How To Resolve Tax Classification Dispute with FTA in UAE?

Getting a wrong classification notice of tax rulings from the Federal Tax Authority (FTA) can have a significant negative effect on your business which can be related to the business operations or the business’s representation in the market. But getting such an FTA notice does not mean it is the end of the line. Under the UAE tax legislation, there are legally sanctioned avenues to challenge unfavourable classification.

Working your way out of the tax judgment made by the FTA is a complex matter and requires very careful following of the legal rules on deadlines, compliance with legal arguments, and perfect papers. The step-by-step guide below shows how to handle the tax classification problem with the FTA.

When can potential tax classification dispute occur?

One of the common queries of the taxable entities is related to the situation where there is risk of misclassification that could erupt into a dispute with the FTA. Some of the circumstances under both VAT and CT regimes would include the following:

Under VAT:

• The misclassification between the standard-rated and zero-rated supply of goods and services
• The misclassification between the taxable and exempt supply of goods and services
• The misclassification between the goods and services, where certain goods would be classified as services and vice versa
• The misclassification between the mixed supply of goods and services and the composite supply of goods and services

Under Corporate Tax:

• The common misclassification related to the qualifying and non-qualifying income, mostly for free zone entities
• The misclassification related to the capital receipts and revenue receipts
• The permanent establishment-related classification disputes
• Business income and investment income are yet another common area of dispute and confusion based on their classification.

The following is the 3-stage process which the taxable person can use while applying for the dispute redressal.

Step 1: Making a request for reconsideration of the FTA

In case you are confident about the fault in the classification done by the FTA or on the penalties imposed, your first step would be to make a formal request to the authority for reconsideration.

Time Guidelines: You need to file the application on the official portal at the latest within 40 working days of having received the first communication about the FTA ruling. If you miss out on this period, your chance to appeal gets automatically nullified.

Information Required: The application should specify the contentious decision being challenged by the applicant, the factual basis for objection with reference to particular tax laws, etc.

The Outcome: The FTA will amend the application and will send the final decision within 40 working days. The decision could be either granting the objection or rejecting it.

Step 2: Escalating to the Tax Disputes Resolution Committee (TDRC)

In case the FTA rejected your application for reconsideration or hasn’t responded to you within 40 days of submission of the same, you may go to the Tax Disputes Resolution Committee (TDRC). The TDRC is an independent decision-making organization. The members are effective judges and distinguished tax experts.

Time frame: The objection must be filed with the TDRC in due time of 40 working days following the decision of the FTA for reconsideration.

"First Pay" Rule: In order for the TDRC to hear your case, you are required to pay all undisputed taxes and surtaxes levied by the FTA. It may happen that before taking the case to the TDRC, a certain percentage of the contested amount must be paid, but if the taxable person wins the dispute, then the amount would be completely refunded.

Decision: The TDRC will carry out hearings and listen to both the parties during which your representative will give the arguments.

Circumstances where you can’t approach the TDRC

Under the following situations the TDRC would reject your appeal for the dispute resolution which would include:

• When the reconsideration request with the FTA has not been made by the taxable person
• When the tax penalties have not been paid
• When the request application is not made to the TDRC within the 40-day timeline. 

Step 3: Moving on to Federal Courts

For large-value disputes with tax dues and penalties that exceed a certain amount, both parties can appeal the verdicts of the TDRC in the federal courts of the UAE. The process takes place under multiple levels of courts. Approaching the federal courts could be considered as the last resort where the disputes has not been resolved yet.

The Importance of Maintaining Thorough Records: In all levels of this multi-level dispute process, the strength of the claim will depend on the keeping of contemporaneous records. The ability to present concrete invoices, transaction contracts, and a transparent transaction trail will determine the outcome of the tax classification case.

How can you avoid any tax classification dispute proactively?

The businesses in the UAE can ensure and stay prepared well in advance to avoid any kind of tax disputes related to classification or any other tax law by ensuring that the following procedures are carried out:

• Strategic internal controls and streamlined procedures could enable the businesses to identify the potential risks related to the classification and hence avoid the disputes even before the occurrence.
• Well-trained tax experts in the team and well-maintained documents with clear classification details could enable the businesses to accurately apply the relevant tax laws and hence avoid any misclassification and penalties.
• Application for the private clarification to the FTA is yet another powerful tool provided by the authority where the businesses can get the insights about any rare or unusual transactions, goods, or services and hence apply the tax law as per the FTA’s guidance.

How Can CDA Help in Resolving the Disputes with the FTA

When attempting to win a dispute with the Federal Tax Authority (FTA) relating to tax classification or fines, time limits and document flows must be strictly followed. Therefore, collaborating with a specialized tax advisory firm such as CDA will allow one to acquire sufficient institutional support to deal with the challenge successfully. 

• Drafting Reconsideration Requests: CDA provides an end-to-end solution by means of professional interventions, including drafting requests for reconsideration. The FTA specifically requires that all internal requests for reconsideration and legal documentation be filed electronically.
• Document Inspection & Audit Protection: In case of tax audits or classification disputes, the burden of proof lies entirely on businesses. CDA searches for historical general ledgers, purchase reports, and customs documents in order to build up the precise and clear chain of invoices and contracts that would withstand scrutiny.
• Strategic Advisory Services: CDA acts as a direct link between your management team and the tax authority. Our experts will assist you with critical clarifications, determine your real financial liabilities, and support the correct calculation of the unquestioned liabilities so that you fulfil the “pay to play” obligations before bringing the issue to the attention of the Tax Disputes Resolution Committee (TDRC).
• TDRC Hearing Representation: In case of significant disputes, CDA prepares relevant technical documentation packages and written arguments for submission to the relevant committee. We study the past FTA rulings and resolutions to protect your corporate assets and reduce the exposure to penalties.

Why Choose CDA?

Disputes arising from tax classifications, accompanied by the FTA, can be quite challenging. The process is very complicated and must be followed to the letter. Attempting to resolve the dispute without technical support can place your company in jeopardy. Contact CDA to ensure that the interests of your business are well protected. Our team of tax experts will take care of the entire dispute resolution process. We will provide you with all the necessary help, from drafting your reconsideration requests to preparing for TDRC hearings.

To know more about our services, contact CDA today !

Mitesh Maithia

Tax Manager

Mitesh is a Tax Professional with expertise in direct, indirect, and international taxation, including transfer pricing, since 2018. Passionate about making complex tax matters simple, he shares insights to help businesses stay compliant and forward-looking.