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 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 activity undertook illegally to avoid customs duties and the import and export of contraband is a case of tax evasion.
Penalties for Tax Evasion in the UAE
The Tax Evasion penalties are slapped against any person or company proven to have been involved in Tax Evasion as per the Penal Code. In addition, the Federal Tax Procedures Law applicable to the UAE Value Added Tax (VAT) and Excise Tax governs all aspects related to taxes and tax evasion.
The Federal Tax Procedures Law of the UAE specifies the case for Tax Evasion offence as follows:
- Where a taxable person intentionally fails to settle any Payable Tax or related Administrative Penalties.
- Where a Taxable Person deliberately understates the actual value of his business transactions or fails to consolidate related businesses with the sole intent of staying below the required tax registration threshold.
- An individual charges and collects amounts from the customers claiming them as taxed without being registered as a taxpayer.
- A person deliberately provides false information, data and false/fake documents to Federal Tax Authority (FTA).
- A person who deliberately hides or destroys business documents or related material must maintain and provide to the authority.
- A person who deliberately misuses is involved in theft or destroy business documents or related materials already in possession of FTA.
- When a person obstructs or prevents the FTA's employees from performing their rightful duties.
- When a person deliberately reduces the tax payable through Tax Evasion or conspiring to evade tax.
The penalty for Tax Evasion in the UAE can be either a prison sentence and/or a monetary fine not exceeding five times the evaded tax amount. The penalty applies to the Authorised Signatories, company Directors, Finance, Audit and Tax team members, Tax consultants, and legal representatives proven guilty of the possible Tax Evasion. The penalty for every tax evasion case will be no less than 500 AED and does not exceed triple the value of the tax on the transaction in question.
Jaxa Chartered Accountants are one of the pioneer tax and accounting companies in the UAE, with offices spread across many Emirates. Our expert consultant ensures clients are constantly updated with the latest tax rules and regulations. In addition, we closely work with our client companies to record, pay and file relevant tax returns and avoid tax-related penalties. Please Contact Us to know more about our services. We'd be happy to help!