The UAE Federal Tax Authority (FTA) has issued Decision No. 6 of 2025 regarding ‘Standards, Controls and Procedures for Dealing with Shortage Within the Designated Zone due to the Natural Characteristics of Excise Goods’ on June 17, 2025, which introduces a formalised and structured process for reporting natural shortages of excise goods held in Designated Zones. The decision is effective July 1, 2025. The key implications of this Decision are outlined below.  

What’s New: Natural Shortage, Pre-Approval and Compliance Obligations

Decision No. 6 of 2025 introduces a clearer and more formalised framework for managing natural shortages of excise goods that occur during production, transportation, or storage. These shortages must arise from conditions beyond the control of the taxable person and must be necessary and unavoidable in the process of making goods available for consumption.

Under the new rules, businesses are required to seek pre-approval from the FTA for any such natural shortages that fall within a permissible percentage. The permissible threshold is not self-declared. It must be determined by an FTA-approved Independent Competent Entity (ICE), an approved laboratory that will conduct a detailed inspection of the production process and premises, assess the nature and extent of expected shortages, and issue a formal report confirming the allowable shortage. The report is valid for up to one year, after which a new assessment may be required.

In addition to this pre-approval, businesses must submit a declaration reconciling actual versus allowable shortages, based on the ICE report. Where there are changes in production lines, equipment, or storage conditions that may affect the expected loss ratio, businesses are required to notify the ICE within 20 working days so that the permissible percentage can be reassessed accordingly.

Documentation and Reporting Obligations

This pre-approval and validation process is accompanied by more stringent reporting and documentation obligations:

• Supporting evidence: Every reported shortage must be backed by the findings of the approved ICE, confirming that the shortage is within the agreed threshold.
• Audit-ready documentation: Businesses must maintain a comprehensive record of:
  • Stock reconciliation statements
  • Internal loss and variance reports
  • ICE assessment reports and technical findings
  • All related correspondence with the FTA, including evidence of submission, approval or rejection
• Readiness for FTA verification: The FTA reserves the right to conduct its own inspections or request additional documentation. Businesses should ensure real-time traceability of excise goods across production and storage systems.

Failure to comply with any of these procedural or evidentiary requirements could result in denial of Excise Tax relief, tax assessments, and potential penalties.

Changes to Existing Reporting Procedures for Shortages

This decision essentially replaces the existing procedures for natural shortages as set out in Public Clarification EXTP007, which allowed for FTA notification and discretionary tax relief based on the circumstances of the shortage. Under the new regime, the FTA’s discretion is replaced by standardised procedures, fixed deadlines, and mandatory third-party assessments.

Note, this decision applies to natural shortages only. Other types of losses/shortages, e.g., those caused by fire, theft, or operational error, remain outside the scope of Decision No. 6 and may still be subject to the procedures outlined in EXTP007 or other applicable guidance.

What Should Businesses Do Now?

To prepare for the new requirements taking effect on July 1, 2025, businesses should:

• Review internal production, storage and transportation processes to determine any natural shortages occurring for excise goods.
• Proceed to prepare and complete a submission for pre-approval to the FTA, including the identification and gathering of all necessary documentation as required under the Decision.
• Support to align ICE on company-specific production or storage processes and obtain pre-approval for the permissible shortage percentage.
• Revisit any existing shortage claims submitted under EXTP007 that may fall within the scope of the new decision and require revalidation.
• Review internal processes and SOPs to align them to the new reporting and documentation requirements.
• Assess and upgrade recordkeeping systems to support real-time reconciliation, shortage tracking, and audit preparation.

Implications of the New Decision

FTA Decision No. 6 of 2025 introduces a formalised framework for a matter that has been a significant issue for many UAE businesses. It aligns the UAE more closely with global best practices in indirect tax governance and places greater emphasis on third-party verification and real-time operational discipline.

While the decision introduces welcome clarity and consistency, it also brings heightened procedural expectations. Delays in reporting, reliance on outdated internal processes, or failure to coordinate with approved laboratories could expose businesses to unnecessary tax liabilities and penalties.

It remains to be seen how this decision will influence the FTA’s approach to historical periods. In the past, the FTA has challenged and, in some cases, penalised businesses for not accurately reporting natural losses. With a clearer framework now in place, there may be renewed scrutiny of past practices, particularly where documentation or approvals were lacking.

At Alvarez & Marsal, our Middle East Indirect Tax team is already working with businesses to navigate these changes effectively. We provide:

• End-to-end assistance with natural shortage approval applications, including preparation of letters and documentation, reviewing of processes, walkthroughs during on-site inspections and overall coordination with the FTA.
• Gap assessments and redesign of SOPs and internal workflows.
• Tailored training for operational, tax, and warehouse teams.
• Strategic advisory on excise governance, inventory reporting, and risk mitigation.

Reach out to us to ensure your business is fully prepared for the July 2025 changes and remains aligned with the FTA’s evolving compliance expectations.

Read the full decision from the FTA here: FTA Decision No. 6 of 2025 on Standards Controls and Procedures for Dealing with Shortage in the Excise Goods - for publishing.pdf