Corporate Tax Audits in the UAE: How to Prepare and Avoid Common Mistakes and Avoid Penalties?
Preparing for an FTA tax audit not only mitigates risks but also helps businesses maintain smooth operations during the process. It is one of the important aspects when we talk about tax and compliance in the UAE.
In this blog, we will be able to understand what a Corporate Tax audit is, and what is the steps or processes to prepare for a tax audit, let us dive into the common mistakes while preparing for a Tax Audit and how to mitigate such risks.
What is a Corporate Tax Audit?
A corporate tax audit is conducted by an authorized official person from FTA. They conduct this inspection to make sure all the companies comply with tax regulations as well as they do their filings with tax liability payments on time before deadlines to avoid penalties.
Steps involved in preparing for Corporate tax Audit as below:-
* Submission of corporate tax return filing on time.
* Maintain financial records and supporting documentation as per the transactions incurred during the year and comply with the regulations.
* Always consult tax experts while filing Corporate Tax returns
1. Maintain Comprehensive Records
* Financial Statements: Income statements, balance sheets, and cash flow statements prepared by IFRS
* Maintaining comprehensive records does not mean we just have to prepare a balance sheet and keep it for our records, It also means we should have a copy of all the Corporate tax filing which has been submitted with complete supporting which we should keep least for 7 years after the relevant tax year ends.
* All sales and purchase invoices are to be kept with expense invoices which are claimed as allowed expenses under UAE Corporate Tax Law.
* The filing of corporate tax should match with bank transactions so bank statements also play a very important role here.
* The filing of corporate tax should match with bank transactions so bank statements also play a very important role here.
2. Organize Supporting Documentation
The Taxable person needs to make sure whatever is happening in the business has all the supporting documents it can if we are applying for any penalty waiver, can be taking any type of exemption
* Proof of exempt income, such as Free Zone certificates or dividend declarations.
* Evidence of foreign tax credits or paid taxes in other jurisdictions.
* Contracts and agreements for related-party transactions.
3. Conduct Internal Reviews
Conducting internal review for the Tax filing which may include as below:-
* Reconciling financial statements with tax returns.
* Verifying what the expenses we have shown as non-deductible expenses are is as per the law.
* We must conduct internal reviews regularly so that we are not missing out on any of the supporting or are aware of what we need to claim or what we should not.
* Making sure that if we have related party transactions it's as per the transfer pricing regulation.
4. Ensure Compliance with Deadlines
You must be aware of our corporate tax filing deadlines and ensure that we submit our Corporate Tax Returns on time to avoid late penalties. In addition to filing corporate taxes, any tax liabilities must also be paid by their deadlines to prevent incurring late payment charges. Failure to file tax returns on time will result in a penalty of AED500* per month within in first 12 months, after the 12th month the penalty amount will increase to AED1000* per month.
There are only 2 situations where the taxable person can apply for a refund;
a) In case of any withholding tax credit
b) In case the taxable person paid excess tax than it should have been.
5. Train Key Personnel
You should make sure that your finance and accounting teams on UAE Corporate Tax laws and FTA requirements. So that they are aware of all the deadlines and penalties if not submit on time. They should be able to check or Use the Emara tax portal.
Common Mistakes to Avoid During a Tax Audit
1. Inadequate Record-Keeping
One of the most important aspects of a tax audit is maintaining documents or supporting needed for corporate tax filing as well as the same would be requested during the inspection, so it is important that always be assured that you keep all the records with supporting and nothing is missed out.
2. Errors in Tax Filings
We should make sure that we are aware of the complete procedures of corporate tax filing and that we know what expenses we can show as deductible, and what should be exempted as per the law. If needed we can take a piece of advice or assistance from any tax experts who can do correct corporate tax filing which will avoid penalties.
3. Non-compliance with Transfer Pricing Rules
Transactions with related parties must comply with the arm's-length principle. Non-compliance can result in adjustments and penalties. All transactions made related to a related party and connected party should be as per arm's length price. For example, selling a car to a relative or selling a car to a third person in the market should be as per the Market; the transaction should be justifiable as per the law.
4. Overlooking Deadlines
Any non-compliance can result in hefty penalties and as a business owner, you must be aware of the deadlines as well as the compliance requirement under UAE Corporate Tax
5. Lack of Audit Readiness
Being unprepared for an audit can delay the process and create unnecessary stress for the business.
Steps during Corporate tax Audit
There are various steps involved during the corporate tax audit such as giving them the notification of inspection, requesting the documents, and supporting as per financial statements. If they find there are documents or supporting are missing the authority would give them time to request the said requirements with a deadline.
How Flying Colour Tax Consultant LLC Can Help
Preparing for an FTA tax audit requires always experienced professionals. At Flying Colour Tax Consultant LLC, we offer:
* Audit Preparation Services: Ensuring your records and filings are audit-ready.
* Tax Compliance Reviews: Conducting internal reviews to identify and rectify discrepancies.
* Documentation Support: Assisting with organizing and maintaining required documents.
* Audit Representation: Liaising with the FTA on your behalf during the audit process.
With our professional support, businesses can navigate tax audits confidently and maintain compliance with UAE Corporate Tax laws.
To learn more about UAE Corporate Tax: Audit Preparation and Common Error, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.