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Tax Fraud and Tax Evasion

What is Tax Fraud?

  • Tax fraud indicates that the taxpayer or company intentionally defrauded the government by not paying taxes that are lawfully due.
  • It occurs when the taxpayer intentionally fails to pay taxes that are due, thereby defrauding the government of the money owed to it. Not only does the FTA have to prove that the taxpayer failed to pay the required taxes, it must also show that the taxpayer intended to fail to pay. Not surprisingly, this is a high burden of proof for the government.
  • Unlike taxation law where the onus of proof is on taxpayer, when it comes to fraud the onus of proof is on the government to proof taxpayer is guilty as tax fraud falls under criminal law.

 

Examples of Tax Fraud:

  • Tax evasion;
  • Using incorrect information on VAT return;
  • Changing company name;
  • Not filing VAT return;
  • Changing details of key persons on VAT return;

What is Tax Evasion?

  • Tax evasion is a subset of tax fraud. The term tax evasion is used in a criminal context, and occurs when the taxpayer deliberately misrepresents taxable income and defrauds the government. Deliberate misrepresentation can take the form of not declaring all applicable income, overstating expenses and deductions, making false claims, or simply failing to file tax returns. Each of these actions involves intentionally falsifying documents.
  • Tax Evasion: The use of illegal means by a Person resulting in lowering the amount of Due Tax, non-payment of the Due Tax or a refund of Tax that he does not have the right to have refunded under the Decree-Law.

 

Examples of Tax Evasion:

When determining whether tax fraud or tax evasion has taken place, the FTA will look for suspicious activity. These can include:

  • Concealing or understatement of income;
  • Inadequate record keeping;
  • Failure to cooperate with tax authorities;
  • Creating false or misleading receipts;
  • Altering checks;
  • Falsifying documentation;
  • Artificial separation;

 

Tax Evasion Penalty – Administrative Penalties

  • THE AUTHORITY is also empowered to issue administrative penalties assessments against a Taxable Person and must notify him of such within 5 business days should the said person be in violation of an administrative procedure listed in Art. 25 of the Tax Procedure Law.
  • Administrative penalties are levied in such situation: taxable person fails to keep the required tax records, taxable person fails to submit data, records and documents related to tax in Arabic to THE AUTHORITY when requested, The taxable person fails to inform THE AUTHORITY of any circumstance that require an adjustment of the information pertaining to his tax record kept by THE AUTHORITY;
  • Such administrative assessments carry specific administrative penalties in respect of each violation, which shall be no less than AED 500, but shall not exceed three times the amount of tax due in respect of which the administrative penalty was levied. (Art. 25(3) of the Tax Procedure Law);

 

Penalties for Tax evasion – Examples of Administrative penalties

  • 76 of the VAT Law sets out the position regarding Administrative Penalties Assessments.
  • The failure of the taxable person to submit a registration application within the timeframe specified in the Tax Law – AED 20,000.
  • The failure of the person conducting business to submit the data, records and documents related to tax in Arabic to THE AUTHORITY when requested – 20,000.
  • The failure of the Registrant to inform THE AUTHORITY of any circumstance that requires the amendment of the information pertaining to his tax record kept by THE AUTHORITY -5,000 for the first time, 15,000 in case of repetition.
  • The failure of the registrant to submit the tax return within the timeframe specified
  • in the Tax Law – 1,000 for the first time, 2,000 in case of repetition within 24 months.

 

Tax Evasion Penalty – FTA penalties

  • In addition to the administrative penalties, THE AUTHORITY can impose a tax evasion penalty, in the form of a prison sentence, a monetary penalty (not exceeding 5 times the amounts of tax evaded) or a combination of the two, with respect to the following instances, when:
  • A taxable person deliberately fails to settle any payable tax or administrative penalties;
  • A taxable person deliberately understates the actual value of his business or fails to consolidate his related businesses with the intent of remaining below the required registration threshold;
  • A person charges and collects amounts from his clients claiming them to be tax without being registered;
  • A person deliberately provides false information, data and incorrect documents to THE AUTHORITY;
  • A person deliberately conceals or destroys documents or other material that he is required to keep and provide to THE AUTHORITY;
  • A person deliberately steals, misuses, or causes the destruction of documents or other materials that are in the possession of THE AUTHORITY;
  • A person prevents or hinders THE AUTHORITY’s employees from performing their duties; or
  • A person deliberately decreases the payable tax through tax evasion or conspiring to evade tax.
  • The competent court shall impose the said tax evasion penalties against other persons who were directly involved or instrumental to the carrying out of any of the listed tax evasion, provided that THE AUTHORITY has proven such direct involvement. Any person who is proven to have been directly involved or instrumental in Tax Evasion pursuant to Art 26 (3) shall be jointly and severally liable with the Person whom he has assisted, to pay the Payable Tax and Administrative Penalties. (Art. 26(3)-(4) of the Tax Procedure Law);
  • 26(3) of the Tax Procedure Law indicates that – the competent court shall impose tax evasion penalties against any person who is proven to have been directly involved or instrumental in tax evasion.
  • Art. 26(4) of the Tax Procedure Law says that without prejudice to Art. 26(2) of this Law, any person who is proven to have been directly involved or instrumental in tax evasion pursuant to Art. 26(3) shall be jointly and severally liable with the person whom he has assisted, to pay the payable tax and administrative penalties pursuant to this Law or any other Tax Law.

 

VAT Grouping and Tax Evasion

  • THE AUTHORITY may refuse to register the companies as a group within 20 working days from receipt of the application (Art. 10 of the Regulations) where Allowing the registration would enable significant VAT avoidance, or evasion.
  • THE AUTHORITY may also issue a notice that two or more companies will be treated as a group from a certain future date. This may apply where related parties are in association, with economic, financial and regulatory links include at least one company which is not registered for VAT.

 

Why your company needs to avoid Tax Evasion:

  • Administrative and criminal penalties;
  • Reputational losses for your company;
  • Personal liabilities for stakeholders and accessories to the crime.

 

Red Flag Indicators:

  • Several “red flag indicators” are used by tax authorities to detect possible cases of tax evasion and/or money laundering involving identity fraud:
  • Geographic – Address/Location: incorrect address used.
  • Financial Analysis: a) Value of tax refund or rebate; b) Large unusual claims and deductions, or similar claims all made in the same manner or format; c) Income appears unreasonable for the client; d) Turnover of company reduced significantly from 2017 to 2018;
  • Documentation and Business Operations: a) Signatures on duplicate returns appear different; b) Information slips appear altered;

 

What can your company do to avoid VAT evasion?

  • Check the TRN is linked to customer;
  • Check the integrity of the invoice received from supplier;
  • Ensure that supplier receipt is as per the FTA requirements;
  • Ensure that suppliers’ invoice is being generated from a system and is linked to accounting system;
  • Ensure supplier has a physical location and visit supplier physical location;
  • Ensure that you have witnessed the supplier corporate documentation such as company certificates.
  • Ensure customer pays VAT and if he refuses to pay VAT report to FTA;

If you are concerned with a tax audit or with the line of questioning you receive from the tax authorities, your best option is to seek out a qualified tax agent to help you through the process and protect your rights.

 

REMEMBER,

IS A CRIME.

 

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