Unravelling the updated voluntary disclosure rules

Introduction

To VD, or not to VD? That is the question.

Mistakes can be made while filing tax returns, and taxpayers often find themselves facing decisions about how to disclose these errors to the Tax Authorities, i.e. whether to file a voluntary disclosure or correct errors in the next VAT return (most tempting as no penalties expected).?

From 1 March 2023, Federal Decree-Law No. 28 of 2022 on Tax Procedures (“new FTP Law”) has repealed and replaced the earlier Federal Law No. 7 of 2017 on Tax Procedures (FTP Law of 2017).? One of the most notable changes in the new version of the Law is the new clause (5) of Article 10, which states that a voluntary disclosure (“VD”) must be made in respect of an error in a VAT return where the error has not resulted in any difference in the amount of due tax. ?This is departure from the old version, which only required a VD where payable tax was understated or where a refund application is overstated.

Notwithstanding that the new provision has technically already come into effect, the FTA’s portal still does not allow for such VDs to be made in practice and there is incomplete understanding of how the new rules may be interpreted.? In these circumstances, it may be interesting to explore some questions that ought to be considered when evaluating the application and implementation of Article 10(5).?

What errors must be disclosed under Article 10(5)?

New Article 10(5) of the new FTP Law requires a VD where an error in a tax return does not result in a difference in the due tax.

At this point, it is important to note that “due tax” is defined in the FTP Law as “tax that is calculated and imposed under the provisions of the Tax Law”.? In the VAT context, this means that due tax effectively refers to output tax that is imposed on supplies or imports under VAT legislation.

In Public Clarification TAXP005 on Issuance of a New Tax Procedures Law, the FTA provided examples of two scenarios which will be covered by the new requirement to make a VD.?

Firstly, a VD will be required in respect of supplies which are reported against incorrect Emirates in Box 1 of a VAT return – for example, where standard-rated supplies related to Dubai were incorrectly reported as made in Abu Dhabi.? Such reporting errors do not impact output tax, and therefore naturally fall into the ambit of Article 10(5).

Secondly, a VD will also be required in respect of incorrect amounts reported for supplies in Boxes 1 to 7, even where the VAT amount was correctly reported.?

While Public Clarification TAXP005 does not expand on the latter example, arguably, the main example of such errors is reporting incorrect values of exempt or zero-rated supplies and imports – given that in certain situations such errors can impact the calculation of input tax apportionment percentages of the taxable person, i.e. their reporting in the correct VAT period may have significant impact on the overall input tax which can be claimed.?

There is a question, however, whether Article 10(5) is only intended to capture errors made in relation to outputs, or if it also covers any errors related to inputs – after all, input-related errors in VAT returns would also result in “no difference in the amount of Due Tax”.? As a consequence, it is possible to claim that any error in respect of reported inputs should automatically require a VD under Article 10(5).

While presumably this is not the intention of the legislation and VD would only be required under Article 10(5) in respect of errors related to outputs, it would be useful for the FTA to clarify this point since it would have significant impact on VD obligations.

Is AED 10,000 threshold still in force?

Introduction of a requirement to make a VD for any error in a VAT return where there is no difference in the amount of due tax, brings about a question of whether Article 8 of the Executive Regulation of Federal Law No. 7 of 2017 on Tax Procedures (“FTP Regulations”) still applies.?As a reminder, Article 8(2) allows taxable persons to correct errors in the next VAT return (rather than having to do a VD for the respective tax periods) where the difference in the payable tax reported in the submitted VAT return was less than it should have been by not more than AED 10,000.

Although it may be assumed that the requirement in new Article 10(5) to file VDs for nil differences effectively eliminates the AED 10,000 threshold completely, this might not actually be the case.

Thus, although the FTP Regulations were drafted to accompany the now-repealed FTP Law of 2017, the new FTP Law specifies that the FTP Regulations remain in force insofar as they do not contradict the provisions of the new FTP Law. ?On review, Article 10(5) and Article 8(2) do not directly contradict each other since they are triggered by different factors:

• Article 10(5), as discussed above, triggers an obligation to file a VD where an error has not resulted in any difference in the amount of due tax. ?Since “due tax” refers to output tax collected in respect of supplies and imports, no obligation to file a VD would arise in situations where an error did result in a difference in due tax.
• Article 8(2), on the other hand, provides an exception from the obligation to file a VD if the payable tax is underreported by not more than AED 10,000. ?The FTP Law defines “payable tax” as “tax that has become due for payment to the Authority”, and in VAT context, means the difference between the output tax and input tax in the VAT return (which becomes the amount that is either payable to the FTA or refundable from the FTA).

Since the two rules have different triggers and do not directly contradict each other, there will be scenarios when an exception from the obligation to file VDs should still be applicable – i.e. where an error or errors do give rise to a difference in due tax (e.g. incorrect application of tax rates or omission to report standard-rated supplies) while simultaneously resulting in under-reporting of payable tax by not more than AED 10,000.? In contrast, any error that does not result in a difference in due tax should be disclosed voluntarily.

It would, of course, be helpful if this issue, including various error and disclosure scenarios, was expressly clarified and confirmed to avoid inconsistencies in the application of the rules.

Further, it is worth noting that while it is anticipated that the current FTP Regulations will be officially replaced by updated Regulations in near future, the expectation is that the exception from the requirement to make VDs for errors below certain payable tax threshold is likely to stay. ?Retaining such an exception would align with both international experience, which shows that requiring VDs for small amounts is not only inconvenient to taxpayers but also costly to tax authorities, and with the general direction of the recent tax developments in the UAE, which aim to reduce compliance burden on taxpayers.?

Is it possible to make a VD?

The questions above go hand-in-hand with the application of the new rule.?Perhaps meaningfully then, currently the FTA’s portal does not actually allow to submit VDs where there is no difference in the payable tax of more than AED 10,000.? As such, although the new VD requirements came into effect on 1 March 2023, it is not currently possible to make such a VD.

While this delay may simply be the outcome of technological changes required to be made to the FTA’s systems, it may be just as likely that it is due to the intent to align the timing of the implementation of the VD mechanism on the FTA’s portal with the release of the updated FTP Regulations.? If the latter is correct, then hopefully taxpayers will receive official clarifications on the above questions before they have to (and are able to) file their first VD under Article 10(5).

In this respect, it is worth noting that there does not currently appear to be a legislative deadline for having to make a VD purely for errors that result in no difference in due tax – thus, the 20-day deadline in Article 8 of the current FTP Regulation does not appear to apply unless there is a difference in payable tax (which would not be the case for an error that does not impact due tax at all).? As such – though this is yet to be formally confirmed – it is possible that there would be no penalties for not filing VDs solely under Article 10(5) until such time that the new FTP Regulation is released.

Conclusion

The introduction of Article 10(5) requiring voluntary disclosures for errors that result in no difference in due tax has been rightfully viewed as one of the more significant amendments in the new FTP Law.?However, although the new rule has potential to directly impact a broad range of taxable persons, there are still some remaining uncertainties in respect of its application and implementation.

Nevertheless, as the intention and the broad application of the new rules are clear, it is important that taxpayers have started identifying errors in VAT returns that resulted is no difference in the amount of due tax – even where it is not possible to voluntarily disclose such errors at the current time, the disclosures will ultimately still be required after the FTA eventually updates the portal to open the VD process in this case.