Tobacco establishment shut down for violating tax regulations worth Dhs91 million in Dubai

The Federal Tax Authority (FTA) carried out an inspection campaign in collaboration with the General Department of the Federal Criminal Police at the Ministry of Interior and Dubai Police General Headquarters – represented by the General Directorate of Criminal Evidence and Criminology (Department of Anti-Economic Crime) – which led to the foreclosure of a commercial establishment in the Emirate of Dubai that was trading tobacco products unmarked with Digital Tax Stamps.

In a press statement issued on Friday, the FTA revealed that all products in violation at the establishment were confiscated – a total of 5,430,356 packs with Dhs91,833,016.40 in due taxes.

The Authority implemented the necessary legal measures against the non-compliant establishment, as part of its efforts to strengthen control over markets in order to combat tax evasion, promote tax compliance, and protect consumers.

The Authority indicated that the joint campaign forms part of its continuous efforts to monitor the market, in collaboration with the relevant authorities.

The FTA called on all business sectors – including producers, importers, and stockpilers of tobacco and tobacco products – to comply with tax legislation in accordance with Federal Law No. (7) of 2017 on Excise Tax in order to avoid fines and penalties for non-compliance with tax laws and legislations.

The Federal Tax Authority stressed that its inspection campaigns use sophisticated digital control systems aimed at preventing the sale, circulation, or stockpiling of any type of product where due taxes have not been paid.

One of these systems consists of applying Digital Tax Stamps on the packaging of tobacco and tobacco products. The Stamps are registered in the FTA’s database; each of them stores information that can be read with a special device used by authorised inspectors, allowing them to verify that all due taxes on said products have been paid.

The Authority reaffirmed its commitment to enhancing collaboration and coordination with all relevant federal and local government entities in order to ensure tax compliance across all seven emirates.

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Incurring a financial loss by forgoing input credits?

VAT: Incurring a financial loss by forgoing input credits?, Businesses often forgo input VAT credit if the purchase/expense invoice is more than 6 months old (or, 2 months in the case of monthly tax periods). Needless to say, such a tax position results in a financial loss to the business. Alternatively, the buyers could strain the business relations with the suppliers by asking to reissue a current dated invoice.

Such a practice to forgo credit is not just incorrect but also contrary to the specific clarifications issued by the Federal Tax Authority (FTA).

Input VAT credit may be recovered by a recipient/buyer in the VAT return of the tax period in which both of the following conditions are satisfied:

i) the buyer receives and keeps the valid tax invoices; and

ii) the buyer pays for the supply or intends to make the payment within 6 months from the due date of the payment.

If the buyer fails to recover the input tax credit in the first relevant tax period, then the credit can be recovered in the subsequent tax period. FTA has also clarified that input tax is only recoverable during the first two periods once the aforesaid two conditions are satisfied.

However, businesses incorrectly count the two tax periods from the date of the invoice. The two tax periods start only when both the conditions are satisfied.

Date of the invoice is not relevant

The first condition refers to the tax period in which the tax invoice is received and kept by the buyer. It does not refer to the date of issue of the invoice.

To illustrate, a tax invoice dated 25/02/2022 is received by the buyer on 15/04/2022. Assuming the quarterly tax periods of Jan-Mar, Apr-Jun and onwards, the first tax period in which the invoice is received is Apr’22-Jun’22.

Condition (i) is satisfied in the tax period Apr’22-Jun’22 even though the invoice is dated 25/02/2022.

FTA has reaffirmed the aforesaid position by clarifying that if the buyer has not received the tax invoice in the tax period when the supply was made, they may deduct the input tax in the tax period in which the tax invoice is received.

As disruptive as it may sound, the date of the invoice is not relevant for recovering input VAT credit. It is the date of the receipt of a tax invoice that is relevant.

The buyers also often ignore that the tax invoice should be in the correct format. In our previous Tax Conversation on 18 Dec 2021, the importance of a correct tax invoice containing the mandatory particulars was discussed.

Importance of intention to pay

The second condition requires that the customer should pay for the invoice or has the intention to pay within 6 months from the due date of the payment.

FTA understands the practicality of business processes. A company may receive a tax invoice but may not have an intention to make the payment until the internal approval process for the invoice is completed.

In the public clarification VATP017, FTA has clarified that the second condition will only be met when the buyer completes the internal approval process and forms an intention to make the payment within the prescribed period.

In other words, the second condition gets satisfied not on the receipt of the invoice or on the date of the invoice. It is satisfied when the internal approval process is completed and the intention to pay is formed by the buyer.

Where a tax invoice is received in one tax period and the intention to make the payment is formed in a later tax period, the two tax periods to recover input tax starts from such a later tax period.

Reduce your financial losses

Forgoing eligible input VAT credit is just a financial loss to a company. Business owners should ensure that the eligible input VAT credit is not let go of an incorrect understanding of the law. The correct tax position in summarised in the attached graphic timeline.

For any input VAT credit forgone in the past, the business owners could evaluate the option to submit a Voluntary Disclosure to recover such credits and financial gains.

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News Courtesy: khaleejtimes.com

Short Term Finance in the UAE and the Use of Trust Receipts

With the strong focus on trading in the United Arab Emirates (“UAE”), traders often require short-term financing and this is where banks and financial institutions step in. 

While typically most banks and financial institutions restrict short-term financing to the letter of credit facilities, the financing of the retirement of the letters of credit is also in great demand and more and more banks choose to extend the existing L/C facility to a trust receipt facility to enable the customer to make a payment towards the L/Cs and retire them by taking on a further short term loan. This type of financing is popular, especially in the UAE where the options for the creation of several types of security (that are otherwise available in most commonwealth countries) are not available. Financing by way of trust receipts does not amount to secured financing. However, it does create certain rights and obligations that put the lender in a better position than most other unsecured lenders.

From the customer’s perspective, financing by way of trust receipts is particularly relevant for importers of raw or semi-finished goods who require such materials for their manufacturing process. Given that a customer who is important of raw material would receive funds only once he sells finished goods in the market, such customers often seek financing from banks or other financial institutions for payments due to their suppliers during the manufacturing stage.

Typically under this structure, the financier pays the supplier of goods on behalf of the customer at the time the customer takes delivery of the goods (usually to retire the existing letters of credit). The ownership of the goods (being financed) is transferred to the financier and the customer is immediately provided with the authority to deal with such goods (under a trust receipt), including using the goods for manufacturing and selling the goods or the finished product.

While the customer is permitted to use the goods received from the supplier, the financier obtains and retains title to such goods, with the customer acting as an agent, trustee, and/or bailee on behalf of the financier in respect of such goods during the financing period. Any proceeds from the sale of the finished goods, shall, to the extent these are related to the raw material supplied under the trust receipts, be held by the customer for and on behalf of the financier and for remittance to the financier.

What are Trust Receipts?

Trust Receipts are not defined under UAE law. In practice, trust receipts are receipts issued by the owner of the goods permitting another party to deal with the goods on behalf of the owner.

UAE Law and trust receipts

The UAE is a civil law jurisdiction and does not recognize common law trusts. However, trust receipts are commonly used in the UAE and would be recognized under UAE law provided the ownership of the goods clearly lies with the financier and the trust receipt issued by the bank clearly permits the customer to deal with the goods as an agent of the financier.

Trust receipt facilities are commonly used in the UAE as documentary credit financing.  Banks and financial institutions issue letters of credit on behalf of their customers in order for the customers to avail of their goods purchased (financed by such letters of credit) and enter into a trust receipt arrangement so that the goods may be released to the customer for sale in the local markets. The trust receipt ensures that the bank retains its title in the goods while releasing the right to deal in the goods to the customer.

The UAE Commercial Code and the UAE Maritime Code recognize bills of lading as the title and transport documents for the transport and shipment of goods. In practice, most trade finance (including documentary credit) is based on either bill of lading in the name of the importer (the customer) or bills of lading ‘to the order of’ the financier. We find that financiers in the UAE often require bills of lading to be made to the order of the financier. In the event the bills of lading are issued ‘to the order of’ the financier then ownership and title in relation to such bills of lading would already vest with the financier. When bills of lading are issued in the name of the customer, it is essential (for the purpose of entering into a valid trust receipt structure) that the ownership of the bills of lading and the underlying goods be transferred to the financier. This may be achieved in the UAE by using the appropriate structure and documentation.

The Commercial Code specifically permits banks to entrust their customers with taking delivery of goods on a trust/agency basis and selling them on behalf of the bank (and to the bank’s account) under terms and conditions agreed between the bank and the customer. The customer will act as a commission agent and the bank shall have all the rights of the principal on such goods or their value. To this end, the customer and the bank may enter into a trust receipt arrangement whereby the bank entitles the customer to release the goods under the bills of lading as a commissioning agent on behalf of the bank.

The term ‘trust’ as referred to in the Commercial Code is different from the concept of trusts as understood in common law jurisdictions.  The term ‘trust’ is literally translated from the term ‘Amanah’. The term trust or Amanah is derived from the UAE Civil Code and relates to a custodianship or deposit arrangement created contractually where a party entrusts or deposits its property to another party for safeguard and preservation. The concept of Amanah and/or a deposit contract would apply to the operation of trust receipts.

Note that in a trust receipt structure it would be essential that the customer (as agent) should be required to abide by the compulsory and express instructions of the bank (as principal). If the customer violates such instructions without an acceptable excuse, the bank may reject the deal. The customer will also be responsible to the principal if the goods perish or there is any damage to the goods and other things that are in the customer’s possession unless the damage or perish results from a foreign cause beyond the control of the customer, or from an inherent defect in the goods.

The UAE Civil Code also contains detailed provisions on ‘deposit contracts’ under which a depositor authorizes another person to take care of his property and to maintain the said property (or use it under instructions of the depositor) and make restitution thereof in rem.
Enforcement Process

The trust receipt structure does not amount to security but does place the financier in a better position for recourse than other unsecured lenders so long as the goods related to the relevant bills of lading or the proceeds thereof are adequately traced and identified.

If the customer trades with the goods in its custody with the permission of the bank, the proceeds arising out of such trade shall then be transformed into a debt owed by the customer to the bank and will not be discharged except by returning the equivalent of the value of the goods to the bank.

Also, if the goods under the trust receipt arrangement are sold by the customer to a bona fide third party then the bank may not be able to trace such goods in the custody of such bona fide purchaser. Further, in the insolvency of the customer, if the proceeds of the goods have been co-mingled with the other assets of the customer, the bank will need to claim in the insolvency, as an unsecured creditor.

Any breach or consequence of such arrangement attributable to the customer may be seen as a breach of duties by the customer as the commission agent under the Commercial Code and a breach of trust under the Penal Code. 

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