Tax Audit under VAT in UAE
Tax Audit is one of the compliance checks to verify a person’s VAT liability is correct by way of examining various records which are maintained by the taxpayer. A tax audit may be carried out at the taxable person’s business premises known as ‘field tax audit’ or in the offices of the FTA. Generally, prior notification of an audit will be given to the taxpayer.
In this article, let us understand Why Tax Audit in UAE? and the process involved in the Tax Audit.
Why Tax Audit?
VAT is a self-assessment tax, meaning the taxpayer himself assess the amount of tax payable and recoverable input tax based on the supplies done during the period and reports it to the FTA through VAT returns. In order to assess the self-assessed declaration is correct or not, the tax audit procedure is used by the FTA.
During the audit, if there are some discrepancies resulting into underpayment of the VAT or over claiming the input VAT deduction, the FTA will issue a notice in the form of assessment asking the taxpayer to pay the VAT along with penalties.
What is the timeline for Tax Audit?
All the VAT registered businesses will not be audited and also there is no fixed frequency in which thetax audit will be conducted. From time to time, the FTA will be select the businesses who are required to be audited. The decision to audit the businesses completely is at FTA’s discretion. The following are some of the factors which are considered in selecting the business for tax audit.
- 1. How large or complex the business
- 2. Past compliance history of the business
- 3. The tendency of late submission of returns
- 4. Instances of incorrect return filing and so on.
For example, a large business selling a high volume of goods and having a poor compliance record is more likely to be subject to a tax audit than a small business with a strong compliance record, as the risk to the tax revenue is greater.
Tax Audit Procedure
The FTA will usually inform the taxable person in the question of tax audit 5 business days in advance. However, in certain exceptional cases like suspected tax evasion, or if there is a reason to believe that notifying would hinder the conduct of the audit, no notice of tax audit will be given.
Tax Audit will be conducted at the taxable person’s place of businesses or in some cases at FTA’s office. If the audit takes place at the taxable person's place of business, it will usually be during the FTA’s normal business hours.
The businesses which are subject to an audit (including their tax agent, or legal representative), must facilitate and provide the required assistance to the tax auditor to carry out the audit in a smoother manner. The following are some of the actions that the taxpayer should ensure on the receiving the tax audit notice.
- 1. Relevant premises are accessible;
- 2. Tax records such as books of accounts, Tax invoices etc. are accessible for examination
- 3. Relevant staff are present (for example the person responsible for compiling the tax return
- 4. Original copies of documents or invoices
In the event of failure to provide the required records or assistance in conducting the tax audit, applicable penalties may be levied on the taxpayer.
On completion of the audit, the FTA will communicate the results of the audit to the taxable person. If the conclusion of the audit leads to the determination of any of the following cases, then tax assessment will be issued.
- Failing to apply for registration within the timeframe specified by the VAT Law.
- Failing to submit a Tax return within the timeframe specified by the VAT Law.
- Failing to settle the payable tax stated as such on the Vax return that was submitted within the time limit specified by the Tax Law.
- Submitting an incorrect VAT return.
- The Registrant failing to account for Tax on behalf of another person when he is obligated to do so under the Tax Law
- The shortfall in VAT payable as a result of a tax evasion
Also, there could also be administrative penalties levied on the taxpayers if the findings lead to those instances specified in the law