Tax Audit Framework – Risk & Consequences

The Federal Tax Authority (FTA) in the UAE is empowered by federal taxation laws to conduct tax audits on individuals and businesses to ensure compliance with relevant tax provisions. A tax audit involves a thorough examination of a business's financial information, accounting records, and VAT return filings to verify accurate assessment and reporting of tax liabilities and fulfillment of other tax obligations.

The FTA has the authority to conduct tax audits without a specific reason and based on their set criteria. They may review tax returns, sales and purchase invoices, customs, and VAT documents related to import/export activities. It is important for businesses in the UAE to prepare for tax audits promptly as the FTA allows only 5 days to respond to their queries.

To be ready for a tax audit, businesses must ensure the correct determination of tax positions for transactions subject to standard rates, zero rates, and those falling outside the scope of taxation. Accurate and complete financial data should be captured in the system for the period covered by VAT returns. Proper reconciliations of VAT returns with relevant ledgers from the books of accounts and customs records should be maintained. Additionally, all supporting documents such as purchase/sale invoices, contracts/agreements, and customs records must be retained.

Here are some key points regarding tax audit procedures and the rights of audited persons during the audit process:

Tax Audit Procedures:

• The FTA may use risk-based selection criteria to determine which entities to audit.
• Tax audits can be conducted at the FTA office, company premises, or any other place where the business is conducted, goods are stored, or records are kept.
• If the audit is conducted at company premises, the taxpayer must be informed at least 5 business days prior to the audit.
• The Tax Auditor has the authority to temporarily close a business for up to 72 hours, with prior notice, in cases involving suspected tax evasion or if the closure is necessary for the conduct of the audit.
• Temporary closure of a business beyond 72 hours or visits to residences requires written consent from the Director-General and permission from a public prosecutor.
• Criminal cases can only be initiated upon application from the Director-General.
• The audited business must provide all the requested information in the format prescribed by the FTA, including invoice-level details.

Rights of an Audited Person:

• Request to see the job identification cards of Tax Auditors.
• Obtain a copy of the tax audit notification.
• Attend the tax audit if it takes place outside the FTA premises.
• Obtain copies of any original paper or digital documents seized or obtained by the FTA during the audit, following the specified procedures and within the time limits set by the Regulations.

Audit Completion:

• The FTA is required to inform the taxable person of the final results of the tax audit within 10 business days from its completion.
• If a tax assessment is performed, the audited person can access the documents and data on which the FTA based its assessment.

How MBG can help: At MBG Corporate Services, we have a dedicated team of tax agents for handling tax audits having experience in handling tax audits in UAE & various other jurisdictions in the world and can assist companies during a tax audit by the FTA in the UAE.

Stay tuned for more insights on provisions of UAE Corporate Tax Law. For any assistance, you may reach out to us by calling us at +971 52 6406240 or by emailing us at [email protected]