What Are the Tax Evasion Penalties in the UAE?

Businesses around the world favour those jurisdictions which provide a conducive ecosystem to sustain and achieve business growth. Welcoming foreign companies to invest and grow is mutually beneficial to both companies and countries. A fair and transparent business ecosystem with adherence to various global standards is one of the major factors in gaining the companies’ trust. As one of the top investment destinations, UAE has a robust legal infrastructure and penal system to ensure fair competition and transparency.

Tax Evasion

Tax evasion can be considered as an illegal activity wherein a person or company deliberately misses paying a true tax liability. Tax evasion involves hiding actual income, proof-less inflation deductions, under-reporting cash transactions etc. Tax evasion can invite criminal charges and substantial penalties for authorities.

The main difference between the terms tax evasion and tax avoidance is that tax evasion involves using illegal methods to avoid paying current taxes. In contrast, tax avoidance involves legal means to lower the tax obligations of a company. Tax evasion is often considered an intentional individual offence, while tax avoidance is regarded as a corporate practice. Other features of Tax evasion are as follows:

• The cases wherein complete non-payment or underpayment of actually calculated tax liabilities are considered tax evasion offences.
• It is important to note that any person or an entity is not considered guilty of any possible tax evasion unless the failure of the party to pay tax is deemed intentional. The company’s financial situation was then thoroughly examined by authorities to confirm whether the non-payment of tax resulted from committing fraud or hiding reportable income.
• A failure to pay tax may be considered fraudulent in cases where the taxpayer made efforts to hide assets by associating them with a person or entity. An individual is judged as hiding income when failed to report work that did not follow regular payment recording methods.
• Some business owners undervalue the total sums of their receipts to the authorities deemed to be the case of purposeful evasion of tax.

Typical Cases of Tax Evasion

Below are a few of the cases when tax evasion occurs:

Failing to Pay Tax & Filing incorrect Returns

When a person or a company files tax returns periodically, they may submit false or incorrect details to either lower the tax or not pay any tax, which will be considered a tax evasion offence.

Inaccurate Financial Statements of Companies

A typical tax evasion case occurs when a company intentionally submits false financial records or accounts books to report incomes less than earned to lower taxes.

Fake Documents for Exemption

It occurs when an individual or an entity submits fake documents to claim tax exemptions from the authorities at the time of return filing to justify the lower tax amount paid or get tax refunds from the authorities.

Storing Wealth outside the Tax Jurisdiction

Tax evasion happens when the undeclared taxable income is safeguarded in the Offshore accounts outside the taxable jurisdiction, and information in these accounts is not disclosed to the income tax department.

Smuggling

Smuggling activity undertook illegally to avoid customs duties and the import and export of contraband is a case of tax evasion.