As we head onto another tax filing season in UAE, a small yet significant portion of businesses find themselves subjected to some surprise scrutiny from the UAE Federal Tax Authority. A regulatory audit in UAE is an external review conducted by the local tax authority and it's often stressful for a business. It's potentially expensive, most especially in terms of the penalties, interests, and extra payable tax. The key in avoiding situations such as this is to avoid committing the acts which trigger a regulatory audit in Dubai, including the following:
Top Reasons Why Businesses are Audited in UAE
Failure to declare company income
Not including all the taxable income of your business in the tax return will be a surefire way for you to get into some big trouble with UAE FTA. Even when you're relying on the information that your inhouse accountants have given you, the ultimate responsibility in making sure that you have included everything will rest with you. This is why it pays in taking time to ensure you have got everything right and completed. The common errors related to failing in declaring income, inadvertent or otherwise, include:
- Undeclared foreign income. A lot of businesses have links throughout the globe. If you have income-generating assets that are based outside of UAE, you have income from overseas employment, or you receive some investment income either from bank accounts or overseas shares, then you have to declare them all during the tax return filing in UAE. Otherwise, your business will get audited by the FTA for numbers that are unaccounted for.
- Failure in disclosing capital gains that are from asset disposals like property or shares
- Understating or total omission of bank interest. A lot of businesses receive small sums as bank interest. They are small and it is very easy for accountants and business owners themselves to overlook. Banking institutions in the UAE report interest that they're paying to their clients to the tax authorities. If there are discrepancies with the reports of banks and your business, then this can cause a surprise audit in UAE.
- Failure in declaring business takings. Should you not declare the sales of your business or miss out on reporting some transactions, the FTA will identify your business as performing poorly in comparison to other businesses with similar economic activities. They're doing so through the establishment of benchmarks for several businesses in different sectors or industries. Local tax authorities look particularly closely at businesses that deal with cash only. Their percentage up to this day is that the only reason businesses run on cash only basis is because they want to avoid tax. If your business is running only on cash, it is advised that you have an audit firm in Dubai conduct an external audit in UAE on your business before the regulators do.
You should read: Business audit: How it can secretly save your company
Claiming deductions your business isn't entitled to
The Federal Tax Authority or FTA puts a red flag on businesses that claim more compared to what they're entitled to. The golden rules for tax deductions that you should always keep in mind are as follows:
- Keep all of the records which will support your claims for deductions
- Don't claim for domestic or private costs
- Only claim the items that you are actually spending money on
The FTA appears to have trouble with businesses that take advantage of the number of concessions that were made available to them for business-related deductions without substantiation. If you intend in taking advantage of VAT reclaims in UAE, for instance, keep all receipts or any proof that you've actually incurred business expenses.
You must read: 5 Myths about Audits in Dubai that should be Avoided
Income way below the value of company assets
If your company vehicle is the latest model of Rolls Royce, plus you are enjoying meals at harborside with company premises located at one of the most glamourous parts of the country, but you're only declaring a miniscule amount as your income during the tax return filing, you'll be closely reviewed by the FTA.
The FTA is capable of assessing the assets that your business owns e.g. boats, properties, machinery, equipment, and cars. They calculate or approximate the amount that you earn in order to support not only your business but also your employees and the company directors. Should the amount of profit you are declaring is substantially less, then you will trigger the alarm bells of the tax authority?
Apart from the traditional sources of information such as records of sales and property purchases, the FTA also scrutinizes social media. It is always best to be honest with your company books, most especially when declaring your income.
If you want to make sure that you’ve eliminated all potential risks of acquiring huge fines and penalties should the FTA conduct a surprise audit of your business, call us here in Farahat & Co today to schedule an external audit in UAE!