New VAT and excise tax statute of limitations rules – not the time to relax yet…

Over the last two weeks, the UAE Government announced a number of changes to the UAE VAT and Excise Tax Laws – among them, the introduction of the new statute of limitation provisions in each of the Laws.?

To take a step back, in a tax administration context, a ”statute of limitation” is a prescribed time limit after an event beyond which a tax authority cannot amend a tax position adopted by a taxpayer – even if that tax position was not correct.?As per the UAE Tax Procedures Law – which applies to all federal taxes, including the excise tax and VAT – the FTA is generally time-barred from making a tax assessment after the expiration of five years from the end of the relevant tax period.?Since the Law defines “tax assessment” as a “decision” issued by the FTA in relation to the payable or refundable tax, this means that, under the FTP Law, the FTA would need to both complete its investigation / audit and issue a decision concerning the tax within this five-year period if it wants to reassess tax for a tax period.

Considering that the excise tax was introduced effective from 1 October 2017, the five-year time limit is about to start time-barring the first excise tax periods.?Similarly, the statute of limitation will soon start effecting the first VAT tax periods (from 2023).?In these circumstances, the announced exceptions to the statute of limitation period will allow the FTA to continue issuing tax assessments beyond the five-year limitation period.?

The two main exceptions of interest are:

1. The FTA can issue a tax assessment (i.e. a decision about incorrect tax) after the expiration of the five-year period if the FTA has notified the taxpayer of a tax audit within the five-year period.?If such tax audit notification has been issued, the FTA has four years from the date of the notification to complete its tax audit or issue a tax assessment.
2. If the taxpayer has submitted a voluntary disclosure in the fifth year from the end of a tax period, the FTA has one year (from the date of the submission of the VD) to conduct and complete the related tax audit and to issue a tax assessment.

The main conclusions which can be gathered from these exceptions to the standard five-year statute of limitation period are:

• The FTA is likely to become more active in issuing notices of VAT and excise tax audits over the next few months in order to retain the right to reassess taxes for the earliest tax periods.
• Receiving a notice of tax audit does not mean that the audit activities will start immediately – the FTA will have four years to actually conduct and complete the audit.?This can bring long-term uncertainty to some businesses in respect of the audited tax periods.
• Under the general FTP legislation, different levels of administrative penalties apply to errors depending on when and how they are identified by the FTA – for example, penalties are lower if errors are voluntarily disclosed before a tax audit is initiated; and higher if errors are discovered, or disclosed, after the FTA has already issued a notice of a tax audit. ?Since the new statute of limitation rules give the FTA up to 4 years to complete a tax audit following a notice of tax audit, any related errors identified or disclosed during the period when the audit is still open may, in principle, be subject to the higher level of penalties.
• In contrast, the FTA will only have one year to complete a tax audit or issue a tax assessment if a business voluntarily disclosed errors in the fifth year from the end of the relevant tax period.?In combination with lower penalties applicable to errors which are voluntarily disclosed by taxpayers (before being notified of a tax audit), this shorter audit period extension clearly encourages businesses to disclose errors voluntarily, rather than wait for a notice of tax audit from the FTA.

In summary, it might be too early for businesses to breathe a sigh of relief in respect of their earlier tax periods – which, for many businesses, were the most problematic from a compliance perspective.?The introduction of exceptions to the statute of limitation indicates that the FTA is keen to continue auditing the earlier VAT and excise tax periods.

Please reach out if you wish to discuss how the VAT and excise tax changes may affect you.