As UAE implements VAT, we look at tax planning versus tax evasion
Tax expert Manoj Agarwal explains why businesses must be aware of their tax liability management in order to avoid falling foul of the law
It has been nine months since the UAE, an erstwhile tax haven like several other GCC countries, implemented its new value added tax (VAT). And across the country, government authorities, businesses and consumers are gradually adjusting to it.
VAT has changed the prospects of consumers and businesses that were enjoying and were accustomed to minimal or zero taxation. In line with the growing competitiveness of the world economy and to encourage economic diversification and boosts transparency, the UAE has shifted towards a taxation economy which is both commendable and necessary.
Businesses may think to manage their cash flows by reducing their tax liability as output VAT until they collect it from end consumers. These methods may be classified as tax planning and tax evasion – two starkly different systems that businesses must be aware of.
Tax planning is the restructuring of activities in a way to maximise the tax benefits by making best possible use of all the legal options like setting up a new company in free zones, focussing on local purchases, and so on.
Tax planning can be done by applying the majority of advantageous provisions which are permissible by law. It’s the art of logically planning the business in such a manner that the benefits of all eligible provisions of the law can be availed effectively so as to reduce or defer tax liability. Tax planning follows an honest approach by conforming to those provisions which fall within the framework of the taxation law.
On the contrary, tax evasion is a technique of refraining from tax liability with the intention of defeating the fundamental motive of the legislature. It is an illegal action whereby a person or entity deliberately avoids paying a true tax liability.
Tax evasion implies that any arrangement of activities overpowers the basic intention of the law. It involves deliberately parking financial affairs in a way that they do not overtly look like violations of the tax law, but are in fact not legal.
Tax evasion includes cases where a business misleads the law, and to do so they use any schemes or arrangements that will reduce, defer and even completely prevent the payment of tax. This may also be done by the shifting of tax liability to another person, so as to minimise the incidence of tax. Tax evasion requires the use of illegal methods to avoid paying proper taxes.
VAT is a consumption tax which is to be borne by end consumer, and businesses are using various tools of tax planning for effective management of its cash flows. While looking for tax planning options, businesses must ensure that the tools they are using do not fall under that category of tax evasion.