VAT: Uncertainty is not an option
Get ready for the Federal Tax Authority Tax Audit 2021 and learn about the risks and consequences of non-fulfillment
'Death and taxes are the only certainty' goes the saying; but in the life of a business, compliance with tax, provisions cannot be left to chance either! That is especially true in the UAE, where the VAT is a relatively recent introduction and companies need to stay updated on the laws updates. Tax audits are an important part of the tax compliance environment.
The UAE's federal law on VAT mandates the Federal Tax Authority (FTA) to audit businesses for tax compliance. A tax audit is the compliance assessment of a company as a taxable entity. It is conducted by the FTA to ensure that a business has paid its liabilities, and the tax due has been deposited with the government treasury on time. Such verifications are necessary as VAT returns are filed on a self-assessment basis and the onus is on the one's assessing to interpret and apply the tax provisions correctly.
It is the taxpayer's responsibility to ensure that VAT is correctly accounted for, collected and paid to the FTA. The importance of being aware of the pitfalls involved, exercising tight checks and control and ensuring that employees are well trained and updated on new developments cannot be overstated. These basics reduce the risk of VAT compliance errors, the most minor of which can have consequences. Sanctions can include interest, penalties and/or prosecution, depending on the case.
Given the complexities involved, however, taxpayers are likely to discover VAT errors at some point. Taking timely action in such events is key to mitigating any sanctions. Businesses need to make full disclosure to and cooperate with revenue.
Businesses in the UAE must prepare for tax audits in 2021. It has already been three years since VAT was implemented and laws and regulations across all business sectors are clear and in place.
Filing of VAT return is the first step towards VAT assessment (contrary to a common misperception that it is the last). Businesses should review their already filed VAT returns and ensure that all tax positions opted by them are correct, that supporting documents are available, that their systems are capturing all the required data, and that reconciliation statements between VAT returns, customs records, and accounting data are being prepared for the VAT audit.
The FTA has the right to conduct a tax audit at any time with a five-day prior notice. The notice may contain details such as the reason for the audit (although it is not obligated to specify one), the audit schedule and place, the parties involved, and so on. During the audit, the FTA may check the filed returns and other details like sales invoices, purchase invoices, import-export customs documents, etc.
As the FTA allows only five working days to respond to its queries, businesses in the UAE should be ready and prepared at all times for an audit. The following is a list of some reviews that can be done to prepare for an upcoming tax audit:
- All taxable supplies to be charged at applicable tax rates;
- Proper supporting documents to be available for eligible zero-tax rated, exempt and out of scope supplies;
- VAT on import of services and goods to be recorded under reverse charge mechanism;
- Only eligible 'input tax credit' to be availed of against import of goods and services under reverse charge mechanism;
- The value of goods imported and the output liability on such imports in the FTA records to be reconciled with the details in the books of accounts;
- Only eligible 'input tax credits' on local purchases and expenses to be claimed
- In the case of mixed supplies (exempted and zero-rated/standard rated), 'input tax credit' to be calculated as per the apportionment provisions of the law;
- Proper records, i.e. tax invoices, tax credit notes, custom bill of entries, custom bill of exits, etc. to be maintained.
The best way to prepare is to relook at the compliance level by conducting thorough checks and examining key areas of tax compliance and the effectiveness of internal controls and checks in place. The key tax compliance areas, as well as the effectiveness of internal checks and controls, should be examined regularly. Please get in touch with MBG Corporate Services to find an answer to your VAT queries email@example.com
Vipin Kumar Ahuja is director - taxation and Peeyush Joardar is a partner - MBG Corporate Services
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