Proper Allocation of any payments made to FTA is not only important but critical in few cases:
as there is no provision of any place where to specify 'Tax Period' to FTA for any future payments against current liabilities arising out of filing of VAT Returns.
With this backdrop, now read on….
We all know as an Accountant the importance of proper allocation (also termed as matching or adjustment) of whether payments made or payments received against the outstanding dues or receivables respectively. If not done correctly, individual liabilities or receivables against unmatched invoices remain due while the unmatched amount lie as an absolute amount. Based on the principle of matching and internal controls, any unreconciled / unmatched item (whether in Bank reconciliation statement or ageing of payables or receivables) is a liability till identified to its source.
An Accountant lives with these unmatched / unreconciled items but Federal tax Authority [FTA] does not. FTA does not like this. So, they have devised the order of priority as follows, giving the choice of selection to the company making the payment to FTA:
This selection may be kept fixed or varied for each individual payment made to FTA. A company will owe to FTA generally two types of dues: Tax and Penalties.
Under 'Tax Liability Cleared First', All outstanding Tax Liability will be matched first (one may read it as adjusted, settled or allocated) and then Penalties, if any.
Under 'Administrative Penalties Cleared First', All outstanding Administrative Penalty Liability will be matched first and then tax Liabilities, if any.
Under 'Oldest Liability Cleared First', All outstanding Liabilities (tax and penalties in that order on a particular date) will be settled in ascending order of date of which it was levied. Please see below image as extracted from FTA portal for explanatory examples of each of these three categories.
All these 'order of things' is fine till the time a company does not have a dispute case with FTA. Come on board the 'dispute' with FTA (non-acceptance of penalties levied or Tax Assessment issued, etc.), these order of things will go for a toss as any payment made to FTA towards current liabilities as arises on submission of progressive VAT Returns, after one has disputed any outstanding amount, FTA will invariably adjust them against the 'disputed tax' amount first (if the selection is 'Tax Liability Cleared First') or 'disputed administrative penalty' (if the selection is 'Administrative Penalties Cleared First'). No need to mention what will FTA do if the selection is 'Oldest Liability Cleared First'.
You may like to ask why this way it has to happen this way? The answer lies in 'no place' to specify to FTA as to which Tax Period any current liabilities, arising out of submission of progressive VAT Returns, belongs to.
Though the company has a right to have a place to specify the 'Tax Period' against any payment made to FTA, as given by Article 9(1) of Federal Law No. (7) of 2017 on Tax Proceduresand Article 7(1) of its Executive Regulations.
Federal Law No. (7) of 2017 on Tax Procedures
Article (9) Allocating Payable Tax Upon Settlement
1. A Taxable Person shall, when paying any amount to the Authority, specify the type of Tax and the relevant Tax Period to which the amount relates; the Authority shall allocate the payment accordingly.
2. If a Taxable Person makes any payment without specifying the type of Tax or the Tax Period, the Authority shall have the right to allocate the full amount or part thereof according to the mechanism that will be determined in the Executive Regulation of this Law.
The Executive Regulation of Federal Law No. 7 of 2017 on Tax Procedure
Title Four – Tax Obligations
Article 7 - Allocation of Unidentified payments
1. If the Taxable Person settles any amount to the Authority without specifying the type of Tax or Tax Period to which it relates, the Authority may allocate the amount for settling any debts or liabilities due to the Authority based on seniority.
3. The Authority shall notify the Taxable Person regarding the allocation of payments according to Clause (1) of this Article
Payment Portal on e-service of FTA website does not have this 'Tax Period' specifying place. While making payment through GIBAN, in spite of a company specifying the 'Tax Period' in its payment instruction to either a bank or exchange house, invariably banks and exchange houses misses out on their onward instruction to FTA. In any case, at disadvantage is the company in question.
It is pertinent to note that FTA consider any amount of tax due including penalties on submission of VAT Returns and/or on Tax Assessment as 'Debts' and will be collected as any corporate will collect its dues from customers. There are positions of Debt Collectors within FTA and if that fails, there is Enforcement department, deriving its powers from Article 20 and Article 36 of Federal Law No. (7) of 2017 on Tax Procedures.
Extracts of these provisions for quick reference
Article 20 - Considering Taxes as Debts owed to the Authority
Where an amount of Tax or Administrative Penalty has been assessed and notified to any Person under the Tax Law, it shall be deemed to be a debt to the Authority and may be collected accordingly.
Article (36) Collection of Payable Tax and Administrative Penalties
If a Taxable Person fails to settle any Payable Tax or Administrative Penalties within the specified timeframe under this Law and the Tax Law, the following measures shall be taken:
1. The Authority shall send the Taxable Person a notice to pay the Payable Tax and Administrative Penalties within 20 business days as of the date of Notification.
2. If the Taxable Person fails to make payment after being notified pursuant to Clause (1) of this Article, the Director-General shall issue a decision obligating the Taxable Person to settle the Payable Tax and Administrative Penalties which shall be communicated to him within five business days from the issuance of the decision, accompanied by the Tax Assessment and Administrative Penalties Assessment.
3. The decision of the Director-General regarding the Tax Assessment and Administrative Penalties Assessment shall be deemed as an executory instrument for the purposes of enforcement through the execution judge at the Competent Court.
When the tax due incl. penalties have been disputed with Reconsideration application to FTA and decision has not been issued by FTA on it.
In absence of no provision of place to specify 'Tax Period' for any future payments made to FTA and whether one has selected as one of the adjustment types, 'Tax Liability Cleared First' or 'Administrative Penalties Cleared First', FTA will straightaway clear the outstanding tax liabilities under dispute first, leaving the current tax liability for which payment has been intended exposed to penal interest on an accrual basis. This has a cascading effect if FTA drags its feet on issuing Reconsideration decision on time. Additional penal interest liabilities on this count may run into millions of dirhams as FTA will continue to apply FIFO method.
What gives FTA power and excuse, both, to act this way? Remember, any tax due to FTA is considered as 'debt' in pure corporate parlance term and one is handicapped to specify the 'Tax Period' while making payments to FTA.
Since the tax dispute matter is under Reconsideration, FTA will not give credence to any Payment Allocation letter submitted whether through email@example.com or through one's Focal Point of Contact Business Services Analyst, Taxpayer Services.
Reduction in Administrative Penalties through Cabinet Decision No 49 of 2021_amending Cabinet Decision no. 40 of 2017, issued on 28th April 2021, w.e.f. 28th June 2021
The Decision allows companies who have been penalized prior to the effective date of the Decision to benefit from a penalty redetermination scheme, where they would only be required to settle 30% of their payable administrative penalties outstanding on 28 June 2021 subject to meeting the requirements specified in the Decision. In order to benefit from the penalty redetermination scheme, companies need to settle all pending tax until 31 December 2021 and 30% of the total administrative penalties imposed and outstanding on 28 June 2021, no later than 31 December 2021.
Since there is no place to specify 'Tax Period' while making payment to FTA as to which one particular payment belongs to and has been made, a company under such circumstances has lost out on the benefit of settling outstanding tax dues latest by 31st December 2021 under this new scheme and thereby managing the cash flow for its benefit. As between 28th April 2021 and 31st December 2021, FTA can not exercise unbridled rights against companies for settling tax dues as 'debts'. FTA would have only requested to settle it but thanks to no provision to specify 'Tax Period' to which any payment to FTA belong to.
FTA need to include a place to specify 'Tax Period' for which one is making a payment either through its portal or through GIBAN, if this is an oversight. If by design, then at least FTA need to send notification under Article 7(3) of The Executive Regulation of Federal Law No. 7 of 2017 on Tax Procedure.
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