The Federal Tax Authority has broad powers to audit Corporate Tax returns, inspect business records, and interview employees. Preparation is everything. Businesses that maintain clean records, document their tax positions, and understand their obligations fare far better than those who scramble when the notice arrives.
With Corporate Tax now in effect, the FTA is building its audit capability and capacity. Tax audits are a normal part of any mature tax system, and the UAE is no different. Understanding the audit process and preparing proactively can make the difference between a clean outcome and significant penalties.WHAT TRIGGERS A TAX AUDIT?
The FTA uses risk-based selection, which means audits are more likely when:
- There are significant or unusual fluctuations in taxable income year over year
- The tax return shows large deductions that appear disproportionate to revenue
- Transfer pricing arrangements with related parties have not been properly documented
- The business is in a high-risk sector or has complex cross-border transactions
- There are inconsistencies between the CT return and the VAT returns filed
Audits can also be random. No business is exempt simply because it believes it is fully compliant.
THE AUDIT PROCESS
The FTA will issue an official audit notification. From receipt, you typically have a specified period to produce documents and respond to queries. The FTA can require:
- Financial statements and accounting records
- Tax workings and supporting schedules
- Contracts and invoices for significant transactions
- Transfer Pricing documentation for related-party transactions
- Evidence of economic substance (for Free Zone businesses)
The FTA may also conduct interviews with directors, finance staff, or tax advisors.
COMMON AUDIT FINDINGS
Based on experience across the region, the most common issues in CT audits are:
1. Transfer Pricing: Related-party transactions not priced at arm's length, or lacking adequate documentation (a Local File is required for businesses above specified thresholds).
2. Deductibility of expenses: Personal or non-business expenses run through the company, or interest costs that exceed the 30% EBITDA cap.
3. Free Zone substance: Businesses claiming the 0% QFZP rate but unable to demonstrate adequate economic substance in the free zone.
4. Exempt income misclassification: Dividends or capital gains claimed as exempt without meeting all conditions.
5. Accounting adjustments: The bridge between accounting profit and taxable income not clearly documented or incorrectly calculated.
HOW TO PREPARE
The best audit preparation is continuous, not reactive. Practically, this means:
Maintain a tax computation file: Document your annual taxable income calculation with cross-references to your financial statements. Show every adjustment you have made and the legal basis for it.
Keep Transfer Pricing documentation current: If you transact with related parties — group companies, shareholders, or connected persons — maintain a contemporaneous record of how you have priced those transactions and why it is arm's length.
Retain all supporting records: Contracts, invoices, board minutes, group structure charts, and evidence of economic substance should be retained and organised.
Review your returns before filing: A pre-filing review by an independent advisor catches errors before the FTA does, and demonstrates good faith.
Appoint a tax advisor as your authorised representative: Having an experienced tax professional manage the FTA correspondence and information requests significantly reduces the risk of the audit escalating.
If you receive an audit notification or want to undertake a pre-audit health check, our tax team is here to help. Early engagement with advisors makes a material difference to outcomes.
M
Mohammed Al Rashid
Dhoaa Al Shams Team
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