UAE Supreme Court rules on removal of sanctions in case of procedural irregularities

In the case decided by the UAE Supreme Court, a taxpayer submitted tax returns for taxable periods beginning in January 2018. The tax returns related, on the one hand, to supplies in connection with real estate owned sole­ly by the taxpayer and, on the other hand, to real estate owned in partnership with another person. The partner's name was not initially included in the tax registration because his name did not appear as the owner of the real property. During an audit, at the direction of the Federal Tax Authority, the taxpayer registered a new account with his partner and resubmitted tax returns under the new account. 

 

The Federal Tax Authority then imposed a late penalty on the taxpayer. The late payment penalties imposed by the authority on the refiled tax returns extend to January 2018. Federal Tax Authority argued that it was only when the tax returns were re-filed, taking into account the partner, that the tax return was correct. In the opi­nion of the Federal Tax Authority, the first tax return filed on time suffered from procedural and formal errors due to the lack of registration of the partner.

 

The taxpayer initiated legal action against this decision of the authorities. The UAE Supreme Court has now ruled that the imposition of a late penalty was wrongful. The registration of the new account had not resulted in any damage to the treasury because the taxpayer had originally filed and also paid all tax returns, including those relating to the real estate in partnership, in a timely manner within the legally prescribed times. The procedural defect does not change this, as this is not a circumstance in which payments have not been made.

 

According to the Supreme Court the tax procedure serves the purpose of collecting the tax owed by law and are not an end in themselves. The authority had to take into account the procedurally incorrectly filed and later corrected tax returns. 

 

This new legislation limits the ability of the Federal Tax Authority to impose penalties where procedural defects have occurred. Before imposing a penalty for the existence of a procedural defect, the Federal Tax Authority must consider whether the purposes of the tax procedure have been fulfilled despite the procedural defect. If, despite a procedural defect, the tax owed by law can be collected, the authority may no longer impose sanctions.