We often hear, “Is your business tax compliant?” The answer usually strikes the imposition of penalties in our minds. However, especially in the UAE, the regulatory strictness is quite high with hefty structured penalties; it is not simply the penalties that matter. A business might be able to pay penalties at one time due to sufficient cash flows, but what happens if there are a series of compliance lapses? It is something bigger than the regulatory risk; a serious business risk. In this blog, we provide insightful information on how compliance failures can turn into massive business risks in the UAE.
What are Compliance Failures from the UAE Perspective?
A compliance failure, in simple terms, is the result of non-adherence to any legal, regulatory, or procedural obligation set by the UAE government and authorities. Therefore, it can include the following:
- Regulatory lapses
- Anti-money laundering (AML) violations
- Operational noncompliance
- Labor & Immigration failures
- Reporting lapses and other business compliance failures
The question is what these failures can result in. Penalties? Yes. But it can become a business risk if there are consistent violations. Let’s understand these risks in the next section.
What is a Business Risk?
A business risk is a possibility that an entity might fail to achieve its objectives. For instance, the possibility of lower cash flows, lower profitability, and so on. It is, in fact, a threat that the business will fail to operate successfully and meet its objectives. Some examples of business risk include:
- Operational risk
- Financial risk
- Reputational risk
- Compliance risk
Compliance risk (AKA legal risk) is one of the types of business risk. Therefore, business risk is a broader term. The point here is that small compliance failures will not only increase the compliance risk but also can lead to other business risks. As a result, firms must take actions to mitigate these risks as much as possible. Let’s understand in the next section.
How Minor Compliance Gaps Can Turn into Serious Business Risks – CZTA Insight
Even a minor compliance lapse can swiftly lead to serious business risks. This, in turn, can affect financial results, reputation, and even the firm’s ability to continue its operations. For instance, regulatory non-compliance can result in financial risk in the UAE. Let’s understand with an example.
Suppose a business faces a regulatory penalty of AED 10,000 due to non-compliance with tax documentation requirements. Initially, the company was comfortable paying the penalty due to sufficient funds. Later on, instead of rectifying the systems and updating the records as per the tax laws, the firm again faces a penalty. This time, the penalty rose to AED 20,000 due to repetitive violations. At this time, the business is facing a cash crunch; however, they have to settle the fine to limit any further increase. Therefore, the entity has to arrange funds at any cost. This is how small compliance failures can escalate into serious business risks, particularly financial risk.
Similarly, other business compliance failures or shortcomings can also result in severe business risks. For instance, if a business has non-compliant accounting records or unclean books, this will result in inaccurate tax computation. Consequently, the company will be incurring an incorrect tax liability to the Federal Tax Authority. First, this might result in regulatory penalties. Furthermore, it can also result in potential tax audits. As a result, the firm might face reputational damage as well. The other perspective is that the management decision-making will be based on unreliable accounting information, posing other business risks.
Thus, compliance failures, small or big, can drastically impact a firm’s future, especially in the UAE business environment. From regulatory penalties to serious corporate threats such as operational instability, entities must implement risk-mitigating strategies.
Some Common Strategies to Mitigate Business Risks and Avoid Compliance Failures
Ideally, businesses must strategize to minimize risks as the first step, i.e., prevention instead of cure. The proactive approach of risk management is recommended. However, it is dependent on the nature and circumstances of a business. Some of the common risk-mitigation strategies include:
Produce an overall business compliance framework
Businesses must highlight the relevant laws and regulations that are applicable to them. For instance, the UAE corporate tax law and related regulations, and decisions for the corporate tax framework. Based on these, they must build an overall compliance duties schedule with key deadlines and a compliance calendar. This can be in the form of a detailed document. However, this overall compliance framework must be updated, as outdated information will cause more harm than good.
Updated Records
All records, from accounting to tax records, must be up-to-date. Maintain all documents as per the relevant laws, as documentation forms the basis of most compliance responsibilities. Also, the accounting and financial data must be timely recorded and reconciled periodically to minimize any anomalies.
Implement Effective Internal Controls
The existence of strong internal controls minimizes the risk of errors and fraud as a result of human intervention. Therefore, it is ideal to have a documented system and procedures, or SOPs, for every process of the company. Furthermore, making systems is not enough; it is important to keep an eye on those systems and check if there is an improvement needed.
Stay Updated and Conduct Regular Reviews
Especially in the UAE business landscape, the laws and regulations are ever-evolving. Therefore, it is essential to stay up-to-date with relevant laws and regulations, policies, and any upcoming changes. Furthermore, firms must conduct regular reviews of risk-mitigating strategies and adapt based on the current and relevant overall business environment.
Always Seek Professional Advice
One of the effective risk-minimizing strategies includes consulting external experts, such as tax consultants like CZTA, for tax and accounting compliance. Firms, usually smaller ones, consider external assistance expensive. However, in the medium to long run, this is a financially viable decision, as it saves a business from serious business risks in the future. Therefore, it is always ideal to onboard experts in the relevant fields.
Summary
Overlooking small compliance lapses can sometimes accumulate and result in massive business risks. Therefore, as a responsible business, we cannot bear non-compliance, not even the smallest ones. However, it is challenging to do. The first challenge is to highlight areas that are prone to such risks, and the second is to formulate strategies to mitigate them. Based on the nature of the business, its jurisdictions, and other factors, a company must develop its overall compliance framework and act accordingly. Furthermore, seeking professional advice is one of the most viable risk-mitigating strategies to avoid compliance failures and resultant business risks in the UAE.
Creative Zone Tax & Accounting (CZTA)
With years of tax and accounting consultancy services in the UAE region, we successfully formulated strategies to minimize compliance lapses and business risks. With the current laws and regulations, as we also strive to remain updated, we are here to assist with any business compliance matter. Contact us to learn more.
