Getting Audited for Corporate Tax in the UAE: A Comprehensive Guide

The UAE implemented a new corporate tax regime for businesses recently. All companies have to file detailed tax returns and ensure timely tax compliance. To enforce discipline, the Federal Tax Authority (FTA) conducts rigorous inspections of company finances called “tax audits.”

Getting picked for an audit can be unnerving for businesses. However, understanding audit triggers, processes, guidelines and managing them via focused preparation can make navigating them easier. This comprehensive guide examines what business owners should expect from corporate tax audits in the UAE.

What Triggers a Corporate Tax Audit?

The FTA selects companies for audits based on four key parameters:

1. Random Selection

• The tax authority picks a few companies at random every year for audit
• Even the most compliant business can get unlucky if chosen in this lottery
• So all companies should always maintain organised financial records

It also uses a risk based approach where companies with complex structures, high turnover, or operating in high-risk sectors are more likely to be chosen.

For example, ABC Contracting LLC filed accurate returns and paid due taxes on time. Yet the computerised selection process included them for audit scrutiny.

2. Tax Return Discrepancies

• If tax returns contain major errors, information gaps or discrepancies, audit risk rises
• Red flags include – mathematical mistakes, unpaid taxes, or declared income much lower than expected

Say a restaurant reported AED 500,000 in revenues but tax payments done only for AED 100,000. This gap will lead to an audit.

3. High Risk Sectors

• Sectors like construction, real estate, trading have complex tax laws
• The FTA closely monitors such sectors through regular tax audits

For instance, a jewellery trading company in Dubai is audited almost every year due to frequent cases of customs duty evasion or transfer pricing manipulation in that sector.

4. Whistle blower Complaints

• Complaints by employees on financial/tax irregularities compel FTA to audit
• These are investigated to check if accusations like tax evasion have basis

If a hotel staffer complains of owners accepting cash payments but not billing those sales, the tax department will inquire.

Therefore companies have limited control over audit triggers, barring improving compliance. Now let’s understand audit preparation.

Preparing for a Tax Audit

When selected for audit, staying organised is key for speedy closure:

Gather Relevant Financial Documents

• Collect financial statements, contracts, invoices, transaction proof, tax returns for all years in audit scope
• Maintain files neatly segregated by departments, years, document types

For example, have all 2019 purchase invoices from suppliers in one labeled folder. Keep them ready for auditor scrutiny.

Review Past Tax Returns

• Check previous tax return filings for accuracy
• Identify and fix errors that could attract penalties like incorrect tax calculations

In the case of the restaurant above, refiling updated returns with actual revenues for past years will demonstrate positive intent.

Appoint Tax Representative

• Engage an accountant/tax consultant to act as audit liaison
• They directly coordinate with FTA auditors on company’s behalf
• Helps minimise business productivity loss during lengthy audits

Leveraging an expert tax advisor reduces audit stress for the hotel owners by letting them focus on operations.

Proactively Minimising Corporate Tax Audit Risk

Businesses can proactively implement measures to reduce chances of triggering tax audits and minimise potential penalties by:

Maintaining Robust Internal Financial Controls

• Ensure proper segregation of financial duties with checks and oversight
• Perform regular account reconciliations
• Maintain well-organised records for easy retrieval

Formalizing Transfer Pricing Compliance

• Document transfer pricing methodology aligning with FTA’s arm’s length principle
• Seek advance agreements where possible

Conducting Periodic Tax Risk Assessments

• Identify risk areas in tax accounting, reporting, payments
• Evaluate controls and address gaps transparently

Stringent Penalties for Tax Audit Non-Compliance

The FTA imposes stringent financial penalties for violations identified during a tax audit, including:

Late Submission Penalties

Fines of AED 200 daily up to AED 10,000 apply for late filing as per due dates

Non-Compliance Penalties

Warnings or fines up to AED 50,000 for record-keeping, documentation lapses

Underpaid Tax Penalties

Outstanding tax dues incur 5% annual interest plus penalty equal to the tax shortfall

Post-Audit Recourse for Disagreements

In case of disputes regarding audit findings, entities can file objections and appeals along with supporting documentation requesting reassessment from the FTA as per process.

Now let’s break down the typical audit process steps.

The Tax Audit Process Step-By-Step

Corporate tax audits involve the following key stages:

Stage 1 – Audit Intimation

• Formal notification sent by FTA via letter or email
• Details taxes, financial years to be examined

The audit notice periods can range from 3 to 6 past financial years.

Stage 2 – Information Request

• Auditors seek all supporting documents through detailed request list
• Must submit within deadline – usually 30 days

Information sought includes financial statements, inventory lists, purchase invoices, bank statements etc. related to sales/revenues, expenses, assets etc.

Stage 3 – In-person Verification

• Involves site visits to inspect inventory, warehouses, offices etc.
• Face-to-face meetings for auditor queries

In-person verification builds further clarity for auditors on the actual scale of business operations to compute expected tax obligations.

Stage 4 – Examination of Records

• Submitted records scrutinised in detail
• Auditors analyse if tax calculations, payments, and reporting comply with laws
• Focus areas – revenues, expenses, deductions, losses, taxes paid
• For example, purchase invoices may get cross-verified with supplier contract values to check for consistency.

Stage 5 – Audit Findings

• Company receives preliminary audit findings
• Outlines non-compliance problems identified and additional tax liability
• Get tax consultant help to review and refute unfounded observations
• If the auditors allege the restaurant suppressed sales without basis, the owners can argue the revenues matched past filings.

Stage 6 – Final Resolution

• FTA issues final audit order after considering all company representations
• Specifies timeline for payment of extra taxes plus penalties
• Interest levied at 5% yearly on unpaid taxes
• The hotel owners may have to pay penalties up to 300% of evaded taxes per law if complaint allegations are proven.

Stage 7- Payment and Audit Closure

• Company pays additional tax liability / penalties
• Tax audit gets formally concluded
• Payment has to be made within deadline, failing which bank accounts may be frozen.

With the process clear, let’s discuss optimal compliance strategies.

Strategies for Smooth Audits

While tax audits are unnerving, some basic discipline helps cooperation:

Respond Quickly

• Reply to all queries and submit all documents within stipulated time
• Delay can signal financial mismanagement – red flag for auditors
• The jewellery trader should submit all purchase and sales details sought within 30 days to avoid scrutiny escalation.

Adopt Positive Approach

• Don’t be adversarial – treat auditors as partners, not enemies
• Stay calm – answer questions transparently
• The restaurant owners should patiently explain actual revenues through supportive documents.

Maintain Organized Records

• Proper documentation trail lends credibility during audits
• Validate expenses, deductions, inventory, sales, taxes paid
• For the hotel, documenting cash sales through video graphic evidence and corresponding POS machine records will help fend off allegations.

Therefore, the key is financial discipline – organising records, minimising errors, cooperating fully and consulting experts. This helps companies survive audits with minimal disruption or penalties.

While occasional cases may lead to prolonged litigation, following regulations and showing positive intent aids faster closure in most instances.

Conclusion

Corporate tax audits are now integral governance checks under the UAE’s new tax regime. Managing them via robust documentation, transparency, timely compliance and expert guidance helps businesses demonstrate good financial hygiene.

Treat audits as opportunities to strengthen internal controls rather than confrontations. Keep your documents audit-ready year-round.

Stay current on changing tax laws. And work closely with consultants and auditors when selected for inspection. This clean approach will go a long way in minimizing audit anxiety or hassles for your company.

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