Tax Dispute Resolution in the UAE: Understanding the Process and Best Practices
As the UAE VAT regime settles and taxpayers navigate the complexities of tax compliance, it is crucial to understand the rights and processes associated with tax disputes and litigation in the UAE. In this blog, Trust Accounts Management will provide an overview of the tax dispute resolution process, highlighting key steps, best practices, and practical challenges that taxpayers may encounter. By gaining a comprehensive understanding of the process, businesses can effectively manage tax disputes and work towards fair resolutions.
1. Settlement of Tax and Penalties Due:
The settlement of tax and penalties due is a crucial step in the tax dispute resolution process in the UAE. Under the UAE VAT regime, VAT is a self-assessment tax, meaning that taxpayers are responsible for declaring the amount of tax due or refundable for each tax period based on their assessment of their taxable activities. However, in certain instances, such as a tax audit, the Federal Tax Authority (FTA) may issue a decision to the taxpayer regarding the amount of tax and penalties due for a specific transaction or tax period.
Regardless of whether the taxpayer agrees or disagrees with the FTA’s decision, it is highly recommended to settle all amounts indicated by the FTA decision within the given time frame. This is because paying the tax will “stop the clock” on any time-geared penalties that may be applicable. By settling the tax and penalties, taxpayers can prevent the accumulation of further penalties and demonstrate their commitment to resolving the tax dispute in a timely manner.
It is important to note that settling the tax and penalties does not imply agreement with the FTA’s decision. It is merely a strategic step to avoid additional financial consequences and provide an opportunity for further discussion and resolution of the dispute. By complying with the settlement requirements, taxpayers can maintain a cooperative stance while actively engaging in the subsequent stages of the tax dispute resolution process.
Moreover, settling the tax and penalties promptly can also have a positive impact on the overall relationship between the taxpayer and the FTA. It demonstrates the taxpayer’s willingness to cooperate and resolve the matter in good faith, which may facilitate smoother communication and potential negotiations during the subsequent stages of the dispute resolution process.
2. Application for Reconsideration:
The ‘Application for Reconsideration’ is an essential step in the tax dispute resolution process in the UAE. This process allows taxpayers to present their case and request the Federal Tax Authority (FTA) to reconsider its decision. By submitting an Application for Reconsideration, taxpayers have the opportunity to provide additional information, clarifications, or arguments to support their position and challenge the initial decision made by the FTA.
The Application for Reconsideration should be submitted within 20 business days from the date stated on the FTA decision notification. It is important to adhere to this timeframe to ensure that the application is considered valid and given due attention by the FTA. Failure to submit the application within the specified period may result in the loss of the opportunity to challenge the decision through this specific process.
When preparing the Application for Reconsideration, it is crucial for taxpayers to provide detailed reasons explaining why they believe the FTA’s decision should be reconsidered. This should be supported by legislative references, which are citations to relevant tax laws, regulations, and guidelines, and any applicable FTA publications that support the taxpayer’s position. By including legislative references, taxpayers demonstrate a comprehensive understanding of the relevant tax laws and regulations and provide a strong foundation for their arguments.
Furthermore, providing supporting FTA publications can reinforce the taxpayer’s case by aligning their position with official guidance issued by the tax authority. This helps establish a connection between the taxpayer’s interpretation of the law and the FTA’s own published guidance, enhancing the credibility and strength of the Application for Reconsideration.
It is important to note that the Application for Reconsideration must be submitted in Arabic, as English submissions will not be accepted. This requirement underscores the significance of ensuring accurate translation of all supporting documents, legislative references, and explanations into Arabic.
By following the prescribed timeframe and providing comprehensive documentation with legislative references and supporting FTA publications, taxpayers increase their chances of having their Application for Reconsideration considered and reviewed thoroughly by the FTA. This sets the stage for a well-informed and constructive dialogue between the taxpayer and the tax authority, promoting transparency and fairness in the resolution of the tax dispute.
3. Objection to Tax Disputes Resolution Committee (TDRC):
The Tax Disputes Resolution Committee (TDRC) plays a crucial role in the tax dispute resolution process in the UAE. It serves as an independent body responsible for reviewing objections filed by taxpayers against decisions made by the Federal Tax Authority (FTA). The TDRC provides a platform for taxpayers to present their case and seek a fair and impartial resolution to their tax dispute.
To submit an objection to the TDRC, certain conditions must be met. First and foremost, taxpayers must settle all outstanding tax and penalties related to the disputed issue. This requirement ensures that the objection is based on the actual tax liability in question, rather than unresolved payment obligations. Additionally, taxpayers are required to have already submitted an Application for Reconsideration to the FTA, regardless of whether a response has been received. This demonstrates the taxpayer’s effort to engage with the FTA and seek resolution before escalating the matter to the TDRC.
The TDRC consists of separate bodies established in Dubai, Abu Dhabi, and Sharjah, with each TDRC having jurisdiction over taxpayers registered in their respective emirate. This ensures that taxpayers have access to a local TDRC that can address their specific tax dispute. The Dubai TDRC handles objections for taxpayers with registered addresses in Dubai, while the Abu Dhabi TDRC is responsible for taxpayers with registered addresses in Abu Dhabi and non-UAE addresses. The Sharjah TDRC covers taxpayers registered in the Emirates of Sharjah, Ras al-Khaimah, Ajman, Fujairah, or Umm al-Quwain.
When submitting an objection to the TDRC, taxpayers must provide comprehensive documentation to support their case. This includes a completed TDRC Objection Form in both English and Arabic, an explanatory memorandum outlining the grounds for the objection in Arabic, and all supporting documentation relevant to the dispute. Supporting documents may include evidence of the original FTA decision, the previously submitted Application for Reconsideration, any response received from the FTA, and proof of payment for tax liabilities and penalties under dispute. The submission of these documents is critical to substantiate the taxpayer’s claims and ensure a well-founded objection.
It is advisable for taxpayers to engage the services of a UAE litigation lawyer experienced in administrative disputes and a UAE tax specialist who can provide expert guidance in preparing the necessary documentation. This collaborative approach ensures that the objection is presented in a clear, concise, and legally sound manner, maximizing the chances of a favorable resolution by the TDRC.
The TDRC will review the objection and provide its decision within 25 business days from receipt of the objection. In exceptional circumstances, the TDRC may extend this period to a maximum of 45 business days. Once the TDRC reaches a decision, taxpayers will be notified accordingly. If the disputed tax plus penalties amount to AED 100,000 or less, the TDRC’s decision is final and cannot be challenged in court. The FTA can then proceed with the collection of the outstanding tax debt.
However, if the disputed tax plus penalties exceed AED 100,000, taxpayers or the FTA have the right to challenge the TDRC’s decision by appealing to the Federal Court of First Instance. This is the next level of recourse in the tax dispute resolution process and involves a formal judicial review of the case. The appeal must be submitted within 20 business days of the TDRC’s decision.
In summary, the TDRC plays a vital role in resolving tax disputes between taxpayers and the FTA in the UAE. By adhering to the conditions for submitting an objection, including settling tax and penalties and providing comprehensive documentation, taxpayers can seek a fair resolution to their dispute. The establishment of TDRCs in Dubai, Abu Dhabi, and Sharjah ensures accessibility and local jurisdiction for taxpayers.
4. Documentation and Involvement of Experts:
- The importance of comprehensive and accurate documentation when submitting an objection to the TDRC.
- Involvement of UAE litigation lawyers and tax specialists to ensure the best possible outcome.
- Role of court-appointed experts with tax expertise in evaluating appeals at the Federal Court of First Instance.
5. Appeal to Federal Court System:
- The process of appealing TDRC decisions at the Federal Court of First Instance.
- Appointment of experts to assist in evaluating the merits of the appeal.
- Timeframe, potential costs, and involvement of experienced litigation lawyers and tax advisors.
6. Tax Disputes Outside TDRC:
- Overview of tax disputes arising in contractual contexts between stakeholders, not involving the TDRC.
- Initiation of civil claims in relevant Emirate courts, appointment of court-appointed tax experts, and the possibility of appeal to higher courts.
7. Payment Methods:
When it comes to settling tax and penalties in the UAE, taxpayers have several payment methods available to them. The Federal Tax Authority (FTA) provides different options to ensure convenient and secure transactions. Let’s explore the available payment methods:
E-Dirham is a favorable payment option for domestic taxpayers who have a local branch or subsidiary in the UAE. It provides a secure and efficient way to make payments directly to the FTA. However, for international businesses without a local presence, E-Dirham may not be a viable option due to the requirement of a local branch or subsidiary.
2. Credit Card:
Taxpayers also have the option to settle their tax and penalty payments using a credit card. This method allows for quick and easy transactions, ensuring timely compliance with tax obligations. It is important to note that credit card payments may attract a charge between 2% to 3% of the total payment amount, which taxpayers should consider when choosing this method.
3. Bank Transfer:
Bank transfer is considered the most effective and widely used payment method for settling tax and penalties in the UAE. Taxpayers can initiate a transfer from their bank accounts to the designated FTA account. This method offers flexibility and convenience, especially for international businesses. However, some taxpayers may face challenges when transferring funds from a foreign bank to a UAE GIBAN (Global IBAN) number. It is advisable to consult with your bank to ensure a smooth and hassle-free transfer.
In addition to the payment methods mentioned above, it is important to highlight the requirement of a local bank account for receiving refunds of overpaid tax or penalties. If taxpayers have overpaid their tax liabilities or penalties, they may be eligible for a refund. The FTA typically processes these refunds by depositing the funds directly into the taxpayer’s registered local bank account. Therefore, having a local bank account is essential to receive any refunds promptly.
Taxpayers should carefully consider the available payment methods and select the one that best suits their needs and preferences. It is recommended to ensure timely payments to avoid any penalties or late fees. Additionally, keeping accurate records of the payment transactions, including transaction dates, amounts, and payment method used, is crucial for proper documentation and compliance purposes.
8. Key Stakeholders:
The tax dispute resolution process in the UAE involves various key stakeholders who play essential roles in ensuring a fair and equitable resolution. Each stakeholder brings specific expertise and knowledge to the table, contributing to the effectiveness and success of the process. Let’s explore the roles and importance of these key stakeholders:
Taxpayers are the individuals or entities involved in the tax dispute and have a vested interest in reaching a favourable outcome. Their role is to provide the necessary information, documentation, and arguments to support their position and present their case before the relevant authorities. Taxpayers must engage actively in the process, cooperate with their representatives, and comply with the requirements and timelines set by the tax authorities.
2. Tax Agents:
Tax agents act on behalf of taxpayers and represent them in their interactions with the tax authorities. They assist taxpayers in preparing and filing the required documents, including the Application for Reconsideration, objections, and other relevant submissions. Tax agents possess a deep understanding of tax laws and regulations, ensuring that taxpayers’ interests are safeguarded throughout the dispute resolution process.
3. Tax Disputes and Litigation Lawyers:
Tax disputes and litigation lawyers are legal professionals specialising in tax law and litigation. They provide expert legal advice and representation to taxpayers during the tax dispute resolution process. These lawyers have an in-depth understanding of the UAE tax system, administrative procedures, and relevant legislation. Their role is to analyse the legal aspects of the dispute, develop strong arguments, and present the case before the relevant authorities or courts, if necessary.
4. Tax Advisors:
Tax advisors are professionals with extensive knowledge and expertise in tax matters, just like our team at Trust Accounts Management. We provide specialised guidance to taxpayers, offering strategic advice on tax planning, compliance, and dispute resolution. We can assist taxpayers in understanding complex tax laws, interpreting regulations, and identifying opportunities to mitigate tax risks. We play a crucial role in ensuring that taxpayers (our clients) are well-informed and make informed decisions throughout the dispute resolution process.
The roles of these key stakeholders are interconnected, and collaboration among them is essential to achieve the best possible outcome in tax dispute resolution. Taxpayers rely on tax agents, tax disputes and litigation lawyers, and tax advisors to provide them with the necessary expertise, support, and representation. By working together, these stakeholders can develop comprehensive and compelling arguments, navigate the intricacies of the legal system, and advocate for the taxpayer’s rights and interests.
It is important for taxpayers to select experienced and qualified professionals to represent them in the tax dispute resolution process. Expertise in tax laws, litigation, and administrative procedures is crucial for ensuring that the taxpayer’s position is effectively communicated and advocated for.
9. Practical Challenges:
Since the beginning of the year, taxpayers in the UAE have faced various challenges in relation to tax compliance and dispute resolution. These challenges can arise from factors such as tax audits conducted by the Federal Tax Authority (FTA), technical decisions issued by the FTA, and unexpected VAT costs impacting the supply chain and overall profitability of businesses.
Tax audits are an essential part of ensuring compliance with tax regulations. They involve a thorough examination of a taxpayer’s financial records, transactions, and tax returns to verify the accuracy and completeness of reported information. However, audits can lead to disputes if the taxpayer disagrees with the FTA’s findings or assessment of tax liabilities.
In some cases, taxpayers may receive technical decisions from the FTA that determine the amount of tax and penalties due in relation to specific transactions or tax periods. Disagreements may arise when taxpayers have a different interpretation of the law or believe that the penalties imposed are disproportionate. These disagreements can result in disputes that need to be resolved through the tax dispute resolution process.
Unexpected VAT costs can also pose challenges for taxpayers, especially when they significantly impact the supply chain and profitability of businesses. Factors such as changes in VAT regulations, incorrect classification of goods or services, or errors in VAT calculations can lead to higher than anticipated VAT costs. These unexpected costs can strain cash flow and financial resources, requiring businesses to carefully manage their VAT obligations and seek appropriate advice to address any discrepancies.
When faced with these challenges, taxpayers must consider their tax governance strategy and decide whether to formally disagree with the FTA’s decision. This decision depends on various factors, including the potential impact on the business, the strength of the taxpayer’s position, and the cost and time involved in disputing the decision. It is crucial for taxpayers to seek guidance from experienced tax professionals who can assess the situation and provide advice on the best course of action.
The tax disputes and litigation process in the UAE is still at an early stage of development. However, it is expected to progress quickly, with the establishment of precedence and the development of consistent interpretations of the law. The process aims to provide taxpayers with more certainty and clarity on tax matters, ensuring a fair and transparent resolution of disputes. Already, we have seen positive outcomes for taxpayers in terms of mitigating penalties, but it is important to note that these outcomes have been supported by strong tax technical and legal arguments.
Over time, the tax disputes and litigation process should give taxpayers more comfort in understanding the consistent interpretation of the law and the reasonable application of the penalty regime in the region. It is important for taxpayers to be proactive in seeking professional advice, engaging experienced litigation lawyers, and working closely with tax advisors who specialise in UAE tax law. By doing so, taxpayers can navigate the practical challenges, protect their rights, and achieve a favourable resolution to their tax disputes.
In conclusion, understanding the tax dispute resolution process is crucial for taxpayers in the UAE to effectively manage tax disputes, protect their rights, and work towards fair resolutions. By following best practices, involving experienced professionals, and maintaining comprehensive documentation, taxpayers can navigate the process with confidence. Trust Accounts Management is committed to providing expert guidance and support to businesses in their tax dispute resolution efforts, ensuring compliance, and optimising their tax positions for long-term success.