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Dubai Customs released guidance (Notice no. 1/2021 (14 January 2021)) concerning the submission of customs declarations and required documents.

The guidance reinstates the process initiated by Notice 1/2018, requiring the submission of customs declarations. Notice 1/2018 was suspended, as part of the government’s response to the coronavirus (COVID-19) pandemic by Notice 2/2020 which paused the requirements to submit customs declarations.

Notice no. 1/2021 revokes the suspension allowed under Notice 2/2020 and reinstates the customs declaration requirements beginning 31 January 2021. As of that date, businesses will have to submit customs declarations and other required documents to Dubai Customs within 14 days of processing of the customs declaration on the Mirsal2 portal. Once the 14-day period lapses, a daily late charge will be applied.

Special rules apply for customs declarations completed between 29 March 2020 and 31 January 2021.

News Courtesy :  KPMG

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Since the implementation of VAT in UAE, the VAT301 form has been available on e-services portal to manually process the VAT payment on Customs Declarations using the Tax Registration Number (TRN).

Recently, Federal Tax authority (FTA) has communicated with the taxpayers that the VAT301 form will be discontinued shortly for users who have a valid TRN and were using this form earlier for settlements via their VAT returns.

For the VAT registrants who already have a valid TRN, in order to continue being able to import goods via customs, they will need to ensure that their custom code is linked to their TRN.

If a registrant does not have a customs code, it will require registering with the Customs Department and linking their new customs code with their TRN.

Alternatively, one will only be able to import goods via a clearing company that is registered with the FTA or only use form VAT301 to utilize the payment option.

Below entities can still request to open form VAT 301 for VAT settlements based on customs declaration through FTA online services:

• Designated entities exempted by FTA.

• Free zone Companies that exports through land to GCC Countries from designated zones for the VAT purpose.
• FTA approved shipping and clearance agencies to clear shipments of on behalf of registered and non-registered importers with FTA.

To submit application to open VAT301 form, there is a form “VAT 301 settlement access form” which is available on FTA website.

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The tax authority of the United Arab Emirates (UAE) issued a clarification (VATP023) concerning value added tax (VAT) and the temporary zero-rating of VAT for certain medical equipment.

The clarification prescribes that the supply or import of certain personal protective equipment during the period from 1 September 2020 to 28 February 2021 and used for protection from the coronavirus (COVID-19) disease is considered to be medical equipment subject to VAT at a zero-rate (0%). Eligible medical equipment is limited to the following items:

• Medical face masks
• Half-filtered face masks
• Non-medical “community” face masks (made from textile)
• Single-use gloves
• Chemical disinfectants and antiseptics intended for use on the human body (but excluding detergents, cosmetics, and personal care products)

A supply or import outside the “specified period” (before 1 September 2020 or after 28 February 2021) is subject to VAT at a rate of 5% (under the general VAT rules).

The application of the VAT zero-rating is effective retroactively from 1 September 2020. In situations when a supplier is aware of the identity of a recipient of eligible equipment, a tax credit note is to be issued and delivered to the recipient in order to allow for a refund of any VAT overcharged on the supply of the eligible equipment during the relevant period. If the recipient cannot be identified, the supplier is to report, and remit collected VAT amounts to the tax authority.

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Although some penalties for violations related to VAT in UAE are becoming less severe, there’s still a very alarming array of VAT enforcement powers that can trap unwary registered businesses. Through proper awareness of all the problem areas, as well as careful planning, it’s possible to avoid being an unwitting victim.

Filing of Tax Returns for VAT-Registered Businesses

The following violations and penalties are applicable for VAT-registered businesses in UAE:

• Failure of a business or its legal representative in filing VAT return within the timeframe specified by the FTA – the penalty is going to be charged onto the company’s legal representative. Penalty is at AED 1,000 for the first offense and AED 2,000 for a repeated offense within twenty-four months from committing the first offense.
• Failure of a VAT-registered business to submit VAT return before the deadline as specified by the VAT legislation – penalty of AED 1,000 will be imposed for the first offense and AED 2,000 for a repetitive case in the next twenty-four months following the first offense.
• Failure in paying VAT stated in a tax assessment or tax return form before the deadline that is specified by the VAT legislation – a taxable person will be incurring a penalty for late payment. Two percent of the tax that’s unpaid will be due to the FTA by the business immediately. Four percent will be due a week following deadline of tax payment. One percent will be the penalty for every day VAT is left unpaid a calendar month following the VAT payment deadline. The maximum penalty for late payment of VAT is three hundred percent.
• Submission of erroneous tax returns – penalty is fixed which is at AED 3,000 for the first offense. For any repeated offense, it will come with an AED 5,000 penalty. There will also be a percentage-based penalty imposed on a business aside from the fixed penalty. Fifty percent of the amount that’s unpaid will be the penalty if the VAT-registered business doesn’t make a VAT voluntary disclosure or a business has made a voluntary disclosure only after it is being notified and the FTA has already started the audit process. Thirty percent of the amount unpaid to the authority will be the penalty if the VAT-registered business discloses the error voluntarily following the notification sent by the FTA for a tax audit and the tax audit hasn’t started yet. Five percent of the amount unpaid to the tax authority is the penalty if the business makes a disclosure voluntarily prior to being sent a notification of a tax audit by UAE tax authorities.

Late registration

The Federal Tax Authority (FTA) must be notified of your liability in undergoing VAT registration when your taxable turnover exceeds the mandatory registration threshold for the past twelve months. The mandatory registration threshold in UAE is AED 375,000. If you believe you’ll be exceeding the threshold soon, you may begin the registration process.

When notification regarding VAT registration in UAE is late and you’ve failed to notify the tax authority, you’ll be charged regardless of the reason or excuse you have for the delay. A penalty of AED 20,000 will be imposed onto your business.

Take note: the penalty may be mitigated at the discretion of the FTA with levels of mitigation greatly dependent on the unique circumstances of every single case.

Following the registration for VAT in UAE

Every business in UAE that is registered for VAT needs to make sure that it’s organized in dealing with taxation on-time and correctly:

• Is there someone within the organization who controls the VAT accounting and make sure new offerings are dealt with properly for the purpose of VAT?
• Is your business system capable of ensuring all input tax and output tax are recorded properly?
• Is there a system in place that can make sure proper evidence can be obtained in supporting claims for VAT input tax?
• Where VAT isn’t charged for supplies made, would there be proper evidence retained and is it correct in law?
• Is there a system in force that can make sure input tax that’s non-deductible isn’t reclaimed including most VAT for business entertaining, motor cars or exempt supplies?
• Are VAT charges always considered prior to contracts being made?

Appeals

Appeals against penalties, assessments, and amount of interest that’s charged by the FTA may be made by a VAT-registered business or its legal representative. The first appeal will be local and independent done by the FTA. The FTA has powers of mitigation for appropriate circumstances. When an appeal is against an imposition of penalties or interest, tax must be paid prior to an appeal being heard. This is unless a business is capable of demonstrating the fact that it’s unable to pay due to financial hardship.

Source : GCC FinTax

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One of the first updates to the UAE VAT Executive Regulations since they were published towards the end of 2017 relates to the zero-rating of exported services. This change in 2020 only involved changing the word ‘or’ to ‘and’ but caused a profound shock in the UAE market for exported services and left a lot of questions open. Given the lack of clarity regarding the update, the FTA subsequently published a VAT Public Clarification on the zero-rating of export of services (“VTP019”) to provide its opinion on the impact of the change.

Legislative Change

Prior to the change, Article 31(2) of the Executive Regulations read:

‘For the purpose of paragraph (a) of Clause 1 of this Article, a Person shall be considered as being “outside the State” if they only have a short-term presence in the State of less than a month or the presence is not effectively connected with the supply.’ [Emphasis added]

Following the change in law, this article read as follows:

‘For the purpose of paragraph (a) of Clause 1 of this Article, a Person shall be considered as being “outside the State” if they only have a short-term presence in the State of less than a month and the presence is not effectively connected with the supply.’ [Emphasis added]

Impact of Change

Prima facie this change appeared to significantly restrict the zero-rating, meaning that if an employee or director of a business entered the UAE for a period exceeding a month, all supplies to that business by UAE suppliers would be subject to VAT. Furthermore, where an employee or director came to the UAE for less than a month, but this was even tangentially connected with the supply, the supply would also be subject to VAT. Finally, and potentially most concerningly, the change in law appeared to mean that businesses with branches in the UAE could never benefit from zero-rating, even where this branch had nothing to do with the supply concerned.

Clearly this would have significantly widened the scope of tax and would have caused significant difficulties for suppliers in monitoring staff movements for all their customers.

FTA Clarification

Once the uncertainty among exporting businesses became clear, the FTA released VTP019 to clarify its position on the meaning of the change, in which the FTA considered the place of residence of the recipient of exported services.

A recipient of services is regarded as having a place of residence in the UAE if they have either a place of establishment or fixed establishment in the UAE. Where a recipient has establishments in multiple jurisdictions, the establishment most closely related to the supply of services must be determined and it is this establishment that will drive the VAT treatment.

UAE suppliers are only entitled to apply the zero rate of VAT on services supplied to customers without a UAE place of residence under the above rules.

The Public Clarification sets out the FTA’s interpretation of the criteria to consider in determining the establishment most closely related to the supply, where there is uncertainty regarding whether a supply of services is received by a foreign or UAE establishment of a recipient. These include the following:

• Which establishment is the contractual recipient of the supply;
• Which establishment is actually benefiting from the supply;
• Which establishment will receive the invoice and make payment for the supply;
• Which establishment provides instructions to the supplier; and
• Whether the services are related to business being carried on by the recipient through an establishment in a particular country.

Furthermore, the FTA stated that only the physical presence of the recipient during the period of supply and consumption needs to be considered; the location of the recipient before and after performance and consumption of the services should not be taken into account for the purposes of residency in relation to the supply.

Importantly, VATP019 states that when determining the location of the recipient, only the establishment most closely related to the supply should be considered. This means that if a recipient has both UAE and non-UAE establishments, and the non-UAE establishment is most closely related to the supply, the condition that the recipient is outside the UAE may still be met, despite the recipient having a UAE establishment.

Continued Uncertainty

While the FTA Clarification provided some welcome clarity in relation pre/post-supply visits to the UAE, as well as in relation to UAE branches and visits exceeding a month not effectively connected to the supply, there are still uncertainties despite the clarification.

For example, the FTA confirmed that a non-UAE recipient of services (including one which already has a UAE establishment) could potentially no longer be considered ‘outside the UAE’ if employees or directors come to the UAE during the period in which the services are performed, and this visit relates to the supply being made.

The problem in this case is that there is no de minimis limit and no concept of scale. For example, a director coming to the UAE for one day for an annual management meeting or in order to sign a contract for the supply could potentially prevent zero-rating. This would be a harsh interpretation of the law but based on currently available information is perfectly possible.

In summary, UAE businesses involved in the export of services should continue to be careful, especially where customer staff are likely to visit the UAE, as certain seemingly insignificant trips could inadvertently cause previously zero-rated supplies to become standard-rated. Where there is any doubt, professional advice or a private clarification from the FTA should be sought.

Source : GCC FinTax

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