Tax Disputes and Litigation

22 Dec, 2023
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Ahmed Gabr

Legal Advisor, Elnaggar & Partners

Overview

  • With the application of excise tax and VAT in the UAE and Federal Decree-Law No. 47/2022 On the Taxation of Corporations and Businesses and since October 2017 and January 2018, tax is becoming a greater challenge for businesses in the region.
  • Ambiguities with the interpretation and application of the relevant laws are creating the potential for disputes between taxpayers and the Federal Tax Authority (FTA), together with other stakeholders. The penalty regime for noncompliance includes both fixed penalties and tax-geared/time-geared penalties, which present a risk for taxpayers of real costs arising in their tax compliance cycle.
  • Businesses should tread carefully, ensuring due consideration is given on a transaction-by-transaction and import-byimport basis and seek clarity, where required, to mitigate risk in this self-assessment exercise.
  • This Practice Note will deal with the various avenues available to taxpayers should they disagree with the application tax imposed by the FTA, and/or the application of the relevant penalty regime.

Definitions

  • Authority: Federal Tax Authority.
  • Competent court: The Federal Court within whose jurisdiction the Authority's head office or branch is located.
  • Tax: Any federal tax administered, collected and enforced by the Authority.
  • Tax law: Any federal law pursuant to which federal tax is imposed.
  • Taxpayer: Any person who is obligated to pay tax in the state, whether such person is a taxable person or an end consumer.
  • Taxable person: A person who is subject to tax under the provisions of the relevant tax laws.
  • Tax agent: Any person registered with the Authority in the register, who is appointed on behalf of another person to represent them before the Authority and assist them in the fulfilment of their tax obligations and the exercise of their associated tax rights.
  • Due tax: Tax that is calculated and imposed under the provisions of any tax law.
  • Payable tax: Tax that has become due for payment to the Authority.
  • Administrative penalties: Monetary amounts imposed upon a person by the Authority for breaching the provisions of Federal Decree-Law No. 28/2022 Concerning Tax Procedures or any other tax law.
  • FTA: Federal Tax Authority.
  • Refundable tax: Amounts that have been paid and that the Authority may return, in whole or in part, to the taxpayer pursuant to the relevant tax law and amounts that may be required to be used for the payment of amounts due or administrative penalties or required to carry forward to future tax periods depending on the nature of the refund, according to the tax law.
  • Tax assessment: A decision issued by the Authority in relation to the payable tax or refundable tax.
  • TDRC: Tax disputes resolution committee.
  • Administrative penalties assessment: A decision issued by the Authority concerning any administrative penalties due.
  • Notification: A notification sent to the concerned person, or their tax agent or legal representative of any decisions issued by the Authority through the means stated in Federal Decree-Law No. 28/2022 and Cabinet Decision No. 74/2023 On the Executive Regulation of Federal Decree-Law No. 28/2022 on Tax Procedures.
  • VAT: Value Added Tax.

 

Practical Guidance

Settlement of tax and penalties due

At times, taxes, such as VAT, are self-assessment taxes where taxpayers are required to declare the amount of tax due/refundable for each tax period based on their own assessment of their taxable activities. In certain instances (e.g., tax audit, import at the point of entry, etc.) the FTA or another authorised body will issue a decision to the taxpayer on the amount of tax and penalties due in respect of a particular transaction or tax period.

It is recommended that the taxpayer settle all amounts indicated within the FTA decision within the given time frame. This is the case regardless of whether or not the taxpayer agrees with the decision of the FTA.

Application for reconsideration

The taxpayer may choose to apply for reconsideration directly to the FTA, as follows:

  • within 20 business days from being notified of the decision (the date stated on the FTA decision notification);
  • detailing the rationale as to why the taxpayer believes the decision should be reconsidered, supported by legislative references and any relevant FTA publications; and
  • in Arabic only (English will not be accepted) via the FTA public website[1 p.9].

Filing an objection with the Tax Disputes Resolution Committee

In the event that a taxpayer and the FTA are not able to resolve their dispute through the reconsideration process, an objection may be submitted (currently in hardcopy) by the taxpayer to the relevant TDRC (Ministry of Justice), all of which have now been established by means of a Ministerial Resolution.

The relevant TDRC for each taxpayer will be determined based on the address that the taxpayer registered with the FTA, as follows:

  • Dubai TDRC: All taxpayers with registered addresses in the Emirate of Dubai.
  • Abu Dhabi TDRC: All taxpayers with registered addresses in the Emirate of Abu Dhabi and non-UAE addresses.
  • Sharjah TDRC: All taxpayers with registered addresses in the Emirates of Sharjah, Ras al-Khaimah, Ajman, Fujairah or Umm al-Quwain.

The conditions for submitting an objection to the relevant TDRC against a decision by the FTA are as follows:

  • settlement of all tax and penalties;
  • application for reconsideration has been submitted to the FTA (regardless of whether a response has been received); and
  • it is filed within 20 business days.

The relevant TDRC should notify the taxpayer of its decision within 25 business days (or a maximum extended period of 45 business days) and the following will apply in relation to the TDRC decision:

Objected tax plus penalties of AED 100,000 or less

  • The TDRC decision is final and there will be no ability to challenge at court.
  • A deemed writ of execution gives the FTA the ability to collect the outstanding amount (tax debt) in, for example, cash, assets or property.
  • Any taxpayer who submits a request to the TDRC for an objected total amount of AED 100,000 or less should be aware that the TDRC decision will be final and therefore should ensure that it has planned its mechanism for settling payment, in the event that the decision is not in the taxpayer’s favour.

Objected tax plus penalties exceeding AED 100,000

  • The TDRC decision may be challenged by the taxpayer or the FTA at the competent court.
  • An appeal must be submitted to the competent court within 20 business days of the date of the TDRC decision.
  • If the appeal is not submitted within the timeframe or no appeal is submitted, the TDRC decision again becomes final and enforceable by the FTA.

Objection to a competent court

The competent court to which appeals of TDRC decisions can be made is now a specialist department at the Abu Dhabi Court of First Instance, which has been established to decide TDRC tax appeals, through the issue of Ministerial Decision No. 237/2019 on the Establishment of A Specialised Chamber to Hear Tax Lawsuits at Abu Dhabi Federal Court of First Instance. Another Specialised Chamber at the Abu Dhabi Federal Court of Appeal has been established by Ministerial Decision No. 238/2019 On the Establishment of A Specialised Chamber to Hear Tax Lawsuits And Another Specialised Chamber to Hear the Requests of Disqualification of Members of Tax Committees at Abu Dhabi Federal Court of Appeal.

This specialist department comprises of senior judges who sit on the determination of tax appeals by taxpayers or the FTA. This department has full judicial authority including being able to appoint court experts to assist in the determination of tax appeals. It also seems very likely that either party could appeal a decision of the Court of Appeal department to the Court of Cassation as is the case with other civil cases.

If either party wishes to appeal the decision of the Court of First Instance, they will then have an automatic right to refer the case to the Federal Court of Appeal in the usual manner with civil cases.

While in theory the appeal process through the courts could be relatively swift and inexpensive, in practice, it could take 12 months or possibly more, which would increase costs.

This is a newly established tax disputes court process and so precedence and case law in this area will need to develop and progress over time. It is important that taxpayers who wish to appeal TDRC decisions or bring a case on a point of tax law in front of the courts, are supported by experienced UAE litigation lawyers and specialist UAE tax advisors.

Other tax disputes

Tax disputes may also arise in a contractual context between two or more stakeholders and concerning the correct tax treatment and obligations in accordance with tax law, where the TDRC is not involved. In this instance, a party will need to begin a civil claim in the Court of First Instance in the relevant emirate where the cases will progress along more traditional lines. However, court appointed experts with tax expertise will routinely be appointed and parties will also need to be prepared and have specialist tax support as well as the help of litigation lawyers. In such contractual tax disputes, there will also be the possibility of appealing decisions to the Court of Appeal (which could include the specialist department established by Ministerial Decision No. 238/2019) and ultimately the Court of Cassation.

Payments to tax authorities

For all settlements of tax and penalties made to the FTA, the following payment methods are available to the taxpayer:

  • E-Dirham, debit or credit card: This is a favourable option for domestic taxpayers, though not a viable option for an international business, in the absence of having a local branch/subsidiary. This will however attract minimal bank charges.
  • Bank transfer: This is the most effective option, however many taxpayers have experienced difficulties transferring funds from a foreign bank to a UAE GIBAN number.

A local bank account is required in order to receive refunds of tax or penalties overpaid.

Tax agents, tax advisers & litigation lawyers

Taxpayers may need local technical expertise, as listed below, in order to support them with tax disputes and litigation in the region.

  • Tax agent: A tax agent acts on behalf of a taxpayer with the local tax authority, TDRC and the competent court to prepare and/or file applications for reconsideration, objections of decisions and appeals for judgement.
  • Tax technical experts: These experts provide the necessary tax technical expertise in order to justify the taxpayers dispute on the application of tax law or the associated penalty regime. Generally, they have significant experience (e.g., 10 years or more) in the area of tax which is under dispute (e.g., VAT), including a professional tax qualification where possible (e.g., chartered tax advisor CTA), and prior experience supporting clients with tax technical matters with tax authorities.
  • Tax disputes and litigation lawyer: This type of lawyer represents the taxpayer in the competent court in defending the taxpayer’s position on the interpretation of law and application of penalties, with support from tax technical experts. Generally, they will have significant experience representing clients in the UAE courts with disputes and litigation, and/or specific tax disputes experience from other mature tax regimes.

Practical challenges and insights

Since 2019, many taxpayers in the region, across a broad range of industry sectors, have experienced the issuance of technical decisions by the FTA, together with the application of penalties, often for VAT. For some, this has resulted in higher-than-expected VAT costs in their supply chain, which is affecting their bottom line.

Depending on the tax governance strategy of a taxpayer, they may or may not have the appetite to formally disagree with a decision of the FTA in regard to tax and penalties due.

Although the UAE tax disputes and litigation process is at an early stage in its development, it is likely to progress at a quick pace, with precedence being developed. In time, it should give taxpayers more comfort on the consistent interpretation of law and the reasonable application of the penalty regime in the region. Similar to global VAT regimes, this process should ensure that the intention of tax laws are achieved.

 

Related Content

Legislation

GCC

  • Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) (the GCC VAT Agreement)

UAE

  • Federal Decree-Law No. 8/2017 On Value Added Tax
  • Cabinet Decision No. 52/2017 On the Implementing Regulation of Federal Decree-Law No. 8/2017 on the Value Added
  • Federal Decree-Law No. 7/2017 on the Excise Tax
  • Federal Decree-Law No. 28/2022 Concerning Tax Procedures
  • Cabinet Decision No. 74/2023 On the Executive Regulation of Federal Decree-Law No. 28/2022 on Tax Procedures
  • Cabinet Decision No. 40/2017 on Administrative Penalties for Violations of Tax Laws in the UAE
  • Cabinet Decision No. 23/2018 on Forming the Tax Disputes Settlement Committees, Their Work Systems and Procedures
  • Ministerial Decision No. 691/2020 On the Formation of the Tax Dispute Resolution Committees for the Emirate of Dubai
  • Ministerial Decision No. 85/2019 on the Formation of the Tax Disputes Resolution Committee for the Emirate of Sharjah
  • Ministerial Decision No. 225/2019 on the Formation of the Tax Dispute Resolution Committee of the Emirate of Abu Dhabi
  • Ministerial Decision No. 237/2019 on the Establishment of A Specialised Chamber to Hear Tax Lawsuits at Abu Dhabi Federal Court of First Instance
  • Ministerial Decision No. 238/2019 On the Establishment of A Specialised Chamber to Hear Tax Lawsuits And Another Specialised Chamber to Hear the Requests of Disqualification of Members of Tax Committees at Abu Dhabi Federal Court of Appeal
  • Federal Decree-Law No. 47/2022 On the Taxation of Corporations and Businesses

 

Ahmed Gabr

Legal Advisor
Elnaggar & Partners

 

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