We got a 300% VAT penalty in the UAE. Here’s how not to.
Since Paddle started in 2012, the tax landscape for SaaS businesses has become increasingly complex, with more and more countries charging tax on the sale of digital goods and services.
I say “increasingly complex” – for some jurisdictions “agonizing” might be more apt.
In 2019, our tax compliance team found this out the hard way when trying to register for VAT in the United Arab Emirates.
Here’s how, despite the efforts of a dedicated team and over eight months, we still got handed a fine.
Staying on top of sales tax compliance
As a reseller, Paddle takes on sales tax liability for all transactions to customers for the 2,000 global software companies we work with.
To make sure we stay on top of tax compliance, we have a team of tax experts who constantly scan the horizon to make sure we know when new regulations like this will be coming into force. This meant that early in 2019, we were one of the first businesses based outside of the UAE to start the registration process.
At the time, the processes had been set up by the Federal Tax Authority (FTA) and as such were tailored to businesses with a physical presence in the UAE. Our team soon discovered that many of the registration documents either needed translating or had to be provided in Arabic. Then there was a set of very specific requirements to contend with, as our Head of Finance, Tanya Freymundt, recalls:
“We couldn’t have anticipated the requirements from them. One of which was to submit our invoices, complete with a company stamp. Not many businesses know these kinds of processes even exist. And at Paddle, we have such large transaction volumes, that it made this an almost impossible task.”
Late filing and remittance fines💰
Managing the language barrier and gathering the right evidence made for lengthy delays and lots of back and forth with the tax authority in the UAE.
The result? A 300% fine for late filing and remittance, with additional fines for late registration.
So, despite starting the process over eight months prior with every intention of being fully compliant, the fine was non-negotiable and we had to pay up. Sometimes you can have the team and the expertise but the complexity of these processes will still catch you out.
“You live and learn”
As our CFO surmised in our recent tax agony webinar, “you live and learn”. But we don’t want you to have to learn the hard way too, so here’s a heads up on what you need to manage the complex world of global sales tax.
To handle the process in-house, you need the time, team, and budget to support your efforts. This includes the expertise to navigate your way through the regulations and the budget to employ local representatives and global tax advisors when needed.
You can use tools to help your team keep on top of where you need to register, and even how. Some might even register for you, for a fee, and the ultimate liability is typically still yours.
Alternatively, you can wash your hands of the whole thing and sell through an all-in-one payments infrastructure provider like Paddle. While the above incident gave us a pounding headache, it didn’t affect our customers or their sales in the slightest because we were liable on their behalf. The onus was on us to fix it – and we did!