5 UAE Excise Tax Mistakes That Trigger 300% Late Payment Penalties

The Regulatory Crucible: 5 Critical Excise Tax Mistakes in the UAE – Are You at Risk of Fines and Penalties?

The implementation of the Excise Tax regime in the UAE marked a strategic turning point in the nation’s fiscal landscape, designed to mitigate health risks and support the diversification of public revenue streams. For businesses involved in the import, manufacture, or stockpiling of designated excise goods – namely tobacco products, energy drinks, carbonated drinks, and sweetened beverages – compliance is not merely an administrative chore; it is an imperative for operational continuity and financial stability. Despite the Federal Tax Authority (FTA) issuing clear guidelines, we consistently observe 5 critical, yet entirely avoidable, errors that expose businesses to significant administrative penalties, backdated tax liabilities, and severe disruptions to customs clearance processes.

The risks associated with non-compliance are substantial, often resulting in penalties that escalate rapidly, reaching up to 300% of the unpaid tax amount in cases of prolonged late payment. Consequently, a proactive and meticulously structured compliance framework is paramount. You must immediately assess your internal processes against the following 5 prevalent compliance failures.

1. Failing to Account for the Retail Selling Price (RSP) in Tax Calculation

The bedrock of Excise Tax calculation is the determination of the highest price at which the good is typically sold to the end consumer. A pervasive and costly mistake is utilizing only the wholesale price or the Cost, Insurance, and Freight (CIF) import value as the taxable base. This error inevitably leads to under-declaration.

• The Problem: Businesses often overlook the legal stipulation that the tax base must be the highest of the following three values: the RSP, the FTA-determined indicative price, or the sales price (excluding Excise Tax). If the declared value is lower than the actual market RSP, the FTA is obligated to reassess the tax liability.
• The Implication: Under-declaration triggers FTA reassessments, resulting in a tax gap which you are then required to settle, accompanied by significant fines for submitting an incorrect tax return. Furthermore, penalties for underpayment of tax will immediately apply, compounding the financial burden. 

2. Incorrect Treatment of Stockpiled Goods and Free Samples

Excise Tax obligations extend far beyond the point of sale or import. They encompass goods held in storage and those distributed for promotional purposes. Many businesses mistakenly assume that only goods sold directly to the consumer are subject to the levy.

• The Problem: The law stipulates that all excise goods in the possession of a registrant, whether for sale or otherwise, must be accounted for. Crucially, giving away free samples of excise goods (e.g., promotional tobacco packs, free energy drinks at an event) is still treated as a supply for Excise Tax purposes, and the tax must be remitted.
• The Implication: Failure to declare and remit tax on stockpiled or gifted products is interpreted as deliberate underreporting. This can lead to the seizure and confiscation of goods, alongside severe monetary penalties, often amounting to the higher of AED 50,000 or 50% of the tax chargeable on the undeclared products. 

3. Delays in Registration and Deregistration Applications

Compliance is time-sensitive. The moment a business engages in the import, production, or stockpiling of excise goods, the obligation to register commences. Conversely, when a business ceases such activities, a timely application for deregistration is equally critical.

• The Problem: Many entities delay registration, incorrectly believing they have a grace period, or fail to apply for deregistration promptly upon exiting the market.
• The Implication: Late registration attracts a mandatory fixed penalty of AED 10,000. Conversely, failure to deregister when no longer required can result in penalties that accumulate monthly, potentially reaching AED 10,000 for the sustained period of non-compliance. Such administrative oversights signal fundamental governance weaknesses to the FTA. 

4. Failure to Maintain Comprehensive, FTA-Compliant Records

The integrity of your tax position rests entirely on the quality and accessibility of your documentation. Inadequate record-keeping is a core philosophy compliance failure that undermines all other efforts.

• The Problem: Businesses often fail to retain records for the mandated five-year period or lack the required specificity, such as stock reconciliation statements, customs declarations, or proof that the RSP was accurately used in tax calculations. Recent updates also mandate specific documentation for managing natural shortages.
• The Implication: The inability to furnish comprehensive, verifiable records upon request during an FTA audit results in a fixed penalty of AED 10,000 for the initial violation, escalating to AED 20,000 for repetition. This single failing can also lead the FTA to issue a punitive tax assessment based on their own estimations, potentially inflating your tax liability significantly. 

5. Inaccurate and Late Filing/Payment of Tax Returns

Missing the statutory deadline for filing returns or making tax payments represents a direct breach of the Federal Tax Procedures Law and immediately triggers a cascade of compounding financial penalties.

• The Problem: Taxable persons must submit the Excise Tax return and settle the corresponding liability by the 15th day following the end of the tax period. Errors in the return, often resulting from Mistake 1 (incorrect tax base), also constitute a filing violation.
• The Implication: Late filing incurs a penalty of AED 1,000 for the first instance and AED 2,000 for subsequent delays. Crucially, late payment carries daily, escalating fines: 2% of the unpaid tax immediately, followed by an additional 4% daily charge after seven days, up to the maximum cap. This exponential penalty structure can quickly erode cash flow and jeopardize solvency.

Area of Concern	Manifestation of Mistake	Critical Business Impact	Suggested Action (Proactive Planning)
Tax Base	Basing tax on CIF/wholesale instead of the Retail Selling Price (RSP).	Significant backdated tax liabilities and penalties for incorrect filing.	Implement a robust pricing system that constantly monitors and documents the market RSP of excise goods.
Inventory	Not declaring or paying tax on free samples or stockpiled goods.	Risk of confiscation of goods and major fines (Higher of AED 50k or 50% of tax due).	Establish internal controls to track and file Excise Tax on all outflows, including free promotional items.
Record Keeping	Failure to retain customs forms, price lists, and stock reconciliation statements.	Fixed AED 10,000 penalty for inadequate documentation upon FTA request.	Digitally retain all excise-related records for a minimum of five years; mandate regular internal compliance checks.

 

Strategic Insight: The complexity of the Excise Tax law, particularly concerning pricing mechanisms and cross-border movement via Designated Zones, necessitates a specialized approach. The key to avoiding these punitive financial and operational risks lies in adopting a model of proactive compliance management.

What You Must Do Now

To navigate this crucial juncture and ensure your business operates within a tax-efficient jurisdiction, you must take immediate, decisive action:

1. System Audit: Review your current accounting and ERP systems to confirm that they are accurately capturing the RSP for all excise goods and that they are configured to calculate the correct tax liability.
2. Compliance Health Check: Evaluate your internal documentation procedures against the FTA’s requirements for record-keeping, especially concerning stock movement and samples.
3. Consultation Mandate: Seek expert counsel immediately if any of these five critical errors resonate with your current operational practices. Leverage professional advisory services to conduct a forensic review of past returns and, if necessary, prepare and submit a Voluntary Disclosure to mitigate potential administrative penalties before an FTA audit is initiated.

Only through comprehensive preparation and adherence to the letter of the law can you mitigate risk and ensure your business remains financially resilient in the evolving UAE regulatory landscape.