In the United Arab Emirates (UAE), the Federal Tax Authority (FTA) is the regulatory body for UAE VAT Laws and takes charge of managing and collecting federal taxes and fines. Being aware of the tax laws is always beneficial to business organizations and individuals. There are situations where the taxpayers are not satisfied with the decision given by the authority. In such cases, you may apply for UAE VAT Reconsideration.

The authority is ready to review its decision and give relief to the taxpayers if they prove the case by filing for UAE VAT Reconsideration.

What is the UAE VAT Reconsideration?

Any person who has received penalties can apply to the Federal Tax Authority (FTA)’s for VAT reconsideration within 20 working days from the receipt of such penalty.

Whether any objections can be raised to the FTA if penalties are imposed?

Yes, if you are not satisfied with the Federal Tax Authority (FTA)’s decision and if they have imposed any penalties, then you can file a VAT reconsideration request to the authority to review the decision made by the FTA.

How to Apply for VAT Reconsideration in the UAE?

The Federal Tax Authority is ready to review its decision on the levy of penalties on business entities. The UAE VAT reconsideration application can be submitted online to the authority appealing the authority to review the case and reverse the penalty. This application is to be submitted within 20 working days from the receipt of the penalty.

Any person who has received the penalty can submit UAE VAT reconsideration for any decision taken up by the FTA, and such an application must be submitted online in Arabic only.

How does FTA respond to the VAT Reconsideration filed?

The authority will review its decision and facts of the case and issue a new decision within 20 working days from the receipt of the application. The Authority will inform the applicant of its decision within five business days of issuing the decision.

The authority can either remove the penalties imposed or can take the stand of retaining the penalty which depends on case to case basis.

Applicable provisions of the Law

Article (27) of the Federal Law No. (7) of 2017 on Tax Procedures speaks about application and procedures for reconsideration

1. Any person may submit a request to the Authority to reconsider any of its decisions issued in connection to him, in whole or in part, provided that reasons are included, within 20 business days from him being notified of the decision.
2. The Authority shall review a request for reconsideration if it has fulfilled the requirements and issue its justified decision within 20 business days from receipt of such application. The Authority shall inform the applicant of its decision within five business days as of the issuance thereof.

VAT Penalties in the UAE

The authority may impose penalties if they come across a situation that has led to tax evasion from the taxable person in the UAE.

VAT Administrative Penalties in the UAE

These penalties are imposed by the Authority for non-compliance and breaching the provisions of this Decree-Law or Federal Law No. (7) of 2017 on Tax Procedures.

Tax Evasion penalties in the UAE

These penalties are imposed on persons who are involved in any kind of tax evasion ow lowering of the tax due illegally. 

What are the circumstances that invite VAT penalties in the UAE?

1. Late Registration for VAT
2. Late Deregistration
3. Failure to file VAT Returns within the time frame
4. Submission of wrong documents or incorrect information
5. No proper records

What are the Seven information’s required to file the VAT Reconsideration Form?

1. VAT Registration certificate
2. Emirates ID for the responsible person for registration
3. Passport copy for the responsible person for registration
4. Registered Mobile number and Memorandum of association to verify the authorized person.
5. The amount of penalty
6. The date of the penalty
7. A detailed summary of the case.

Based on all this information the VAT reconsideration can be filed. Also, note that this application and the supporting documents need to be submitted in Arabic only. There are no fines and penalties when submitting the VAT reconsideration form.

Example of UAE VAT Reconsideration 

ABC LLC a company registered in the tax group wanted to leave the tax group and register separately. However, in the process of applying for separate registration, they received a late registration penalty of AED 20,000/- from the Federal Tax Authority.

So, the UAE VAT Reconsideration was filed indicating the facts of the case to the authority. The authority has accepted the filed UAE VAT reconsideration and has reversed the penalty that was imposed.

What are the other options ahead if you are not satisfied with the FTA’s decision?

If you are not satisfied with the decision taken by the FTA even after submitting the VAT Reconsideration Form, then in such circumstances the case can be taken to the Tax Dispute Resolution Committee.

An objection can be raised if the VAT reconsideration request is rejected by the authority to the Tax Dispute Resolution Committee within 20 business days from the date of notification.

However, you cannot raise the objection to the committee in these two circumstances:

1. If the reconsideration was not filed with the FTA previously
2. If the penalties levied by the authority are not settled

The committee will review the case again and make a decision within 20 working days from the date of receiving the objection. In certain situations, the committee will extend the time frame to an additional 20 business days if the authority finds any reasonable facts about the case.

The Tax Dispute Resolution committee’s decision will be final if the penalty amount or the tax payable is less than AED 100,000/-

Further, the taxable person who has the penalty of more than 100,000/- and wants to challenge the decision of the committee can approach the federal court within 20 working days from the date of notification of the objection.

The application of the Designated Zone (DZ) rules is a known area of focus for the United Arab Emirates (UAE) Federal Tax Authority (FTA) when conducting checks on repayment returns, and for broader FTA audits. In our experience, many businesses are facing material exposures to tax assessments and penalties arising from incorrect application of the DZ rules and associated requirements to account for import Value Added Tax (VAT).

Who is this alert for?

Any business which operates and make supplies from a DZ for VAT purposes in the UAE and any business that receives goods from suppliers located within a DZ in the UAE. More specifically, we would expect this alert will be of particular interest to those businesses involved in supply chains which involve the movement of goods within, between, to and from DZ’s, particularly where goods cross the UAE border.

Designated Zones rules – recent issues

We have seen a number of recent examples where businesses are facing material exposures to tax assessments and penalties arising from the incorrect application of the DZ rules, either in relation to their own supplies or as a result of the VAT treatment applied by vendors.

In our experience, many businesses struggle to apply DZ rules to the practical examples they face in their business on a day to day business. As a result,businesses are being required to make adjustments to supplies previously treated as out of scope of VAT, in order to charge VAT at 5% to their customers. Such corrections can attract significant penalties which increase over time and can be up to 350% of the original tax due.

In addition, the recent Public Clarification VATP012 on Importation of goods by agents on behalf of VAT registered persons, raises some important points about the eligibility to recover VAT paid on import. In certain cases, this will lead to businesses being required to make adjustments to the value of import VAT automatically populated in Box 6 of the VAT return. In many cases, businesses appear not to have fully considered the implications of the Public Clarification on their current business and reporting practices.

If you are a business involved in supply chains which include movements of goods within, between, to and from DZ’s there is a risk that VAT rules may be applied incorrectly in many cases, including:

• Supplies made under a Delivered Duty Paid (DPP) incoterm, or similar arrangements involving delivery of goods to premises in the UAE mainland
• Supplies where the Importer of Record (IOR) is not owner of the goods at the time of import e.g. where the customer imports the goods under their own import license before legal title transfers·        
• Supplies where goods are entered into a DZ under an import license which authorizes imports into a different DZ or UAE Free Zone·        
• Supplies of goods made where the customer intends to consume the goods within its own business or for private purposes·        
• Supplies of goods where the supplier is unaware of the purpose to which the customer will put those goods·        
• Supplies involving or related to real estate situated within the DZ, amongst others

Where supply chains involve goods which are also subject to Excise Tax, further
complications can arise.

List of Designated Zones in the UAE

Designated Zones – Abu Dhabi

1. Free Trade Zone of Khalifa Port
2. Abu Dhabi Airport Free Zone
3. Khalifa Industrial Zone
4. Al Ain International Airport Free Zone
5. Al Butain International Airport Free Zone

Designated Zones – Dubai

1. Jebel Ali Free Zone (North-South)
2. Dubai Cars and Automotive Zone (DUCAMZ)
3. Dubai Textile City
4. Free Zone Area in Al Quoz
5. Free Zone Area in Al Qusais
6. Dubai Aviation City
7. Dubai Airport Free Zone
8. International Humanitarian City – Jebel Ali

Designated Zones – Sharjah

1. Hamriyah Free Zone
2. Sharjah Airport International Free Zone

Designated Zones – Umm Al Quwain

1. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port 
2. Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road

Designated Zones – Ras Al Khaimah

1. RAK Free Trade Zone
2. RAK Maritime City Free Zone
3. Al Hamra Industrial Zone – Free Zone
4. Al Ghail Industrial Zone – Free Zone
5. Al Hulaila Industrial Zone – Free Zone

Designated Zones – Fujairah

1. Fujairah Free Zone
2. FOIZ (Fujairah Oil Industry Zone)

Designated Zones – Ajman

Ajman Free Zone

Under UAE VAT Law, the responsibility to levy, collect and pay tax to the government is on the person who is making taxable supplies i.e. on the supplier. This means, whenever a registered supplier is making a taxable supply, he needs to charge VAT and pay the same to the government. The mechanism of collecting tax by a registered supplier from his customers is known as forward charge mechanism. For example, A-One Spares Ltd sold spare parts worth AED 100000 to General Automobiles Ltd and collected VAT of AED 5000 at the rate of 5%. The VAT of AED 5000 is collected on a forward charge basis. However, the UAE VAT Law and Executive Regulations notifies certain type of supplies on which VAT need to be charged on Reverse Charge Mechanism.

Before understanding those supplies which are liable for Reverse Charge VAT, first let us understand the concept of reverse charge mechanism.

What is VAT Reverse Charge Mechanism?

Under reverse charge mechanism, on certain notified supplies, the recipient or the buyer of goods or services is responsible to pay the tax to the Government, unlike in the forward charge, where the supplier is liable to pay the tax. The key change is the shift in the responsibility of paying tax, which is moved from the supplier to the buyer.

Why VAT Reverse Charge Mechanism?

In order to ensure that the VAT is collected on the supply of goods or service where the supplier is not a taxable person and the supply has been made in the state of UAE, the government has introduced the concept of reverse charge mechanism. Due to this, the recipient or the buyer is treated as a person making taxable supplies to himself and will be responsible to pay VAT to the government.

What are the supplies liable for Reverse Charge VAT in UAE?

In UAE VAT, broadly the import of concerned goods or services and supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy are under reverse charge VAT. The UAE VAT Law has listed the following supplies which will be liable for VAT on reverse charge mechanism, provided the applicable conditions are met as prescribed in UAE Executive Regulations:

• Imports of concerned goods or concerned services for business purpose
• Taxable supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy by registered supplier to registered buyer in the State of UAE
• Supply of goods or services by a supplier who does not have a place of residence in the state to a taxable person who has a place of residence in the State of UAE.

All of the above mention supplies are liable to reverse charge mechanism. However, for each of the above supplies, specific conditions are mentioned in the UAE VAT Executive Regulations which need to be full filled, to be liable for reverse charge VAT.

Reverse Charge VAT Example

In order to ensure that VAT is collected on the supplies where a supplier is not a taxable person in the state of UAE, the concept of Reverse Charge Mechanism is introduced in the UAE VAT. Under this, the recipient or the buyer of goods or services will be liable to pay tax to the government. Thus, as a recipient or buyer of goods or services under reverse charge mechanism, the following responsibility needs to be discharged:

• Determine the value on which tax needs to be levied
• Account the VAT due on reverse charge supplies
• Remit VAT to the government
• Claim Input Tax, if eligible.
• Maintain the records such as invoice and other documents to substantiate the tax payment and input tax claim

In order to make the concept of Reverse charge mechanism clearer, let us understand this with an example:

A-One Spare Ltd, a registered dealer in spare parts and accessories in Dubai imported spare parts worth AED 5500 from Speed Motors Ltd, located in India.

Here, A- One Spare Ltd, being a registered importer, is required to pay VAT @ 5% on AED 5500 i.e. AED 275 to the government.

How different is Reverse Charge VAT compared to Forward charge mechanism?

Let’s make the comparative analysis of VAT on forward charge and reverse charge with an example of domestic supplies of goods at 5% versus the import of similar goods.

If you closely observe the illustration, the net result of reverse charge mechanism is same as that of forward charge basis. The only difference in reverse charge VAT is the shift in the responsibility of paying VAT which is moved from supplier to the recipient. In the above illustration, it is moved from ABC Firm to XYZ firm. In a way, the concept of reverse charge mechanism helps to alleviate the difference between local and international suppliers and puts both into the same position.

The Federal Tax Authority  (“FTA”) has released Public Clarification VATP017 “Time-frame for recovering Input Tax”.  VATP017 clarifies the FTA’s position on when input tax may be recovered through the VAT return, and the recourse available to the taxable person where input tax is not recovered within the prescribed time period.
 
Recoverable input tax must be recovered in the first tax period when the two conditions
below are satisfied (referring Article 55(1) of the VAT Law):

1. The taxable person has received a tax invoice; and
2. He intends to pay the consideration for the supply before the expiration of six
   months after the agreed date for the payment of the supply.
    
   

   When the taxable person receives a tax invoice, the input tax can only be recovered in the tax period when an intention to pay is formed within a prescribed period. Some businesses have internal approval processes that must be completed before payment of an invoice.  VATP017 clarifies that the taxable person’s intention to make the payment only crystallizes when the internal invoice approval process is complete and an intention to make payment within the prescribed period is formed.
    
   Therefore, before a taxable person can recover recoverable input tax, he must hold a tax invoice and satisfy the condition that he has formed an intention to pay within the prescribed period of time.
    
   An additional requirement under Article 55(1) of the VAT Law is that input tax must be recovered in the first tax period when the two conditions above are satisfied.  Where the taxable person fails to recover the input tax in this tax period, the recoverable input tax

may be included on the tax return for the subsequent tax period.  Where the input tax is not recovered in either of the two eligible tax returns, the input tax will be out of the scope of the time for recovery through the VAT return, and will require submission of a voluntary disclosure to recover it.
 
VATP017 also clarifies the position where the taxable person has recovered the input tax on the tax return but has failed to make the payment before the expiration of six months after the agreed date of payment.  The taxable person should reduce his input tax by the unpaid amount in the tax period that corresponds to the expiry of the six month period.  This input tax will be recoverable once the taxable person has made the payment.

Foreign businesses may also recover the VAT they incur when visiting the UAE.

As per Article 67 of Executive Regulations of UAE VAT Law, businesses/ business visitors to claim VAT paid on the purchase of goods and services incurred in UAE.

A non-government foreign business may obtain a refund on VAT paid in UAE by submitting the refund request for business visitors as prescribed by the Federal Tax Authority.

Terms/Conditions to reclaim refund by business visitor:

1. Input tax is not recoverable in case of entertainment expenses/ motor vehicles or other expense incurred for personal use.
2. Claim is not applicable to non-resident tour operators in UAE.
3. Foreign business cannot claim refund if business makes taxable supply in UAE.
4. The foreign business should be from the countries with reciprocal arrangement with the Ministry of Finance (List of the countries enclosed at the end)
5. The business should not have a fixed establishment and not carrying any business in UAE and is not a taxable person in the UAE.
6. They are carrying on the business and are registered with a competent authority in the jurisdiction in which country they are established.
7. Minimum amount of claim should be 2000 AED.

Steps to file for Refund VAT for Business Visitors in UAE

1. Sign Up with FTA portal-eservices.tax.gov.ae
2. Add company details in the registered mail id portal.
3. Submit the refund form
4. All documents required for refund as discussed above should be sent to The Federal Tax Authority the document should reach within one month from refund request submission.
5. Refund form will be processed within 4 months by the FTA
6. Once request is approved, refund is issued within 10 working days.

Below mentioned are the details required for submission of a refund request –

• Proof of incorporation in the respective country of establishment.
• Tax registration certificate of the respective country (if any).
• Bank Account details
• Copy of passport of the authorized signatory.
• Proof of authority of the authorized signatory.
• Original Tax invoices with proof of payment.

What are the important guidelines issued from the Federal Tax Authority to submit the refund request for Business Visitors in UAE?

The below mentioned guidelines issued by the authority with regard to refund request submission are as mentioned below:

• All the documents are preferred to be in original hardcopy with proof of payment. No softcopies are entertained, which will lead to rejection of refund request.
• As stated above, the hardcopies of invoices and other documents shall be sent to the Federal Tax Authority within one month of submission of the refund request along with the printed request form with the refund submitted reference number and a sufficiently pre-paid envelop having the name and details so as to return the documents after verification.

In the case of a company that has multiple number of branches, the Refund is only available to the branch(es) which is / are established in a country with a reciprocal arrangement in place. Refunds will only be paid to a bank account in the eligible country and the bank account must be in the name of the applicant / Foreign Business.

Below mentioned are the list of countries approved for the VAT refunds for Business Visitors with reciprocal agreement as at September 2019.

Following are the fully applicable country lists-

If the visitor is from a country not in the above list, or does not have a VAT system, it is required by the visitor to contact the Ministry of Finance of the respective country, which would have to contact the UAE Ministry of Finance for inclusion in the approved list.