The tax audit conducted by the Federal Tax Authority (FTA) of the UAE is a financial and tax compliance check for companies conducting business activities in the UAE. The FTA's responsibility is to ensure that companies pay taxes in accordance with the law and maintain the fairness and transparency of the tax system through a strict audit process. The core purpose of tax audits is to prevent companies from avoiding and evading taxes, and to ensure that they comply with tax laws and pay the correct taxes. During the audit process, companies are obliged to fully cooperate and provide all financial and business records as required. If companies refuse to cooperate or provide false records, they will face fines, late payment fees, and even criminal liability in serious cases. When the FTA conducts a tax audit, it usually sends a notice to the company 5 days in advance to inform the time, place and requirements of the audit. The scope of the audit covers the company's tax records, financial statements, transaction vouchers, etc. Auditors will carefully verify the authenticity and accuracy of the data to determine whether the company has committed tax violations. In addition, based on the results of the risk assessment, the FTA may also conduct key audits on high-risk companies.

Table of Contents

1. The Nature of FTA Tax Audit 2. High-risk triggering scenarios for FTA tax audits 3. How should enterprises deal with FTA tax audits? 4. Services we can provide you

1. The Nature of FTA Tax Audit

1. Definition and legal basis:

According to the UAE Tax Procedure Law, FTA tax audit is a comprehensive review of corporate tax declarations, tax calculations and compliance by tax authorities, covering areas such as value-added tax, consumption tax and corporate income tax. In 2023, FTA updated its audit rules, giving auditors the right to conduct surprise inspections without warning, and can trace financial records for the past five years.

2. Core objectives:

① Verify the accuracy of self-assessment: For self-assessed taxes such as VAT, verify key links such as input tax deductions and taxable supply identification (such as cross-border service tax processing).

② Crack down on tax evasion: In 2022, FTA recovered more than 1.2 billion dirhams in taxes through audits, of which 60% involved fictitious transactions and false invoices (source: FTA annual report).

③ Optimize tax governance: Promote enterprises to establish a digital tax internal control system to reduce systemic risks.

3. Enterprise pain points:

① Failure to properly preserve electronic tax invoices will result in a single fine of up to 500,000 dirhams.

② Unreasonable pricing of cross-border related transactions triggers transfer investigation adjustments.

2. High-risk triggering scenarios for FTA tax audits

1. Abnormal data fluctuations:

The input tax deduction rate exceeds the industry average by more than 20% (e.g., the average deduction rate in the retail industry is 15%, and if the enterprise reaches 35%, it will trigger an early warning).

The proportion of zero-tax or tax-free sales reported for three consecutive quarters exceeds 50%.

2. Industry-specific audits:

Gold and precious metals trade: In 2024, the FTA will focus on monitoring the matching of VAT invoices with actual logistics.

E-commerce and digital services: Verify whether overseas B2C transactions pay VAT in compliance with regulations (such as Google Ads services).

3. Cross-border transaction loopholes:

Free zone companies and mainland companies have not submitted "Economic Substance Reports" (ESR) for related transactions.

Import services that have not applied for the "Reverse Charge Mechanism" as required.

3. How should enterprises deal with FTA tax audits?

1. Ensure the accuracy and completeness of all financial and tax information: Enterprises must establish a complete accounting record and business book system in accordance with tax laws to ensure that every transaction is traceable and every account is clear. In addition, enterprises should conduct a comprehensive review of previously submitted tax returns to confirm their accuracy to avoid historical problems affecting the audit results.

2. Standardize accounting records and business books: Enterprises should establish a complete accounting record and business book system in accordance with tax laws to ensure that every transaction is traceable and every account is clear. This includes providing detailed accounting records, covering key accounts such as journals, general ledgers, accounts receivable and accounts payable, to ensure that auditors can fully understand the company's financial situation.

3. Provide complete materials required for the audit: In the tax audit, the company needs to provide the following materials: financial statements (including balance sheet, income statement, cash flow statement and statement of changes in shareholders' equity), accounting records and ledgers, internal control documents, bank statements and confirmation letters, contracts and agreements, capital expenditure and investment records, purchase and sales records, salary and remuneration records, asset lists and tax documents (including tax returns and tax payment vouchers), etc.

4. Actively cooperate with the tax authorities: After receiving the tax audit notice, the company should actively cooperate with the tax authorities and provide the required documents and information. During the audit, the company should carefully verify the doubts in the "Tax Assessment Notice" and rectify the problems as soon as possible. If there is a dispute, you can fully communicate with the tax authorities and, if necessary, you can protect your rights and interests through legal channels.

5. Pay attention to tax law trends and maintain tax compliance: Companies should pay attention to the latest developments in UAE tax laws and obtain the latest tax information by subscribing to the official newsletter of FTA or consulting professional tax consultants. In addition, companies should ensure that their accounting systems can accurately record tax information and conduct internal audits regularly to ensure tax compliance.

4. Services we can provide you

Zhuoxin Enterprises has a long history of guiding companies through FTA tax audits in the UAE. We have a team of dedicated tax professionals who support clients before and throughout the process to ensure a seamless audit experience.

Zhuoxin Enterprises and its team of federal tax experts help businesses across different industries understand the expectations and requirements of the FTA. We ensure that you remain compliant and meet all conditions before an unannounced audit by the FTA. We analyze your documents and financial transactions. We also review your previous statements to identify potential issues that could have a negative impact during an audit. Our consultants have experience assisting multiple businesses in the UAE, so they are able to provide the highest quality support.

If you are concerned about an unannounced FTA audit, contact our tax experts today. We will assist you in optimizing your operations to save thousands of dollars.