UAE’s New Tax Procedures Executive Regulations
The UAE has recently issued Cabinet Decision No. 74 of 2023, impacting its Tax Procedures. This Decision replaces the previous Executive Regulation on Tax Procedures and aligns it with the most recent version of the Tax Procedures Law, which was effective since 1 March 2023 but did not have Executive Regulations yet. The New Executive Regulation shall be effective from 1 August 2023.
The FTA has additionally issued guidance by way of a Public Clarification on Tax Procedures (TAXP006). The Public Clarification aims to highlight the differences between the previous and new Executive Regulations and provides additional clarification on the new provisions.
We have listed what we consider the most notable changes as per the new Executive Regulations:
- Article 1 – Under the newly expanded definition, the term ‘Assets’ now encompasses not only tangible assets but also intangible assets such as patents, brands, licenses, trademarks, computer programs, copyrights, goodwill and customer lists.
The relevance of the expansion relates to the potential seizing of these assets and record keeping.
- Article 2 – Businesses have an obligation to maintain “documents supporting the entries in the accounting records and commercial books”. This provision was broad in the new Federal Tax Procedures Law, and its execution was delegated to the Executive Regulations. It is now clear that the obligations include:
- Business-related documents such as correspondence, invoices, tax invoices, licenses, and agreements/contracts.
- Documents containing details of any election, determination, or calculation made by a taxable person in relation to its tax affairs, including the basis, method of estimation, determination made, and calculations performed, are required to be maintained.
In other words, this suggests, amongst others, that the working papers to prepare a CT return are also records that the FTA may consult.
- Documents related to related party transactions and the circumstances under which such transactions were made, including transfer pricing documents, are required to be maintained.
We note, however, that Pillar Two companies and businesses with a turnover of more than 200M AED are already subject to the requirement to prepare a master file and local file under Ministerial Decision No. 97 of 2023. In addition to that, Qualifying Free Zone Persons also need to adhere to transfer pricing principles.
The takeaway here presumably is that no matter the size of the business, when there is a related party transaction, these need to be documented and analyzed. In other words, there seems to be no de minimis rule for related party transactions, which, particularly for SMEs, may pose certain challenges.
We note further that there is no guidance as to what are not considered business records. Do internal emails constitute business records? There seem to be little or no limitations to the audit power of the FTA.
Additionally, there seem to be no limitations to potential fishing expeditions nor to audits with one taxpayer to detect noncompliance with another taxpayer.
- Article 3 – The New Federal Tax Procedures Law delegated this provision to the Executive Regulations. It specifies that the default record-keeping period is five years as from the year following the tax period to which they relate.
For real estate records, the period is seven years. Article 71(2) of the VAT Executive Regulations still states that it is 15 years, and the Capital Asset Scheme for VAT purposes requires a taxable person to monitor the use of a real estate asset over 10 years’ time. While the Executive Regulations to the Federal Tax Procedures Law could claim the lex posterior principle, it is unclear whether it would be a lex specialis. Irrespective of a potential academic discussion on the matter, it is likely that the law of the lowest common denominator will determine that taxpayers will still keep real estate records for 15 years.
The period for record-keeping is extended in case of an audit, dispute or voluntary disclosure, in line with the extensions of the statute of limitations made in the new Federal Tax Procedures Law.
- Article 4 – Further contains requirements for the electronic keeping of records.
- Article 5 – Previously, only documents in Arabic were prescribed for submission to the FTA. However, now taxpayers have the option to submit these documents in either English or Arabic. When submitted in English, the FTA may request a translation.
This provision is essentially legalizing a practice which was currently in existence, where many records were already submitted in English and accepted. The UAE courts system in recent years has been more accepting of the use of English, and the new Civil Procedures Decree-Law No. 42 of 2022 already foresaw the use of English in mainland courts as from 2023 onwards.
- Article 6 – Businesses that are tax-registered with the FTA are required to promptly notify the FTA of any changes in their e-mail address, trade license, or legal status.
- Article 7 – All licensing bodies responsible for issuing trade licenses to businesses in the UAE are now required to promptly notify the FTA with essential data and information on each business within 20 business days of the issuance or renewal of the trade license.
- Article 10 – Taxpayers should submit a voluntary disclosure to rectify errors in the Tax Return, including errors that do not affect the tax due. The Clarification gives the example of imports of services made by a taxable person with a full right to recover input VAT or incorrect Emirates reporting.
- Article 11 – The FTA can now notify individuals through various means, including text messages on mobile phones, notifications via smart applications, and notifications through the FTA’s electronic systems.
- Article 12 – A natural person seeking to register as a tax agent must meet the minimum educational requirements and possess relevant experience in tax, accounting, or legal fields as per the new Executive Regulations.
The tax agent is no longer required to be proficient in both Arabic and English, as fluency in either language is now acceptable. Additionally, there is no need to submit proof of medical fitness to perform the duties of the profession.
This change is important and will substantially increase the number of available tax agents and will add to the diversity of available tax agents. There will be further Decisions providing a tighter framework of the tax agent concept. Organisations, i.e., Companies, will also be able to register as a tax agent (this was previously referred to as an “agency”).
- Article 13 – The New Executive Regulations provides comprehensive guidelines and procedures for both listing and delisting tax agents by the FTA.
- Article 14 – The New Executive Regulations introduces additional obligations for tax agents in addition to the ones specified in the previous Executive Regulation, such as, for example, meeting continuous development and record-keeping requirements.
- Article 16 – The New Executive Regulations mandates that the FTA must provide a person with a minimum of 10 business days’ notice before initiating a tax audit. Despite this change, the general procedures, rights, and obligations related to the tax audit remain unchanged and in effect.
The New Executive Regulations do, however, include certain modifications and updates to ensure compliance with the latest tax regulations and practices.
- Article 17 – Tax audits can be done on data stored electronically.
By conducting tax audits on electronically stored data, the FTA aims to enhance transparency and compliance in tax reporting. It enables the FTA to verify the accuracy of tax returns and ensure that taxpayers are fulfilling their tax obligations in accordance with the law. Having readily available electronic records also reduces taxpayers’ burden during the audit process, as they can provide the required information in a digital format.
The provisions presumably prepare for E-audits and audits of the E-invoicing records under the E-invoicing obligations, which will enter into force in July 2025.
- Article 22 – A new provision was added in the new Executive Regulations where the FTA is now authorized to sell seized and abandoned goods that are perishable or susceptible to shortage or leakage.
- Articles 23 & 24 – In cases of tax evasion crimes and deliberate failure to settle administrative penalties, individuals have the option to submit a reconciliation application to the FTA before any criminal proceedings commence. The application is made with the Federal prosecutor.
To be eligible for reconciliation, the person must commit to fully settling the payable tax and administrative penalties owed to the FTA as part of the reconciliation process. This measure allows individuals to rectify their tax-related misconduct and avoid further legal consequences by resolving outstanding tax obligations through reconciliation.
The new Executive Regulations provide additional details and guidance on the procedural aspects of the reconciliation.
- Article 25 – The new Executive Regulations provide provisions for the extension of deadlines with 20 days for relevant tax assessment review requests, objections, accepting submissions, and reconsideration. The Tax Disputes Resolution Committee may also extend its period to decide on an objection by another 60 days and may even, in exceptional circumstances, accept a late submission of an objection by a taxpayer.
- Article 27 – Upon the appointment of a bankruptcy trustee, the FTA must inform them about the due tax amount for the business subject to bankruptcy. If required, the FTA will also notify the trustee of its intention to conduct a tax audit for a specific tax period within 20 business days of the trustee’s appointment.
We note further that there is still no manager’s or director’s liability foreseen in the tax procedures law (see our earlier comments here).
The changes in the Executive Regulations are not substantial, and they are not meant to be, as substantial changes would need to go into the law. The changes around tax agents are important, though and will have an important effect on the sector.