason for the FTA to conduct an audit of a company. They can conduct it for any reason or whenever they want as per a set of criteria. It is advisable to all the business entities in the UAE to prepare themselves as FTA allows only five days to respond to queries. Businesses have to ensure that they have correctly determined tax positions for standard rated, zero rated and out of scope transactions. Further, they need to ensure that accurate and complete financial data has been captured into the system upto the period for which VAT returns have been filed, proper reconciliations of VAT returns with respective ledgers from books of accounts and custom records are maintained and all the supporting documents and custom records are maintained.
Tax audit procedures
- FTA may apply risk-based selection criteria to determine whom to audit
- FTA may perform tax audit at the FTA office or the company premises or any other place where business is conducted
- Field audit notification: If the authority decides to conduct audit at company premises, it shall inform the taxpayer at least five business days prior to the tax audit
- Temporary closure of 72 hours: The tax auditor has the right to temporarily close the business of a person subject to tax audit for a period not exceeding 72 hours with prior notice in any of the following cases:
a) If the authority has serious grounds to believe that the person subject to the tax audit is involved in tax evasion;
b) If the authority has serious grounds to believe that not temporarily closing the place where the tax audit is conducted will hinder the conduct of the tax audit;
- Written consent from the director-general (DG) to access the business premises — In all cases where temporary closure of business will be required, the tax auditor shall obtain the prior written consent of the DG
- In the case of visit to a residence, permission from a public prosecutor is required
- In case of extension of closure of business beyond 72 hours, approval from a public prosecutor is required
- Criminal cases can only be initiated upon an application from the DG
- Once the tax audit is initiated, the concerned business is required to produce all the information as required in the format as prescribed by the FTA. Unlike the VAT return, which is a box-wise summary based on the nature of transactions i.e. the consolidated details of sales, purchase, input VAT, output VAT, etc. are declared, the audit, as prescribed by the FTA, is required to produce details at the invoice level
Rights of an audited person
- Request the tax auditors to show their job identification cards
- Obtain a copy of the tax audit notification
- Attend the tax audit, which takes place outside the FTA, and
- Obtain copies of any original paper or digital documents seized by the FTA
Audit completion
- The FTA shall inform the taxable person the final results of the tax audit within 10 business days from the completion of the tax audit
- If any tax assessment is performed, a taxable person can view or obtain the documents and data on which the FTA based its assessment
Voluntary disclosure
- The FTA encourages the submission of voluntary disclosure by taxpayers who may have violated the provision or who believe that a mistake was made
- Proactive approach for failures or mistakes is necessary for avoiding a penalty. A voluntary disclosure should be made by a taxable person to notify the FTA of an error or omission in their tax return, tax assessment or tax refund application
- It is a matter of question how a business can find errors/mistakes in already filed VAT returns. A business can go for VAT audit review/ VAT health check to understand the mistakes in already filed returns. A VAT audit-review by a registered tax agency (approved from the Federal Tax Authority of the UAE) can help you to find all the errors/mistakes/omissions in your VAT returns
- Eventually, this exercise will minimise the risk of fines and penalties in case of a tax assessment by the FTA. It will also ensure that you do not create VAT issues for your customers, which can adversely affect your commercial relationship
For any queries, please get in touch with MBG Corporate Services
Email: uae@mbgcorp.com;
WhatsApp/Phone: +971-526406240
Visit: www.mbgcorp.com/ae
— Mahmood Badri is CEO-GCC, institutional business and taxation at MBG Corporate Services, and Vipin Kumar Ahuja is associate partner — taxation at MBG Corporate Services
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