Businesses in the UAE have by now, adapted to conducting their operations within the new VAT regime. Although the UAE VAT Law remains relatively new and contentious with many companies continuing to grapple with the emerging issues and ultimately with the Federal Tax Authority’s (FTA) interpretation of the law.

There have been a few cases to date that involved successful challenges to the FTA’s assessment on taxes and penalties, where the UAE courts had intervened with a literal interpretation of the provisions of the law.

In a recent decision by the Abu Dhabi Court of First Instance, which was successfully obtained by Baker McKenzie Habib Al Mulla in favor of a UAE based company, the Court upheld an appeal against fines and penalties of approximately AED 20 million imposed by the FTA in respect of a voluntary disclosure made by the company. The Court also ordered that the FTA repay the amount to the company.

With many companies finding themselves in similar situations, the judgement is critical and a market-first in many respects. It is one of the first few successful tax appeals against a decision by the Tax Dispute Resolution Committee (TDRC) and also one of the first few tax appeal cases to be referred to court appointed experts.

The company submitted a voluntary disclosure before the FTA in relation to certain services for which the applicable VAT rate was uncertain, and paid the tax as part of that submission. However, in addition to the fines and penalty prescribed under the Tax Procedures Law with respect to voluntary disclosures, the FTA imposed administrative penalties applicable to late payment of taxes in submitted returns or notified assessments. The FTA rejected the company’s request to reconsider the imposition of additional fine and penalty for late payment of tax.

Following the laid down appeals process, the company raised an objection before the TDRC. The TDRC dismissed the objection on procedural grounds, without considering the substantive issue of whether or not the FTA was right to impose the additional fines and penalty. The company subsequently appealed to the Abu Dhabi Federal Court of First Instance.

The Court’s main argument was that the Tax Procedures Law distinguishes penalties for late payment of tax as shown in submitted returns or notified assessments, from fines and penalties applicable to voluntary disclosures. Thus, the FTA was wrong to impose both sets of penalties on the company instead of only the specified penalty applicable to voluntary disclosures. The Court considered the substantive issues in full.

Following its referral of the case to an appointed expert, the Court decided on 7 April 2020 to:

  • admit the challenge claim in form;
  • reverse Decision of the Tax Settlement Committee in Dubai;
  • obligate the FTA (the Defendant) to repay the penalty to the company (the Plaintiff) in the amount of AED 19,897,345; and
  • dismiss all other motions.

The Court’s full reasoning is set out in the Annex hereto.

Challenge process

This case follows a successful judgement against the FTA on tax penalties amounting to AED 20.8 million levied on a Dubai based beverage distributor, on which Baker McKenzie Habib Al Mulla had acted for the company before the FTA Reconsideration Committee, the TDRC and the UAE Federal Courts. The TDRC found that the company only owed AED 8.8 million in taxes, rejecting the FTA’s claim and ordering it to repay the company the extra AED 11.9 million.

These judgments demonstrate that although tax is relatively new in the UAE, there is a robust judicial system in place to safeguard the application of the tax legislation and regulations in cases where taxpayers challenge the FTA’s position on tax matters. When challenging the FTA’s levies, taxpayers should adhere to the specific procedures and timeline for recalculations, re-considerations and objections before the TDRC and the relevant UAE courts.

We are happy to support you throughout the challenge process in relation to your tax dispute and litigation matters. For further information, please contact Mohamed El Baghdady and Reggie Mezu of the UAE Tax team or your usual Baker McKenzie contact.

This alert is prepared by Mohamed El Baghdady (Senior Associate, Tax Litigation, Dubai) and Reggie Mezu (Senior Tax Counsel, Dubai).
Author

Mohamed El Khatib is the UAE Head of the Litigation practice of Baker McKenzie Habib Al Mulla, based in Dubai. Mohamed has over 25 years’ experience (including over 17 years in the UAE) in litigation across a number of industries and areas of UAE law including criminal, civil, banking, corporate disputes, real estate, construction and employment.

Author

Mohamed El Baghdady is a senior associate in the Dispute Resolution Practice Group of Baker McKenzie Habib Al Mulla, based in Dubai. He is experienced across a number of specialized areas including civil, commercial and criminal law, energy and infrastructure, corporate disputes, real estate, construction, employment, intellectual property and tax.

Author

Reggie Mezu is a Senior Special Counsel in Baker McKenzie Habib Al Mulla, based in Dubai. He has practiced tax for nearly 30 years in the Middle East, Africa and Europe, including in the UAE for 15 years. Reggie regularly advises clients on tax planning, corporate structuring, cross-border transactions, double tax treaties, reform and development of fiscal frameworks, general advice, and most recently, the new value added tax (VAT) regime in the Gulf region.

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