By definition, taxes are obligatory fees or charges imposed on people or corporations enforced by a government entity that can be regional, national, or regional, mostly to fund and facilitate government activities. Usually, the taxes are to be paid by the citizens, business, or the end consumers of the business’s goods. The sole purpose of tax being collected is the betterment of the economy and people living in it.
It is important to mention that taxes are payable only by the people who are liable to pay. Hence, the tax liability is the total amount of tax debt owed by an individual, corporation, or any other entity to a government authority regulating taxes (taxing authority). Tax liability can be better understood as the total amount of tax an individual or a business is responsible for paying to the taxing authority. Generally, tax liabilities arise when a particular amount of income is earned, again on the sale of an asset, or another taxable event occurs.
Consequently, the burden of tax and the responsibility to report all income comes on to the taxpayer. The fun fact is that no one likes to pay the taxes, but taxes have to be paid since it is mandatory by law. Here is when the concept of tax avoidance and tax evasion gains weightage and meaning.
Tax avoidance is schemes that help an individual or a company minimize taxes legally and maximize the income left after paying the tax. Tax avoidance strategies are usually used for lowering the tax bills by structuring the transactions of an individual or a business so that an individual can get the maximum tax benefit. For example, taking tax credits is one of the most popular methods of tax avoidance.
Moreover, businesses and corporations avoid taxes by taking all legitimate deductions and shadowing income from taxes by setting up retirement plans for the employees and other legal means. Similarly, there are Tax Loopholes and Tax Shields. Tax shields are strategies for avoiding taxes. A tax shield is the conscious use of tax expenses to offset taxable income. At the same time, tax loopholes are a form of tax avoidance. Since there is always a loophole clause in the tax laws, individuals and businesses use these to legally reduce their taxes. But one has to take careful measures as when the individual or business is tempted to use a tax loophole; they have to keep in mind that the tax laws are complex and difficult to interpret. It is advised to get a competent, honest tax expert or lawyer who can make you aware of when the line between tax avoidance and evasion is crossed.
On the other hand, tax evasion can be understood as illegal means to avoid paying federal taxes. It is an attempt to reduce tax liabilities by deceit or concealment. Hence, tax evasion involves hiding or misrepresenting and deceiving the incomes or other profit gains that can be taxed. This can be done by underreporting income (failing to report all or some of the income), inflating deductions without proof, hiding or not reporting cash transactions, or hiding money in offshore accounts. In other words, it’s a willful attempt to evade or defeat any tax which is rightfully levied upon the taxpayer.
Consequently, tax evasion can also be included in the definition of tax fraud, which is illegal and intentional nonpayment of taxes by an act of deceiving or misrepresenting. There are times when people do not report income gained through illegal activities such as gambling and selling stolen goods. Other times people think it is favorable to not report the income gained by way of tips on the services or the money they earn through legal activities such as garage sales, babysitting, tutoring, yard work, etc. As per UAE law, tax evasion can be defined as Tax evasion is defined in the law as, “The use of illegal means resulting in the reduction of the amount of the due tax, nonpayment thereof, or a refund of a tax that a person does not have the right to have refunded under any tax law.”
The United Arab Emirates(UAE), with its well-established infrastructure and stable political system, is a very liberal trade regime in the Gulf region. The UAE has commendable economic growth, considering how it moved away from relying totally on the energy sector. In the UAE, the government’s no federal tax policy has proved to be the most luring factor for the expatriates. However, despite this major fiscal advantage, there are other financial regulations that each individual or business has to adhere to reside peacefully and lawfully in the UAE. For instance, UAE imposes Value added tax (i.e., 5% tax on the use of goods and services levied at each point of sale and excise tax on particular items like energy drinks or carbonated drinks, etc. Apart from this, UAE has Corporate tax, which is imposed on the businesses established in UAE, property transfer tax, which is different in every emirate, and individual taxes, which are only applicable on the GCC Nationals.
In the UAE, tax is generally regulated by authorities like the Federal Tax Authority (FTA) and the Ministry of Finance. It was only in December 2019 when the Federal Tax Authority and the Federal Public Prosecution began coordination and cooperation on regulatory measures to address cases of tax evasion. The regulating authorities are undertaking training courses in the field of tax evasion and means of confronting it. The FTA aims to form a joint team to identify the legal documents required to be dealt with for tax evasion issues and manage the witness and victim protection program. The Federal Supreme Court addressed the first tax evasion issue on 14th October 2020 in a judgment relating to voluntary disclosures and evasion intention. The Federal Supreme Court in its judgment said that where a person knows about an error, they should disclose and correct the error within twenty weekdays. In case they cannot correct or disclose, they must be held for committing tax evasion. In case of tax evasion, the criminal penalty is a prison sentence and a monetary penalty of five times the amount of evaded tax, or both.
Interestingly, There is no limit to the prison sentence term, which is set by the tax legislation but Article 69 of the Penal Code says that:
“The minimum period of imprisonment may not be less than a month nor exceed three years unless the law provides otherwise.” It is essential to mention that in tax evasion issues, the burden of proving tax evasion falls on the Federal Tax Authority. The UAE Penal Code explicitly states that ignorance of the law is not considered an excuse. Hence, all taxpayers are expected to have complete knowledge about the application of the tax legislation and its intricacies.
Many individuals and businesses end up paying federal income tax more than necessary due lack of knowledge of tax laws and fail to keep good records. It is important to understand that even though the tax we pay is really essential for the government and the economy, there is no need to pay more than required or owed. This overpaying of taxes can lead to severe losses to businesses and individuals. Hence, while paying the taxes, it is suggested that always take the help of an honest and reliable tax legal expert who can guide tax avoidance to reduce the tax and save the same from tax evasion or any criminal liability.