09 Sep 2020

Hadef in the Courts: successful outcome in VAT case involving voluntary disclosure

Authored by: Rami Omar and Taher Abdeen

Hadef & Partners recently achieved an important outcome for an international company in relation to a VAT case.

UAE business has become accustomed to working within the VAT regime which was introduced on 1 January 2018 at a standard rate of 5%. However, companies, the authorities and the judiciary continue to adapt and interpret the detailed regulations.

Hadef & Partners represented an international company in a dispute with the Federal Tax Authority (“FTA”) in respect of payment of tax and related penalties.

The international company discovered an inadvertent error in certain previous tax declarations. There were genuine reasons for the error. The international company made a voluntary disclosure to the FTA in this regard, disclosing the financial discrepancy, together with confirmation of its desire and ability to immediately pay the amount due.

The FTA calculated the tax amount due, and requested that the international company pay this, together with penalties calculated in accordance with the VAT Law and applicable regulations.

However, the international company was surprised to be subsequently notified of an additional substantial penalty. That notification was duly objected to by the international company, but the objection was initially dismissed. This decision was challenged before the Tax Dispute Resolution Committee and the additional penalty was cancelled. The FTA appealed to the Federal Court of First Instance. The FTA argued that it had the right to levy a delay penalty on the declared amount, arguing that such penalty should be calculated from the date of the tax declaration for the relevant tax period, and that such penalty applies separately to the penalty imposed and paid in relation to the voluntary disclosure.

Hadef & Partners argued, on behalf of the international company, that the inadvertent error had been voluntarily disclosed and the required additional payment duly made, together with the applicable penalty in accordance with the law. We also explained to the court the purpose for which the legislator established the procedure for voluntary disclosure, the punitive gradation and the penalty allocated by the legislator for such a matter. It was further argued that the FTA was wrongly seeking to impose an additional penalty, not in relation to late payment, but in relation to alleged tax evasion which does not apply to voluntary disclosure of an inadvertent error, based on the actual facts and other circumstances of the case.   

The Court of First Instance found in favour of the international company.

The Tax Procedures Law (No. 7 of 2017) differentiates between (a) penalties for late payment of tax in tax declarations and (b) fines and penalties in relation to voluntary disclosure.