The tax dispute resolution committees began operation in 2019. There are three tax dispute resolution committees in the United Arab Emirates:

• one in Abu Dhabi dedicated to taxpayers with a registered address in Abu Dhabi;
• one in Dubai dedicated to taxpayers with a registered address in Dubai; and
• one in Sharjah dedicated to taxpayers with a registered address in the other five emirates – namely, Ajman, Fujairah, Sharjah, Ras Al Khaimah and Fujairah.

The tax dispute resolution committees are the second step in a grievance process that a taxpayer takes. The first step being submission of a reconsideration request to the Federal Tax Authority, subsequent to which, if the taxpayer disagrees with the FTA’s decision to the reconsideration request, they may object to the tax dispute resolution committee competent to their registered tax address.

The tax dispute resolution committees were formed by law in 2017, and although the first objections were submitted in 2018 to the Dubai tax dispute resolution committee, the committee came into formation and operation in March 2019, with its first rulings being issued in April 2019.

All objections registered in 2018 and early 2019 before the Dubai tax dispute resolution committee commenced operation were docketed in March 2019.

In 2019, there have been 38 registered objections with the Dubai tax dispute resolution committee, and in this article, we look at developments and lessons learned.

Nature of the Tax Dispute Resolution Committees

So far, the tax dispute resolution committees are considered to be administrative bodies with the authority to issue judicial decisions. Each is comprised of a judge and two technical experts. Memorandums of objection submitted by taxpayers should not only argue the technicality of their position but should also provide for the legal arguments and references to the appropriate case precedents to advocate their position and provide the legal grounds for the judge to fully rationalize his decision. The tax dispute resolution committees have ruled on matters which are more legally intricate than they are technical; such as UAE precedent on acting in good faith, perfection of notification and summons, or the Legislator’s intent in the drafting of certain provisions in the tax law. Lack of legally apt arguments would deter the issuance of a ruling favorable to the taxpayer – particularly as various objections before the tax dispute resolution committees have been due to different interpretations of the law by the taxpayer and the FTA.

Official Form Issued

In mid-2019, the Ministry of Justice which oversees all tax dispute resolution committees issued an official form to be used when submitting an objection against a decision by the FTA. The form requires the inclusion of the value of taxes and penalties objected to, dates of the underlying reconsideration request, shareholders and branches, etc., and importantly, the following information necessary to protect procedural sanctity of the dispute:

• The capacity of the person submitting the challenge.
• Evidence of empowerment (POA) of the legal representative.
• Memorandum explaining the reasoning of the objection.
• The decision of the FTA being objected to.
• Proof of payment of the tax and penalties, as applicable.

Notification

Once the ruling of a tax dispute resolution committee is communicated to the taxpayer, the taxpayer has twenty working days to challenge the ruling before the tax disputes circuit of the federal primary court. The ruling of a tax disputes resolution committee will be communicated via the email address provided in the official objection form submitted to the tax disputes resolution committee. Albeit overseen by the Ministry of Justice, notification of rulings of the Dubai tax disputes resolution committee is conducted via the Dubai Courts automated smart notification system. Taxpayers should ensure the email address submitted is diligently reviewed and managed to avoid the ruling being diverted to junk or spam, etc. Article 8 of Civil Procedures Law Regulations states that a notification of a judgement/ruling by email is considered perfected on date of being sent – not on the date/proof of receipt. As far as current judgements have established, if a taxpayer falls outside the time limitation to challenge a ruling before the federal courts due to the email containing the ruling being unseen by the taxpayer, the federal courts would reject such challenge. For the Dubai tax dispute resolution committee, taxpayers can continuously check the public online case inquiry service for an update on their dispute.

‘Pay Now, Argue Later‘

UAE laws and by-laws making up the tax legislation have an explicit requirement for the taxpayer to pay all taxes and penalties due before being able to resort to a tax dispute resolution committee, and subsequently, the federal courts. The rule is generally known as ‘pay now, argue later’. This rule has been respected by the tax dispute resolution committees and the higher levels of the federal courts to be a mandatory requirement, not subject to any leeway.

Incorporation of Civil Procedural Law Provisions

The Tax Procedures Law does not reference other legislation to fill vacuums. This raised a question as to whether litigants or the tax dispute resolution committees (or federal courts) could refer to other laws such as the Civil Procedures Law to answer procedural questions not addressed in the Tax Procedures Law. For example, the Tax Procedures Law does not explicitly state the consequence of the FTA not responding to a request for reconsideration with twenty working days of receiving such request from a taxpayer. However, the Civil Procedures Law states that any grievance request to an administrative body is considered rejected if no response is provided within the time limit. Whether the two laws could be read in conjunction was unclear.

Usually, a subject matter law would have a complementary relationship with similar laws and legislations respective of its subject matter, so that some of the provisions of the similar law can be borrowed to supplement a vacuum in the subject matter law. For example, Article 4 of the Personal Status Law states that: “In the absence of any text in this Law regulating the procedures of any matter, the provisions of the Civil Procedures Law and the Law of Evidence in Civil and Commercial Transactions shall apply.”

Article 4 of the Law on International Judicial Cooperation in Criminal Matters states that: “The provisions of the Criminal Procedures Law and any relevant laws shall apply to any matter not governed by a text in this law.”

Article 67 of the Law for the Regulation and Protection of Industrial Property states that: “The decisions of the committee may be appealed before the competent court in accordance with the Civil Procedures Law…”

However, the Dubai tax dispute resolution committee relied on provisions of the Civil Procedures Law in its ruling. Unless otherwise ruled inapplicable by the Federal Supreme Court, this provides litigants; taxpayers and the FTA, an avenue to incorporate provisions of the Civil Procedures Law, and the Civil Procedures Law Regulations into their arguments in case a matter is not explicitly addressed in the Tax Procedures Law.

Time bars

UAE tax legislation provides taxpayers with relatively short time bars to act against decisions by the Federal Tax Authority (FTA) that a taxpayer disagrees with (including penalty assessments). In failing to do so, a taxpayer loses their right to challenge depending on the respective stage of the challenge.

With the Eid public holidays around the corner, we address a wide misconception in the reading of the Tax Procedures Law that had caused taxpayers substantial losses or missing the opportunity to challenge decisions.

The issue is that public holidays are not discounted from the time bars.

Generally, to dispute a decision by the FTA, a taxpayer can submit a reconsideration request and/or a reduction and waiver application to the FTA.

A taxpayer may then resort to the tax dispute resolution committee of Abu Dhabi, Dubai, or Sharjah, depending on the taxpayer’s registered tax address or if they are an out-of-state registrant.

Subsequently, the taxpayer can challenge a committee decision before the Tax Disputes Circuit of the Federal Primary Court in Khalifa City.

All these steps share a common time bar between them.

(With the exception of reduction and waiver applications which have different time bars and procedural requirements.)

The time bars are set as per (أيام عمل) in the Tax Procedures Law in Article 27 for reconsideration requests, Article 30 for objections before the competent tax dispute resolution committee, Article 33 for challenging before the Federal Primary Court, and in Article 26 of the Tax Procedures Law Executive Regulations with respect to reduction or exemption applications.

The time limit is 20 (أيام عمل). *

We use the Arabic terminology (أيام عمل) because the misconception has arisen out of the translation of this term to English.

The term (أيام عمل) is a descriptive term meaning ‘days of work’ and can be translated as business days.

But importantly, can also be translated as weekdays.

This elaboration is quite elementary, but significant for the purposes of this article and for taxpayers in pursuing reconsiderations of an FTA decision.

Lost in translation

In the English language, business days are generally accepted and understood to mean days other than weekends and holidays.

Weekdays are generally understood as meaning the working days of the week other than Saturday and Sunday (or the equivalent days of the weekend depending on the jurisdiction).

In the UAE, the weekend is Friday and Saturday.

Comparatively, in Arabic, there is no formal or colloquial direct translation for ‘weekend’.

Instead, weekend is referred to in Arabic as a descriptive sentence being ‘the end of the week’ or as the ‘holiday at the end of the week’.

Likewise, there is no common Arabic translation of the term ‘weekdays’ as is the case in the English language.

So, the use of the term (أيام عمل) in the Tax Procedures Law could mean business days or weekdays.

In the law

Of course, not only is language analysis important but more so the legislative backing for this deduction.

Here we refer to Article 45(2) of the Tax Procedures Law which states the following:

“If the last day of the time limit coincides with a public holiday, the time limit shall be extended to the first weekday thereafter.”

With this explicit provision, it is clear that the wording of the law in using the term (ايام عمل) is intended to mean weekdays, not business days.

Otherwise, if the term (أيام عمل) was to mean business days, Article 45(2) would serve no purpose.

Weekdays in the UAE are Sunday – Thursday.

Counting time bars for purposes of submitting a reconsideration request, a reduction or wavier application, an objection, or a challenge before the Federal Primary Court* should be on the basis of weekdays, irrespective of whether a public holiday occurs during the time bar. Unless the public holiday is on the last day of the time bar, at which point the last day to make a submission would be the first weekday after the public holiday (or weekend).

* Time bars for appealing a Federal Primary Court or Federal Appeals Court judgement are subject to the Civil Procedures Law and are counted in calendar days and are 30 and 60 calendar days respectively.

This manner of reference to ‘weekdays’ in legislation very rarely occurs. Emirati legislation almost uniformly refers to calendar days for the purposes of time bars. Hence, the reason this novel confusion that has arisen in the reading of the Tax Procedures Law (and its Executive Regulations).

Origin of the ‘business days’ English translation

The Ministry of Finance provides an unofficial translation of tax laws; which is the version that has been commonly circulated between non-Arabic speakers in the market.

The Ministry of Finance makes an explicit caveat in its English translations that it is an unofficial translation. In other words, it has no legal bearing.

Because of the nomenclature between business days and weekdays, it would have been expected that the reader would either refer to Article 45(2) or refer to the Arabic text.

Ultimately, a person subject to a specific law is expected to rely on the official language text as is published in the Official Gazette – or to be diligent, request counsel to advise.

For purposes of an example, another explicit discrepancy between an English translation of a law available on the Ministry of Finance website and the official Arabic text is seen in is Article 37(2)(c) of the VAT Law Executive Regulations.

The unofficial English translation states ‘a service apartment…’.

The official Arabic text states ‘a hotel apartment…’.

Nonetheless, reiterating, it is the general expectation that persons to whom a law applies will rely on the original text in the Official Gazette as opposed to unofficial translations, and seek counsel to advise on interpretation.

In the courts and counting time bars in general

Since 2018, during the first tax cases before the Federal Courts, and repeatedly thereafter at the reconsideration, objection, and Federal Court stages, positions have been taken that the public holidays are not to be discounted from the time periods.

In calculating time bars in general, Article 11 of the Civil Procedures Law administers the calculation of time bars as follows:

Article 11(1): If the law has set, for attendance or for the occurrence of procedures, a duration counted by days, months or years, the day on which the notice is served or the matter considered by the law as giving effect to the duration shall not be counted. The duration shall expire by the end of the office hours of the last day thereof.

Article 11(5): In all cases, if the end of the duration falls on a public holiday, the duration shall be extended to the following weekday.

Significance

Because a taxpayer generally has a relatively short period of 20 weekdays to act between every stage of a tax dispute up to the Federal Primary Court, we have seen most decisions being taken, or most applications being submitted, on the last day or last few days of the time bar.

This is generally because – in a practical sense – upon receipt of a decision not agreed to, the taxpayer engages in internal discussions (possibly amongst management in different jurisdictions), then obtains input from tax advisors and tax counsel, and must prepare the application and confirm the application. A process which generally takes a few weeks.

Moreover, a substantial number of tax disputes since 2018 have been rejected due to being submitted late and falling outside the time bar.

As the Eid holidays close in, taxpayers with current applications or disputes will be taking the Eid holidays into account whilst counting time bars.

It is necessary to consider that the Eid holidays will not be discounted from the time bar, but only need to be accounted for if the last day of the time bar falls during the public holiday, at which point the last day of the time bar would be extended to the first weekday after the public holiday.

Tax dispute time bars

Reconsideration request to the FTA against a decision by the FTA: 20 weekdays as of the following weekday from the date of notification of the decision.

Objection to the competent tax dispute resolution committee against a reconsideration decision: 20 weekdays as of the following weekday from the date of notification of the decision.

Challenge to the Federal Primary Court against a tax dispute resolution committee ruling: 20 weekdays as of the following weekday from the date of notification of the ruling.

Appealing a Federal Primary Court judgement before the Federal Appeals Court: 30 calendar days as of the following calendar day from the date of notification of the judgement.

Appealing a Federal Appeals Court ruling before the Federal Supreme Court: 60 calendar days as of the following calendar day from the date of notification of the judgement.

Note: Notifications of reconsideration decisions and tax disputes resolution committee rulings are conducted via email. A person being notified by email is deemed notified upon the date the email is sent. * Not when the email is received. Taxpayers are generally advised to create dedicated email addresses for tax procedure purposes and whitelist the FTA, Ministry of Justice, and tax dispute resolution committee email addresses respective of the tax dispute procedures to ensure awareness of any notifications during the tax disputes procedure. Currently, the Federal Court is also notifying taxpayers of tax disputes via email in certain instances and taxpayers should follow-up diligently with the Federal Courts to ensure whether a case has been filed, and what email address the Federal Courts used to communicate the trial details to the taxpayer.

* According to Ministerial Decision No. 33 of 2020 amending certain provisions of Ministerial Decision No. 57 of 2018 promulgating the Executive Regulations of Law No. 11 of 1992 on Civil Procedures.

Since early 2019, the tax dispute resolution committees, and Federal Primary and Federal Appeals Courts have ordered the invalidity of applying late payment tax penalties capped at 300% retroactively to voluntary disclosures.

On 14 October 2020, the Federal Supreme Court overturned the position taken by the committee and Court judges, and ordered that voluntary disclosures are to be considered a branch of the original tax return – hence that both are one and the same, meaning that submission of a voluntary disclosure is akin to a late submission of a tax return.

The subsequent question circulating was whether the tax dispute resolution committees, and the Federal Appeals and Federal Primary Courts would echo the judgment by the Supreme Court.

In the week of 25 October, several judgements were passed by the Federal Primary Court applying the judgment of the Federal Supreme Court verbatim – in both content and principles – applying late payment penalties to voluntary disclosures retroactively calculated as of the date of the original tax return.

This confirms the expectation that the judges of the committees, and the Primary and Appeals Courts will echo and mirror the findings of the Supreme Court on this matter.

Does this close all avenues to litigate?

This does not necessarily prevent taxpayers from challenging late payment penalties on voluntary disclosures.

The right to resort to the judiciary is a constitutional right, and the procedure itself is granted as a subject matter right in the tax procedures legislation.

There are certain conditions, however, that must be respected when litigating a matter that is similar to one that has been previously litigated and adjudicated on by the Federal Supreme Court.

The Constitutional Circuit of the UAE Federal Supreme Court ruled in 2019 that:

“…the Federal Supreme Court’s ruling has an absolute authority that is binding on all and all state authorities, including courts of different degrees and types, and it is not permissible to disband it, debate it, override its content, or reconsider the same case from a newcomer to this court…”

Hence, for taxpayers arguing the same basis that voluntary disclosures are to be considered a separate procedure than that of tax returns and hence subject to independent penalties – the Federal Supreme Court judgment will likely dismantle and trump this argument before any committee of Federal Court judge.

However, alternative procedures and arguments not heard by the Federal Supreme Court, that do not contradict the findings of the Federal Supreme Court judgment issued on 14 October, may provide an avenue for taxpayers to dispute the application of late payment penalties on voluntary disclosures.

In January 2019, the Federal Supreme Court (FSC) ruled on whether a double-exequatur requirement was necessary for the enforcement of an arbitral award issued under the Rules of the London Court of International Arbitration (LCIA), seated in London.

The declaration sought from the FSC was whether an arbitral award issued under LCIA rules and seated in London could (or not) be recognized and enforced as it had not been granted exequatur by the English Courts before a petition to confirm and enforce the award had been lodged in the United Arab Emirates.

The appeal to the FSC was in challenge to a rejection by the Khor Fakkan Federal Appeal Court (KFFAC) to submit a petition to confirm and subsequently enforce the award. The KFFAC rejected the petition on the basis that it has not been granted exequatur by the English Court prior to enforcement in the UAE. Essentially, the KFFAC’s judgement was that the party looking to confirm the award for enforcement must obtain a double-exequatur; a requirement under the Geneva Convention of 1927 where the award must be “final” in the country of origin as.

The necessity for a double-exequatur was abolished by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the Convention), which was adopted by the UAE pursuant to Federal Decree No. 43 of 2006. The Convention replaced the word “final” with “binding” so that no leave for enforcement (or exequatur) would be required from the country of origin.

Overturning the ruling of the KFFAC, the FSC found that the court’s refusal to recognize and enforce the award was due to misinterpretation of the term “authenticated” under in Article IV(1)(a) of the New York Convention which requires that a duly authenticated original award (or a duly certified copy) must be presented by a party looking to confirm and enforce an arbitral award.

The FSC found that the KFFAC had misinterpreted the meaning of the term “authenticated” with the meaning of enforceability or exequatur. The interpretation by KFFAC was due to the Ground e of Article V(1) of the Geneva Protocol on Arbitration Clauses (1923) and the Geneva Convention on the Execution of Foreign Arbitral Awards (1927). Ground e of Article V(1) provided that the enforcement of an award may be refused if the party against whom the award is to be enforced evidences that the award is not “binding”. Succeeding the 1923 Geneva Protocol, the 1927 Geneva Convention amended the requirement from “binding” to “final” which was ultimately interpreted by courts as a requirement to obtain grant of an exequatur from the court of the country of origin; hence the coming into practice of the double-exequatur system until the 1958 New York Convention.

The case involved a husband (the defendant) who took a video of his wife (the complainant) and sent the video recording to the complainant’s mother instantaneously through the instant messaging application; WhatsApp.

The complainant/wife filed a criminal complaint against the defendant/husband for breach of Federal Decree-Law No. 5/2012 on Combating Cybercrimes (the “Cybercrime Law”) which prohibits the use of a computer network or electronic information system or any information technology means for the purpose of the invasion of privacy.

The complainant/wife requested that the defendant/husband be penalized under Article 374/1 of the Penal Code and Article 21 of the Cybercrime Law. (Citations provided below.)

Amongst the requests by the complainant for the judiciary to order a fine against, and the imprisonment of the defendant, the complainant also requested an order for the prohibition of the defendant to access WhatsApp and the telecommunication network used by the defendant in the purported crime.

The complaint was first filed in mid-2017, with the final and binding ruling being issued by the Federal Supreme Court in mid-2019.

It is was decided by the Federal Supreme Court that invasion of privacy crimes committed through WhatsApp are not covered by the Cybercrime Law if the crime involves two or more persons in a closed room with the subject matter and media not privy to others outside that room.

The court did not rule on whether there were breaches under the Penal Code as the limitation period of three months on insult and slander accusations had expired by the time the complaint was filed.

In this ruling the Federal Supreme Court sets two elements to the test of whether the privacy of another person has not been invaded via electronic/digital means:

• Outside of cyberspace, if the accused, the suggested victim, and the recipient(s) of the media purported to have invaded the privacy of another, are physically located in a place closed-off to others; and

• If the media purported to have invaded the privacy of another is distributed only to persons in the same closed-off venue, who are also privy to the subject matter of the distributed media.

In the Workplace

The ruling raises questions towards the applicability of the Cybercrime Law in a workplace environment.

Comparatively, if this ruling were to be used as reference in managing workplace privacy policies, then it is arguable that a recording/image of one employee shared amongst other employees may not necessarily fall under the Cybercrime Law’s invasion of privacy provisions if said employees are all within a closed-off area (a closed office space for example) at the time, and the media is not distributed to persons outside that closed office space.

Provisions

• Article 21 of the Cybercrime Law:

Shall be punished by imprisonment of a period of at least six months and a fine not less than one hundred and fifty thousand dirhams and not in excess of five hundred thousand dirhams or either of these two penalties whoever uses a computer network or and electronic information system or any information technology means for the invasion of privacy of another person in other than the cases allowed by the law and by any of the following ways:

1- Eavesdropping, interception, recording, transferring, transmitting or disclosure of conversations or communications, or audio or visual materials.

2- Photographing others or creating, transferring, disclosing, copying or saving electronic photos.

3- Publishing news, electronic photos or photographs, scenes, comments, statements or information even if true and correct.

Shall also be punished by imprisonment for a period of at least one year and a fine not less than two hundred and fifty thousand dirhams and not in excess of five hundred thousand dirhams or either of these two penalties whoever uses an electronic information system or any information technology means for amending or processing a record, photo or scene for the purpose of defamation of or offending another person or for attacking or invading his privacy.

• Article 374/1 of the Penal Code:

Shall be sentenced to detention for a maximum period of six months or to a fine not exceeding five thousand dirhams in case the libel or insult takes place through the telephone or facing the victim in the presence of others.

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Issue

The first case involving the method of calculating late payment penalties on voluntary disclosures has been adjudicated by the Federal Supreme Court.

The Federal Supreme Court has taken a position divergent from that of the tax dispute resolution committees, and the Federal Primary and Federal Appeals Courts on this matter.

The judgment is significant because late payment penalties are calculated at a maximum of 300% of the tax debt.

A voluntary disclosure is when a taxpayer notifies the Federal Tax Authority (“FTA”) of an error or omission in a previous tax return, tax assessment or tax refund application.

A voluntary disclosure is obligatory when the taxpayer discovers a mistake – and submission of the voluntary disclosure must be made within twenty weekdays of discovering the mistake.

Once the taxpayer makes a voluntary disclosure – the resulting late payment penalties can reach a maximum of 300% of the disclosed amount calculated retrospectively as of the original tax return, tax assessment, or tax refund application.

Voluntary disclosure penalty calculation

The voluntary disclosure results in the FTA applying fixed penalties that comprise of AED 3,000 for the first time, and AED 5,000 for each subsequent voluntary disclosure.

A voluntary disclosure also results in the FTA applying a percentage-based penalty of 5% calculated based on the tax amount variance between the value in the voluntary disclosure and the original tax return, tax assessment, or tax refund application. This is referred to as a ‘tax benefit’ penalty.

Thirdly, the FTA generally applies a late payment penalty to voluntary disclosures at 2% immediately, 4% after the first week, and 1% daily up to a maximum of 300% calculated retrospectively as of the date of the tax return, tax assessment, or tax refund application that is being remedied – not as of the date of the voluntary disclosure.

Federal Supreme Court judgment

The case involved the application of late payment penalties on voluntary disclosures.

Since early 2019; the tax dispute resolution committees, the Federal Primary Court and the Federal Appeals Court, have taken the position that late payment penalties do not apply to the tax amount variance between the voluntary disclosure and the original tax return.

In other words – that the late payment penalties should be calculated as of the date of the voluntary disclosure, but not retrospectively as of the date of the original tax return.

However, the Federal Supreme Court has taken a position divergent from that of the tax dispute resolution committees, and the Federal Primary and Federal Appeals Courts.

The Federal Supreme Court reasoned that voluntary disclosures are to be considered a branch of the original tax return.

Based on this reasoning, the Federal Supreme Court ordered that late payment penalties should apply retrospective to the voluntary disclosure, calculated as of the date of the original tax return.

For example, if a person discovers a mistake in a tax return from April 2018, and makes a voluntary disclosure in April 2020, the late payment penalties up to 300% would be calculated as of April 2018 – not April 2020.

Article 101 of the UAE Constitution states that the judgements of the Federal Supreme Court shall be final and binding upon all. Thus, it is expected that the tax dispute resolution committees, and the Federal Primary and Federal Appeals Courts shall echo the position taken by the Federal Supreme Court on this issue.

VAT on Liquidated Damages

Construction litigation is generally segmented into two claims. The first is a claim for sums that are due but unpaid, whether contractually or on quantum meruit basis, generally for a transaction which has concluded. The second type of claim is compensation for a transaction that has not taken place, i.e. no underlying service or good has been provided.

In respect of the second type of claim, the UAE Civil Transactions Law permits the parties to set a compensatory amount for liquidated damages. Notwithstanding, the law also permits a court “…at the request of one of the parties, amend such an agreement, in order to make the amount assessed equal to the prejudice.”

Often before a competent court or an arbitration tribunal, litigants trigger the right to reassess compensation for liquidated damages which entails various applications, hearings, pleadings, and expert work that litigants should manage efficiently for any subsequent VAT liability concerns or tax trials.

The UAE Federal Tax Authority’s public clarification on the matter titled ‘VAT treatment of compensation-type payments’ explains that liquidated damages for loss of earnings – not for the provision of any goods or services – are outside the scope of VAT.

In its public clarification, the Federal Tax Authority describes ‘liquidated damages’ as “predetermined amounts that contractual parties designate during the formation of the agreement for the injured party to collect as compensation upon a specific breach – for example, in case of early termination of a contract or performance delay. The purpose of such payments is not to provide consideration for a provision of any goods or services but to compensate a party for loss of earnings. As such, the payments are outside the scope of VAT.”

Litigation Considerations

The litigation commences with the dispute notice which sets out the allegations that create the basis for the claim. In this sense, the notice describes the allegations and heads of damages, it is a considerable piece of evidence to determine the taxation treatment of the construction dispute proceeds received, and any expenses that may be incurred.

The complaint then materializes into a construction dispute before an arbitration tribunal or competent court and may have consequential effects in a subsequent tax trial before any of the Abu Dhabi, Dubai, or Sharjah tax dispute resolution committees, or before the tax disputes circuits at the federal courts.

With VAT liabilities in mind, litigants should maintain a holistic approach during submission of documentation in a construction dispute to ensure that the segmentation of the claims allows for determination of the tax treatment of the moneys that will ultimately be awarded.

Ultimately, the judgement or award issued in the construction dispute may or may not specifically allocate the award moneys clearly and consequentially hinder a litigant from identification of the tax treatment that should apply. Litigants should be vigilant in their analysis of how the judgement or award is detailed and follow any necessary applications before the courts or arbitration tribunal to obtain evidentiary documentation of how the awarded moneys are allocated.

Set-Off / Nomenclature

The respective public clarification by the Federal Tax Authority explicitly considers and elaborates on nomenclature in determining whether a payment is consideration for a supply or not. The public clarification states verbatim that “…it is important to ignore the labels or titles the parties give to a payment.”

For employers, this should be accounted for where the employer is the recipient of liquidated damages and applies rights of set-off. Although the treatment of liquidated damages would be outside the scope of VAT, employers must account for potential VAT liability in cases where payment of liquidated damages by a contractor are set-off against contractor invoices.

Evidence

Upon receipt of the judgement or award, the taxpayer (e.g. the contractor) will determine the tax treatment that shall be applicable to the moneys awarded. The treatment should be in line with the Federal Tax Authority’s public clarifications and general tax legislation. Article 48 of the Tax Procedures Law places the burden of proof on the taxpayer to evidence the justification of the tax treatment.

Litigants would be prudent in considering the tax treatment of the ultimate judgement (or award) at the outset of the litigation and plan accordingly, with tax litigation expertise involved in the case management process, in case of a potential subsequent tax trial.

The outcome of the construction dispute will also provide evidence on whether the compensation can be attached to an underlying service or good – even if they are considered liquidated damages by the parties – at which point a VAT liability may be incurred (such as the case of set-off rights noted above).

The taxpayer will have to evidence that the moneys received are indeed compensatory in nature for liquidated damages before the Federal Tax Authority, or a tax dispute resolution committee, or the federal courts, in a potential tax trial.

When drafting an arbitration clause, it is vital to make sure that the clauses are simple and clear in order to avoid uncertainty and disputes over their semantics and effect. This is the first step to ensuring the time and cost-effectiveness of a potential dispute as it will minimize the risk of possible disagreements regarding the jurisdiction of the tribunal or the process of appointing the arbitrators. At the very outset of drafting the arbitration clause, it must be explicit that the parties wish to have their disputes resolved via arbitration and to waive the original jurisdiction of the courts. If this intention cannot be inferred, it means that the ‘medium’ used has missed its target.

The repercussions of the failure to express clarity and intention of the parties to refer to arbitration in case of a dispute manifested in a case leading to a Federal Supreme Court judgment issued recently.

The Case in Question

The case in question revolves around an agreement that was executed in March of 2013, relating to the non-payment of medical supplies.

The language used in the arbitration clause was in English and the issue arose out of whether or not the clause was explicit in commanding the parties to refer to arbitration as the dispute resolution mechanism.

The arbitration clause stated in case the parties could not reach an amicable settlement in relation to any dispute within 30 days, either party may trigger arbitration dispute proceedings to be seated in Abu Dhabi, conducted in English and subject to the rules of the Abu Dhabi Commercial Conciliation & Arbitration Centre.

When the dispute arose for non-payment over the sale of the medical supplies, one of the parties filed the dispute before the Primary Court. The Primary Court found it had no jurisdiction to hear the case due to the arbitration clause.

The Primary Court judgement was appealed with the argument that the original language used in the arbitration clause did not obligate the parties to refer to arbitration, but rather, was an optional method for dispute resolution. The Appeals Court accepted the appeal argument and remanded the case to the Primary Court to apply its jurisdiction and rule on the merits of the dispute.

The party arguing that the arbitration clause was obligatory challenged the ruling of the Appeals Court before the Federal Supreme Court on the basis that it had submitted a translation of the arbitration clause from English to Arabic, provided by a judicially certified legal translator, to the court which evidenced that the arbitration clause was obligatory.

The Federal Supreme Court ruled that the judgement of the Appeals Court was unfounded as it did not debunk the translation presented by the party advocating for the obligatory language of the arbitration clause.

The Federal Supreme Court found that the Appeals Court could have ordered the appointment of a language expert from the respective expert registry, or the party advocating for the courts’ jurisdiction could have submitted a counter-translation evidencing that the arbitration clause was indeed optional. Neither of these potential procedures had occurred.

The Federal Supreme Court overturned the Appeals Court judgement.

But what if the Appeals Court of its own accord or by litigant’s request ruled for the requirement of a court-appointed language expert to opine on the English text of the arbitration clause?

Or what if the party advocating for litigation had submitted a translation by a judicially certified translator that arbitration clause was optional?

In both hypotheticals; the result would have been an even further prolongation of the dispute and an increase in costs.

The moral of the case is the importance of clear and effective arbitration clauses (or agreements); that include the seat of arbitration, number and selection of arbitrators, institutional or ad hoc, governing law of the subject matter in dispute and possibly governing law of the arbitration agreement (if different), capacity to agree to arbitration, the authority to sign arbitration agreements, multiple party arbitration, enforcement, opt-in and opt-out provisions (although they may be problematic), sovereign immunity if a party to the transaction is a State, scopes of disputes covered, and other matters.

In the late nineties, a contractor sued a government tender committee for AED 65,467,250 in compensation for losses and lost earnings as a result of not being awarded five tenders related to construction and maintenance works that the contractor had bid for.

The contractor argued that its five bids contained the lowest prices and fulfilled all the conditions of the tenders. Both the primary court and the appeals court rejected the claim.

The Federal Supreme Court, however, overturned the lower court judgments and found the tender committee to be administratively liable towards the contractor for the five rejected bids.

The case was brought forth on grounds of contravening Abu Dhabi Law No. 4/1977 On Tenders, Auctions and Warehouses in the Emirate of Abu Dhabi – particularly on the basis that Article 21 of the said law states that:

“The preference between the tenderers shall be according to the selection of the tenderer presenting the lowest total price, should the bid thereof be consistent with the tender conditions. However, the tenderer presenting a higher price may be chosen should the lower prices be unreasonably low and not assuring proper work progress.”

The Federal Supreme Court ruled that it was evident from the statutes regulating contracting by way of tender, that the legislator has subjected public tenders to basic principles of openness, equality, freedom of competition and the mechanism for awarding the tender, and obligates the administrative authority (i.e. the tender committee) to disclose the reasons for rejection of a bid.

The Court’s rationale was that this is to ensure that the administrative authority follows a decreed path in order to reach the appointment of the best bidders in accordance with the law. The contracting procedures are organized by way of tender, so that it takes place in two stages, the first of which includes preliminary work and the second in which the contract is concluded.

Continuing, the Court stated that the preliminary tender processes consist of setting the conditions for the tender, announcing it, receiving bids, fulfilling the conditions of the tender, and then separating between the bids. These were considered by the Court to be internal organizational rules that are the prerogative of the tender committee. Nonetheless, the Court opined that the provisions that are set by the legislator are for the benefit of the administrative authority (i.e. the tender committee) and private persons alike, with the aim of ensuring the impartiality of the bidding processes and respecting the principle of equality among all bidders.

In interpreting the law, the Federal Supreme Court noted that the bidder with the lowest price is originally the owner of the right to the award whenever the bid is consistent with the terms of the tender, and with the exception of this principle, the administrative authority may award the tender that was submitted at a higher price if the lower price was unreasonably reduced, as there may be concerns regarding good performance, and this exception was a violation of the basic principle that governs public tendering procedures, which is the mechanism for awarding the tender.

In its judgment, the Federal Supreme Court found the tender committee to be administratively liable.

The significance of this case is not only that a contractor had succeeded in an action against an administrative decision issued by an administrative authority (i.e. the tender committee), but that the Federal Supreme Court found the committee to be liable for its decision.

In other words, the Court did not only invalidate the decision, but also found that liability arose against the contractor’s claim of AED 65,467,250.

One of the rarely commented upon competencies under Emirati law is administrative law and administrative decisions; the law that governs the relations between government agencies, and government agencies and the private sector, and the decision taken by government agencies.

There is no single administrative legislative text in the UAE, rather, the corpus of administrative law is comprised of scattered provisions in various pieces of legislation – but mainly the Constitution and Article 84 (bis) of the Civil Procedures Law – and also scholarly works and jurisprudence.

As a matter of fact, Article 84 (bis) was only added to the Civil Procedures Law in 2014.

In 2019, there were almost 1,130 administrative cases filed before the various stages of the Federal Courts. Not to mention the myriad other administrative cases that are domestic respective of domestic administrative authorities in Emirates that have independent judicial authorities (i.e. Abu Dhabi, Dubai, RAKI, DIFC, and ADGM).

Most administrative disputes revolve around invalidating an administrative decision – in other words – cancelling the administrative decision and its consequence. The discussion surrounding forms and procedures of administrative disputes is quite broad and has its own respective nuances such as the effects of administrative decision in rem and those in personam, and whether effects can be retrospective, or whether there can be a monetary value attached to an administrative decision and its invalidation.

However, with all that said, it is extremely rare for a Court to find an administrative authority liable for an administrative decision – particularly where the plaintiff is claiming compensation for losses and lost earnings.

Generally, the Courts either uphold the administrative decision, or invalidate it, or invalidate it and replace it with a quasi-judicial/administrative decision – but rarely does a Court find the administrative authority liable.

This particular case in this article is what one may refer to as an ‘orphan’ case. It occurred in an exceptional instance, and it is unclear if there are other similar judgments, or whether the Federal Supreme Court may repeat such a judgment.