Accumulated VAT credits

As we approach five years since the implementation of Value Added Tax (VAT) in the United Arab Emirates (UAE), we have seen in practice that many taxpayers have accumulated VAT credits which remain unclaimed from the Federal Tax Authority (FTA). For taxpayers to receive the VAT credits from the FTA in cash, a separate VAT refund request is required to be submitted, which will be verified by the FTA prior to approval. It is therefore important that the underlying data should be compliant and that the original VAT returns are filed as per the current UAE VAT legislation.  

Key areas of consideration for accumulated VAT credits

Many businesses have allowed VAT credits to accumulate while reviewing the accuracy of their historic filling positions. The FTA raises a number of queries during the refund verification process, which can lead refunds to be rejected until businesses take action and file Voluntary Disclosures (VDs) to rectify historic errors. Whilst refund requests can be resubmitted after initial rejection by the FTA, restarting the process increases the time taken to obtain refunds in cash and may exacerbate management of working capital positions.

Additionally, the Federal Tax Procedures Law specifies the statute of limitation in Article 42, which confirms that (except in cases of tax evasion) the FTA may not conduct a tax assessment after the expiration of five years from the end of the relevant tax period. However, in recent amendments to the Federal VAT Decree-Law No. 8 of 2017 (UAE VAT Law), which takes effect from 1 January 2023, an extension to the time limit for the FTA to conduct audits into prior VAT periods is a significant change. 

According to the new article, where the FTA provides notice of an audit within five years of the end of the relevant tax period, the FTA may conduct an audit within four years from the date of notification. This significantly expands the potential window for the FTA to conduct a tax audit and means that the FTA in theory has a window of nine years from the end of a tax period to conduct an audit, if the audit notification is provided by the end of the initial five year period. The updated VAT Law makes it clear that a taxpayer may not submit a VD to correct any errors identified more than five years from the end of the tax period, therefore it is important that taxpayers review the earliest tax periods to confirm their accuracy. 

We recommend this includes submission of a request for refunds to be paid out where applicable, as corrections to the refund requested for the tax period will not be possible via VD after five years have passed. Notwithstanding the above, we have observed that the frequency of tax audits is increasing as the FTA focuses on reviewing the accuracy of tax returns filed from 1 January 2018 onwards and ensures that tax assessments can be raised before these periods fall out of time for audit. It is yet to be seen how the FTA will respond to refund requests for these earliest tax periods following the expiry of the statute of limitation, and therefore it is recommended that taxpayers should consider submitting VAT refund requests in connection to the earliest tax periods of calendar year 2018 prior to the expiry of five years from the end of the tax period. 

Note that VAT refund requests usually trigger information requests from the FTA, and multiple information requests may be required in order to conclude the refund approval process. The FTA's stipulated deadline for the provision of information is usually 3 to 5 business days. As a result, businesses should ensure their data is organized in the format requested by the FTA, and that their likely document samples are prepared, in order to ease the process of responding to the queries raised by the FTA. 

Key steps of the VAT refund process for registered taxpayers 

1. Submit an application: Submit the VAT refund application on the user portal along with the supporting documents. As mentioned above, prior to the submission of a VAT refund request, taxpayers should thoroughly review data schedules and documentation to avoid any risk of rejection or exposure to a greater degree of scrutiny by the FTA for certain transactions.
2. Notification: An automated notification from the FTA will be sent to the taxpayers’ registered email ID’s.
3. Requests for information (if applicable): Any follow up questions will also be communicated via email or telephone call by the reviewing FTA officer. It is often the case that multiple requests for information may be made by the FTA during the course of the refund request review. After responding to a request for information, the FTA will usually respond within 20 working days to either request further information or to approve or reject the refund.
4. Completion of the process: Once the process is completed, the taxpayer will receive a VAT refund within 5 business days following the approval

How Deloitte can help

Our Indirect Tax team has an in-depth understanding of the tax risk management and the FTA’s likely approach to potential errors. This knowledge has developed over time since the introduction of VAT, allowing our tax experts to provide businesses with pragmatic insight on the best ways to proactively manage tax risks and release cash refunds from the FTA.  

Our team of specialists can support businesses with the preparation of data schedules up to the submission of VAT refund request(s), the review of data and the identification of areas that are likely to be challenged by the FTA prior to submission. They are also able to support in rectifying historic issues that have been identified and can manage follow-up requests from the FTA to support businesses in receiving refund approvals. 

The Deloitte Indirect Tax team has supported a large number of businesses in receiving their cash refunds of VAT credits from the FTA and their approach is tailored to the specific circumstances and requirements of each business.