Compliance isn’t just about filing your business taxes on time and keeping accurate records—it’s also about being prepared for tax scrutiny, including VAT and transfer pricing audits. In the UAE, the Federal Tax Authority (FTA) oversees the collection, management, and enforcement of tax laws and regulations. This means your business could be selected for a tax audit at any time. Rather than panicking, it’s far better to understand what an audit entails and how to be fully prepared. In this blog, we’ll provide essential background on tax audits in the UAE, with a special focus on VAT and transfer pricing.
Conducting a Tax Audit – Federal Tax Authority
As per Cabinet Decision No. 74 of 2023, the tax authority shall consider the following particulars before conducting an audit.
a) The necessity of the tax audit to promote the integrity of the overall tax system.
b) The responsibility of the taxable person, or any other person associated with it, to comply with the relevant tax legislation.
c) The expected tax revenue to be collected.
d) The burden of proof is on both the taxable person and the authority concerning compliance.
The authority may decide to conduct an audit of a taxable person previously audited; they should take into account the following considerations:
a) The results of the previous audit.
b) Any additional information that will alter the decision or position of the authority.
The decision of the authority to conduct the tax audit is final, and therefore, it cannot be objected to or challenged by any person.
General Tax Audit Procedures – VAT and Transfer Pricing Audits
The general audit procedures can be the same whether it is for VAT or a transfer pricing audit. Let’s highlight some of the key audit procedures that the authority may perform during the exercise.
1. During the audit, the authority may inspect:
a) The documents and assets available at the premises.
b) Data and records stored electronically.
c) Accounting systems used by the respective taxable person.
2. To proceed with the audit, the occupying tenant or the person having control over the premises (as considered by the authority) shall provide all the assistance to the authority for an effective audit.
3. Any employee of the authority may accompany the tax auditor if the employee’s presence is necessary to enable the tax auditor’s powers to be effective.
4. The authority may notify a taxable person to provide any information or any documents concerning itself or another person. The relevant person must provide the documents and/or information to the authority within the time, form, and location specified in the notification.
5. A tax auditor carrying out a tax audit based on a permit of the public prosecutor shall present such permit, as well as the approval issued by the authority. This is in addition to the proof of identity if requested.
Transfer Pricing Considerations
The basis of transfer pricing is the “arm’s length principle”. For a tax audit, the transfer pricing documentation should allow the FTA to determine that the tax outcome of the tax period has been affected by transfer pricing practices that are not in line with the arm’s length principle. The burden of proof lies with the taxable person to maintain sufficient supporting documentation as well as to make timely submissions to the FTA. This is to support the position taken in the tax return as it relates to the related-party transactions that are in scope for each tax year. The FTA has the right to make queries and request information and data for its review and decision-making.
There can be modifications in the form of “transfer pricing adjustments”. This is to ensure that the taxable outcome of the controlled transaction aligns with the arm’s length principle. When there is a violation of the arm’s length principle, either party, the taxable person or the FTA, can initiate the transfer pricing adjustments.
VAT Considerations
One of the core compliance responsibilities for taxable persons regarding the value-added tax is record-keeping. All businesses in the UAE must record their financial transactions and ensure that these are accurate and updated. Entities that meet the minimum threshold requirement (as per their financial records) must register for VAT. If a business does not register for VAT, it must maintain documents to prove to the FTA that they don’t meet the threshold. So, the key here is to maintain complete documentation, including financial records, invoices, import documentation, and so on.
Conclusion
Tax audits—whether for VAT or transfer pricing—are an important part of running a business. That’s why it’s best to stay proactive, prepare in advance, and be audit-ready. Your readiness largely depends on how well your business adapts to changes in the regulatory environment. In the UAE, Corporate Tax and VAT are still relatively new, and the laws continue to evolve. Relying on outdated information can lead to non-compliance and costly penalties.
To stay compliant and avoid risks, it’s wise to work with a qualified tax consultant.
Creative Zone Tax & Accounting (CZTA)
The goal of a successful business is to make a profit while remaining compliant with the tax laws. CZTA ensures that its clients achieve their objectives without any hassle of tackling complex compliance issues. Contact us today to learn more.
