Motor Insurance, VAT

UAE’s motor insurance payments have many VAT-linked pros and cons

alnuaimi July 26, 2022

300 Closed

UAE’s motor insurance payments have many VAT-linked pros and cons

One of the most principles of VAT is neutrality, which means that VAT should apply uniformly across goods and services. This is ensured through a standard VAT regime coupled with the right of deduction on intermediate consumption.

An exemption regime, such as that applied to financial and insurance services, goes against VAT neutrality because it restricts the right of deduction for non-taxed activities. This results in a cost impact on business structures, competitive disadvantages, etc.

Life insurance services are exempt from VAT in the UAE, while general insurance attracts VAT at 5 percent. Insurance companies providing vehicle cover are liable to charge VAT at 5 percent on the premium. We will discuss the nuances of VAT around non-life insurance in general and, more specifically, motor insurance.

Settlement claims

Under a general insurance contract, a settlement made by the insurer in respect of a claim may either be by way of financial indemnification (payment of a monetary claim) or in-kind, where the insurance company agrees to arrange for repairs or agrees to replace the vehicle. In principle, settlements made by the insurer in respect of an insurance claim are outside the scope of VAT.

Excess or deductibles

An excess, or deductible, is the amount the insured must bear in the event of loss as a threshold before the insurer will pay the settlement claim. The amount paid by the insurer will be the claim amount less the excess amount. The excess or deductible is not a consideration for any supply by the insurer, and as such, should be out of scope for VAT purposes.

Subrogation or reinsurance

There could be cases of reinsurance, subrogation, fraud, etc. under which an insurance company can recover part or whole of the cash payment made under the contract from another person.

Reinsurance is the practice of insurance companies to insure their risk of paying claims to insured in the event of a vehicle loss. The reinsurer will charge a premium for covering the insurance company’s risk and pay an agreed amount for any covered losses by the insurer, like any other insurance contract.

Subrogation is a term describing a right held by most insurance companies to legally pursue a third party that caused an insurance loss to the insured. In most subrogation cases, an insurer pays its client’s claim for losses directly and then seeks reimbursement from the other party’s insurer.

The amount received by the insurer under reinsurance or subrogation is not a consideration for any supply by it, and as such, should be out of scope for VAT purposes.

VAT on disposal of salvaged vehicles

The views on the applicability of VAT on the disposal of salvaged motor vehicles are divided. Several countries treat it as a taxable supply, whereas a few treat it as being outside the scope of VAT.

Such disposal by an insurance company is an incidental part of the insurance business. While the transfer of title to the salvaged vehicle from the insured to the insurer could be out of the scope of VAT, the sale to a third party could be treated as a supply of goods. It may be noted that the transfer of title to the salvaged vehicle by the insurer to a third-party customer is not covered by the terms of the insurance contract between the insured and the insurance company. Hence, it could be treated on par with the normal supply of goods and could attract VAT.

One could also argue that there is no transfer of legal ownership of the salvaged vehicle from the insured to the insurance company upon indemnification of the loss. The insurer is merely disposing of what would have otherwise been disposed of by the insured.

The property – the vehicle – is not transferred or registered in the name of the insurer, at the time of disposal. As such, the disposal is not a supply in the hands of an insurance company for VAT purposes. This is also in line with the doctrine of subrogation. Thus, the insured may be required to discharge VAT, if applicable.

Input VAT on expenses

In a case where the insurer agrees to pay for repairs, a third-party workshop would provide repair services to the insured but would get paid by the insurance company. In such cases, the insurance company is not eligible for input VAT in relation to payments of monetary claims paid to the insured.

Generally, insurance contracts with VAT-registered persons who are eligible for input VAT charged by the third-party vendor will state that claims will be paid exclusive of VAT. Whereas, for other persons, either not registered or not eligible for input VAT, the insurance claims will be paid inclusive of VAT.

News Courtesy: gulfnews.com

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Tax

UAE Free Zones – How Tax Exempt Are They?

alnuaimi July 25, 2022

308 Closed

Freezone benefits under the CIT law and the Designated Zone benefits under the VAT law in the UAE. How do they compare and how will they impact your business?

With the Corporate Income Tax (CIT) regime planned to be introduced in the United Arab Emirates (UAE) next year (2023), many businesses are examining the impact of the reforms on their existing business structures.

Free Zones have played a large part in the economic development of the UAE, attracting foreign businesses with relaxed requirements and tax benefits. The tax regime applicable to Free Zone businesses has evolved greatly in the last years, with the introduction of VAT in 2018 and CIT planned to be introduced in 2023 respectively.

What is the applicable regime? We provide you with a recap in this article.

Highlights of the proposed UAE CIT system

The CIT system will be implemented with effect from June 2023. The headline rate will be 9% for taxable income earned in a year exceeding AED 375,000 (slightly above $100,000). This is globally a very competitive rate, and even within the Gulf states, it is the lowest among states that have a CIT regime.

The Public Consultation Document issued by the Ministry of Finance states that the CIT regime will apply to the following persons

UAE companies and other legal persons incorporated in the UAE.
Foreign legal entities that have a Permanent Establishment (PE) in the UAE.
Individuals (natural persons) engaged in a business or a commercial activity in the UAE.

The calculation of taxable income would be aligned with the international accounting standards. Like most tax systems, the taxpayer would be able to deduct most expenses that are incurred in the process of generating revenue, subject to expense deduction limitations. Likewise, losses can also be generally carried forward from one year to the next and set off against future profits.

UAE resident companies will generally be subject to CIT on their worldwide income, including capital gains. There are certain exceptions to this rule.

To retain and further develop the UAE’s status as an international financial and regional hub, the UAE has proposed many reliefs intending to reduce the effective tax rate or simplify matters administratively for businesses.

Amongst others, it has envisaged adopting a so-called ‘participation exemption’ which is relatively common. Here, a UAE Corporate shareholder would generally be exempt from CIT on dividends received and capital gains earned from the sale of shares of a subsidiary company, subject to fulfillment of both of the following two conditions:

The UAE Corporate shareholder owns at least 5% of the shares in the subsidiary company.
The (foreign) subsidiary is subject to CIT at least 9%.

Finally, we come to grouping options available under the proposed regime. Such grouping may reduce the effective tax rate of a group containing several businesses. The objectives of providing the grouping facility are:

To allow one group member’s loss to be set off against another group member’s profits.
To treat the whole tax group as a single taxable person, with the parent company responsible for the administration and payment of CIT on behalf of the tax group.
To ignore the transactions between the members of the tax group.

A UAE resident group of companies can elect to form a tax group if the parent company holds at least 95% of the share capital and voting rights of the subsidiaries.

Where the parent company does not meet the 95% criteria and instead holds 75% of the ownership of the subsidiaries, it can still seek to transfer losses from a loss-making group company to a profit-making group company, as long as both the following conditions are met:

The company transferring losses is neither exempt nor benefits from the 0% Free Zone regime.
The total tax loss offset ought not to exceed 75% of the taxable income of the company receiving the tax losses for the relevant period.

In addition to the above-mentioned facilities, the proposed UAE CT regime will also allow for an exemption or deferral of CT in respect of the transfer of assets or liabilities between members of a group, to avoid triggering an unnecessary tax charge when businesses reorganize themselves. The CT regime would also allow some corporate reorganization transactions (e.g., mergers) to be undertaken on a tax-neutral basis.

What about the Free Zone tax exemption and Corporate Income Tax?

Companies and branches that are registered in a Free Zone (Free Zone Persons) are within the scope of the CIT regime and subject to filing requirements.

The UAE Government has committed, however, that the tax exemptions will continue to apply to Free Zone Persons provided they (i) maintain adequate substance, (ii) comply with all other regulatory requirements, and (iii) income is earned from transactions with businesses located outside the UAE, or from trading businesses located in the (same or any other) Free Zone.

The complications start when Free Zone businesses interact with businesses located in Mainland UAE (Mainland Persons). Let’s consider a few scenarios here:

A Free Zone business (that does not have a branch in the Mainland) transacting with a Mainland business:

– If the income is passive (like interest, royalties, dividends, and capital gains from owning shares in Mainland Persons) – 0% CIT.

A Free Zone business (that has a branch in the mainland):

– Taxed on the Mainland Sourced income.

– Not taxed on its other income.

A Free Zone business transacting with a (group company) Mainland business:

– 0% CIT, but

– Payments made by the Mainland business to its group company in Free Zone will not be deductible.

A Free Zone business located in a Designated Zone for VAT purposes earning income from the sale of goods to a Mainland business:

– 0% CIT, if

– The Free Zone business is the importer of record of those goods.

A Free Zone business earning income by transacting with a Mainland Person (not covered in any of the above four scenarios):

– Such a Free Zone Person will have its 0% CIT privilege disqualified for all of its Income.

Fair to say, that there are a number of complexities involving Free Zones.

UAE VAT

VAT was introduced in the UAE on 1 January 2018 at a standard rate of 5% on the supply of goods and services.

VAT is a broad-based consumption tax levied on almost all supplies of goods and services in the UAE, including deemed supplies, as well as the importation of goods into the UAE.

Like most VAT systems, VAT in the UAE avoids a cascading effect on tax (tax on tax) by allowing the Input tax to be subtracted from the output tax liability. Generally, Input tax can be recovered (subtracted from output tax) when goods or services are (intended to be) used for making taxable supplies in the UAE or supplies outside the UAE.

The term ‘goods’ here refers to all types of physical property. Any supply that does not constitute a supply of goods, is a supply of services.

The provisions relating to place of supply and valuation of supply are mostly in line with international standards. Some benefits are offered to supplies made in certain Free Zones (referred to as Designated Zones) discussed in the next headline.

UAE VAT and Free Zones

When the UAE Government introduced the concept of Free Zones, it did not envisage the requirement of a VAT system at that time. Accordingly, to ensure that the UAE continues to remain a competitive trading and investment destination even after the introduction of the VAT law, some relief is available for the sale of goods. For the supply of services, however, there are no exceptions made to the regular VAT system, except for the shipping of goods from a Designated Zone, if supplied by the same supplier of the goods.

Some businesses in some Free Zones benefit from an exception. These Zones are referred to as ‘Designated Zones’. The list of Designated Zones that are effective as of date is provided in Appendix 1.

Designated Zones are defined as a specific fenced geographic area and have security measures and Customs controls in place to monitor the entry and exit of individuals and the movement of goods to and from the area.

Designated Zones are treated as being outside the State for VAT purposes for certain supplies of goods. This means that a supply of goods within a Designated Zone is treated as made outside the UAE, and therefore, outside the scope of VAT in the UAE.

Even though Designated Zones are considered to be outside the State, a sale from Mainland UAE to the Designated Zone is taxable at the standard rate of 5%.

The situations involving a Designated Zone where VAT liability generally become due (treated to be imported into the UAE) are either of the following:

Goods are consumed within the Designated Zone.
Goods are rendered unaccounted for.
Goods are taken out of a Designated Zone and into Mainland UAE (including Free Zones not considered as Designated Zones).

In short, the VAT implications of transactions with entities in the Designated Zones can be summarized below:

Domestic sale from the UAE to a Designated Zone – 5%.
Domestic sale from Designated Zones to the UAE Mainland – Import taxable at 5%.
Domestic sales from Designated Zones to Designated Zones – VAT is not applicable.
Domestic sales within the same Designated Zone – VAT is not applicable (except for retail sales).
Export from Designated Zones to GCC countries/non-GCC countries – VAT is not applicable (outside the scope of VAT).

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EXTP007: Excise Goods which are deficient/missing Process for

News, Public Clarifications, Tax

Excise Tax Public Clarification

alnuaimi July 2, 2022

316 Closed

EXTP007: Excise Goods which are deficient/missing – Process for the destruction of Excise Goods within a Designated Zone

There are certain limited cases envisaged under Cabinet Decision No. 37 of 2017 on the Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Excise Tax (“the Executive Regulation”), where relief from excise tax is available for excise goods that are found to be deficient, or there is a shortage in their quantity, within an excise tax designated zone.

In addition, there may also be circumstances where a business may seek relief from the Federal Tax Authority (“FTA”) from paying the Excise Tax associated with goods destroyed within a designated zone.

In order to destroy excise goods and obtain the relief mentioned above, the FTA must be notified of the deficiency or shortage, and its approval must be obtained in line with the process outlined in this document.

Summary

In principle, goods that are considered ‘wastage’ or are deficient or there is a shortage of the expected quantity when located within a designated zone, will be treated by the FTA as having been released for consumption and, therefore, will be subject to excise tax.

As an exception to the above provision, the Executive Regulation allows for a relief to be granted from accounting for excise tax on goods located within an excise tax designated zone in certain cases. Such relief is available where the warehouse keeper responsible for the excise goods follows the process outlined in this document.

Relief will only be granted where the FTA is notified by the warehouse keeper within the specified timeframe and accepts that the deficiency in, or shortage of, the excise goods are due to a legitimate cause.

Where a taxable person intends to destroy excise goods located within a designated zone, they must first obtain prior approval from the FTA in order to destroy the goods.

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

alnuaimi July 1, 2022

287 Closed

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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VAT

How we can go wrong in determining VAT Treatment

alnuaimi June 27, 2022

345 Closed

How we can go wrong in determining VAT Treatment

Determining accurate VAT treatment is crucial in every business transaction hence; indispensable care is significant to determine the VAT treatment even if the organization is operating on a small or medium scale.

During my professional career, I came across various scenarios where business owners neglect to take professional advice related to VAT treatment and depend on what similar industry business is following which ends up in an FTA Audit, which obviously concludes with a massive penalty.

Here, I would share a VAT Treatment followed by business entities in the industry.

Introduction

On concurrent reading of Section 2 of Article 45 of the Decree-Law

“International transport of passengers and Goods which starts or ends in the State or passes through its territory, including Transport-related Services. “

And Section 1 of Article 33 of the Executive Regulation

“The supply of international transportation Services for Passengers and Goods and Transport-related Services shall be subject to the zero rates in the following cases:

a. Transporting passengers or Goods from a place in the State to a place outside the State.

b. Transporting passengers or Goods from a place outside the State to a place in the State.

c. Transporting passengers from a place in the State to another place in the State by sea or air or land as part of a supply of international transport of those passengers if either or both the first place of departure, or the final place of destination, is outside the State.

d. Transporting Goods from a place in the State to another place in the State if the Services are supplied as part, or for the purpose, of the supply of Services of transporting Goods either from a place in the State to a place outside the State or from a place outside the State to a place in the State. “

This decree implies that Transportation of goods or passengers from/to the state to/from a place outside the state, for such services of transportation, VAT is applicable at 0%. As well law considered “Transport related services” that will fall under the 0% VAT.

Referring to Sub Section (d) Section 1 of Article 33 of Executive Regulation “The supply of transportation service from/to Port in U.A.E to/from U.A.E mainland is treated as Standard-Rated Supply (5%).”

The falsification followed by interpreting Sub Section (d) Section 33 is that the transportation from port to mainland or vice versa is a part of international transport since the goods arriving from the port or departing from the port are in International transit. Hence, subject to Zero Rate.

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News, Public Clarifications, Tax

FTA Clarification Public Tax Excise

alnuaimi June 22, 2022

434 Closed

FTA: Clarification Public Tax Excise

There are certain limited cases envisaged under Cabinet Decision No. 37 of 2017 on the Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Excise Tax (“the Executive Regulation”), where relief from excise tax is available for excise goods that are found to be deficient, or there is a shortage in their quantity, within an excise tax designated zone.

In addition, there may also be circumstances where a business may seek relief from the Federal Tax Authority (“FTA”) from paying the Excise Tax associated with goods destroyed within a designated zone.

In order to destroy excise goods and obtain the relief mentioned above, the FTA must be notified of the deficiency or shortage, and its approval must be obtained in line with the process outlined in this document.

Summary

In principle, goods that are considered ‘wastage’ or are deficient or there is a shortage of the expected quantity when located within a designated zone, will be treated by the FTA as having been released for consumption and, therefore, will be subject to excise tax.

As an exception to the above provision, the Executive Regulation allows for a relief to be granted from accounting for excise tax on goods located within an excise tax designated zone in certain cases. Such relief is available where the warehouse keeper responsible for the excise goods follows the process outlined in this document.

Relief will only be granted where the FTA is notified by the warehouse keeper within the specified timeframe and accepts that the deficiency in, or shortage of, the excise goods are due to a legitimate cause.

Where a taxable person intends to destroy excise goods located within a designated zone, they must first obtain prior approval from the FTA in order to destroy the goods.

UAE Supreme Court orders cancellation of tax penalties

alnuaimi June 16, 2022

272 Closed

UAE Supreme Court orders cancellation of tax penalties for re-submission of returns

Facts

The taxpayer submitted tax returns for the prescribed tax periods as of January 2018, and these returns included supplies related to real estate owned individually to the taxpayer, as well as real estate owned in partnership with another person.

The taxpayer’s partner was not added to the tax registration from the beginning due to the absence of his name as an owner in all real estate.

The taxpayer registered a new account with the partner on the directives of the Federal Tax Authority during an audit and re-filed the tax returns under the new account.

Penalties

The FTA applied late payment penalties to the taxpayer as the new account required re-submission of the returns that had been filed previously by the taxpayer under the original account.

The FTA considered that the new submissions were the correct submissions as the original submissions were not correct in form and procedure because the account did not include the partner.

The FTA applied the late payment penalties to the new submissions tracing back to January 2018.

Supreme Court order

The taxpayer challenged this up to the Federal Supreme Court.

The Supreme Court found that the reopening of the new account did not result in damages to the State funds because the taxpayer had originally submitted and paid all tax returns, including the real estate in the partnership, on the legally prescribed dates.

The procedural deficiency did not manifest a circumstance where the payments had not been made.

In reasoning, the Supreme Court stated:

“Since this argument is in order, it is decided that tax procedures are not an end in themselves, but rather a means to achieve the goal of the lawgiver in collecting the legally due tax. Allegedly, the tax returns made under the wrong procedure that were subsequently corrected were not taken into account. Rather, the FTA’s right to collect the fine decided by the legislator on the wrong procedure only recedes, without this right going beyond that by imposing other fines for a tax collected on the date specified by the law, even under the aforementioned procedure.”

Significance

This judgment reassures the application of justice and equity in tax dispute proceedings before the Federal Courts of the UAE. Taxpayers must seek learned and practiced counsel when faced with a tax dispute.

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Tax, VAT, VAT Filing

Input Tax Recovery under VAT in UAE

alnuaimi June 10, 2022

294 Closed

Input Tax Recovery under VAT in UAE

Input tax is the tax paid by a person on purchases or inward supplies. A major element of VAT in UAE is the provision to recover the tax paid on inputs. This means that a person can reduce the value of input tax eligible for recovery from the tax payable and only pay the balance amount as tax. This ensures that tax is paid only on the value-added at each stage in the supply chain. Hence, the amount of input tax eligible for recovery plays an important role in the cash flow and operating expenses under VAT.

Let us first understand how input tax recovery works.

Process of input tax recovery

Example: In January ’18, Jehan & Co, in Abu Dhabi purchased 10 desktop computers @ AED 1,000 each. On this purchase, Jehan & Co. pays VAT @ 5% of AED 500. In the same month, Jehan & Co. supplies 20 desktop computers @ AED 2,000 to a consumer. VAT @ 5% is collected by Jehan & Co. on the supply, amounting to AED 2,000.

Here, the output tax payable by Jehan & Co. for the month of January ’18 is AED 2,000.

Input tax recoverable for the month of January ’18 is AED 500

Tax payable = Output tax payable – input tax recoverable

Hence, tax payable by Jehan & Co. for the month of January, ’18 is AED 2,000 (Output tax payable) – AED 500 (Input tax recoverable) = AED 1,500.

Here, as you can observe, the tax paid on purchase by Jehan & Co. can be used to reduce their output tax payable. Only the balance tax payable is required to be remitted to the Government.

Conditions for input tax recovery

A registered business can recover the VAT paid on the purchase of goods and services used for business purposes and subject to certain conditions. These conditions to be satisfied are:

Should be used to make Taxable supplies

The supplies on which tax is liable to be paid are called taxable supplies (i.e. supplies made at 5% or zero-rated supplies). Input VAT recovery is allowed to be claimed only on inputs used to make taxable supplies, not exempt supplies.

For example, Jehan & Co. purchase 20 units of Item A @ AED 50, for a value of AED 1,000. Out of the 20 units purchased, 10 units are used to manufacture Item B, which is taxable and 10 units are used to manufacture Item C, which is exempt.

Hence, Jehan & Co. can claim input VAT recovery only for the value of input used to make taxable supplies, i.e. 10 units used to manufacture Item B @ AED 50, which is AED 500.

The recipient receives and keeps the Tax Invoice

The recipient claiming input tax recovery on a supply should ensure that the Tax Invoice pertaining to the supply is received and kept in the records. The Tax Invoice should show the details of the supply related to the input tax recovery being claimed.

The recipient pays the consideration for the supply

The recipient claiming input tax recovery should pay or intend to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply.

Hence, the provision for input tax recovery is a very important component of VAT in the UAE. Businesses need to ensure that they are able to correctly identify supplies on which input tax can be recovered, ensure that they fulfill the conditions for a claim of input VAT recovery, and claim the input VAT recovery on time. This will help in ensuring optimum cash flow and working capital in the business. All this work can be made easier by the use of VAT software which will help automate each of these tasks with respect to input tax credit and leave you with enough time and resources for you to focus on your business.

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Tax

UAE’s Corporate Tax Is a Step towards the Future & Global Business Credibility

alnuaimi May 30, 2022

314 Closed

UAE’s CT (Corporate Tax) Step towards the Future & Global Business Credibility

The United Arab Emirates (UAE) for long had been trapped in the conventional image of an oil-lubricated economy. However, Dubai worked over the years very systematically and helped the nation unshackle to position itself as a modern state with massive investments in the areas of innovation and technology.

The gulf nation since has been in the limelight, kicking in a series of reforms aligning itself with the global community – the latest one being the 9% federal corporate tax thus complying with the international tax standards template set by the Organization for Economic Cooperation and Development (OECD).

Industry experts and financial analysts hail the introduction of corporate tax, and they argue that the move would further add impetus to the UAE – the undisputed economic engine of the Middle East and North Africa (MENA) region – which has been gradually reducing its dependence on the traditional revenue earned from fossil fuel.

“I have seen some arguments that the corporate tax would be a deterrent for investors. They are totally senseless. Instead, I can say the move would strengthen the UAE’s economy manifold as the country would become a fertile soil for well-meaning businesses and corporate behemoths,” former geopolitical and economic advisor, K.V.Mohan Menon told the Economic Times.

An investment banker by profession, Menon who is now the chairman of Kerala-based SDF Industries Ltd had lived and worked in many countries, in particular the gulf region. He says everyone thought Singapore, once a tax haven, was finished when it embraced a 17% tax. “But where is Singapore now? So, I don’t see much merit in these doomsday predictions,” Menon gets candid.

A businessman with global connections and a keen observer of the Middle East region, Menon is not at all surprised by the UAE’s latest move. “The country was a signatory to the global pact last year which set a minimum tax rate of 15% for large corporates and multinationals. So, it is only in anticipated lines. The only surprise, if you call it a surprise, is the UAE fixing the tax at 9%,” he opines.

The new corporate tax introduced by the UAE, experts have pointed out, would bring an additional $ 13 billion in revenue to the government exchequer. Even so, Menon argues, it would not affect the startups negatively since only businesses outside free zones making more than Dh.375,000 in profits come under the tax net.

“I see this as a thoughtful action since Dubai Startup Hub, its key contributions to GDP, and the nation’s thrust on building a knowledge-based economy would continue to remain relevant and unaffected, Menon asserts, adding that the UAE still has the lowest corporate tax, next to Bahrain which still has no corporate tax. This makes the gulf nation still an attractive investment destination.

“At the same time, it also wants to send a strong message to the market that it does not want to be the home for fly-by-night operators. So, I see this as a cautious, calibrated approach. But beyond the tax and compliance structure what will keep Dubai an all-time attraction for investors is its ease of doing business culture,” affirms Menon.

The UAE and Dubai are flexible and pragmatic in their approach and they have always been the first to see the writing on the wall particularly when it comes to diversifying their revenues away from hydrocarbons. “Dubai, in particular, has taken an early and interesting lead in positioning itself as an innovation hub, be it IoT, Blockchain, or AI,” points out Menon.

The future is all about transparency and the UAE knows that it would lose its competitive edge if it remains out of the compliance club. “This is more so at a time when Saudi Arabia is doing everything to attract multinationals to its soil,” says Menon who sees the corporate tax move as a ‘clean-up’ operation that would weed out organizations that do not share the UAE Government’s social vision.

In other words, it means in the long run, the country would be home only to those organizations that even while working for profits would not forget or neglect their social responsibilities raising the economic and global status of the UAE by making meaningful contributions, aligning themselves with the globally accepted best practices and norms. That is what people like Menon argue.

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Federal Tax Authoritys Board of Directors adopts FTAs Financia

News, Tax

FTA Board of Directors adopts FTA’s Financial Statements for 2021

alnuaimi May 26, 2022

479 Closed

Federal Tax Authority’s Board of Directors adopts FTA’s Financial Statements for 2021, explores development plans

During the meeting held at the Authority’s headquarters in Dubai this morning (Wednesday), the Board reviewed a report on the FTA’s plans to develop and enhance the tax system’s procedures and bring them in line with best practices, as well as to upgrade services offered to customers through fast, accurate, and easy-to-use digital platforms. The report called for implementing a set of procedures and initiatives to further advance the FTA’s performance through continuous follow-up and development in order to raise the efficiency of the tax system to meet taxpayers’ aspirations.

On a different note, the FTA Board of Directors examined the progress in developing the draft corporate tax law.

HH Sheikh Maktoum issued directives to maintain the pace of upgrades made to the FTA’s services, in line with international best practices and digital transformation plans, which were developed to boost the UAE’s competitive edge in terms of services provided, as well as to support the country’s vision to become the world’s highest-ranking government on trust and performance indicators. The directives call for focusing on the customer and enhancing competencies to become a world leader in government services; they draw on the UAE’s principles for the next 50 years and the terms of the new methodology for government operations.

The Happiness of FTA Customers

The reports presented during the meeting demonstrate the FTA’s efforts to maintain high-performance scores across all activities, His Highness asserted, noting the Authority’s plans to elevate its services to ensure satisfaction for all clients from all segments of society. “The Federal Tax Authority is committed to strengthening its relations with all entities involved in implementing the tax system in the government and private sectors, and to fulfilling its role in driving nationwide economic diversification policies through the administration and collection of federal taxes, in line with best practices,” His Highness said.

“The Authority is constantly reviewing the executive regulations it issues for each tax legislation in order to ensure top-level performance and streamlined procedures,” HH Sheikh Maktoum explained. “The stages ahead will witness sweeping developments and upgrades to tax systems and procedures in order to enhance the quality of the FTA’s services.”

The Board reviewed a report that outlines the FTA’s accomplishments over the last year and the first quarter of 2022, documents the progress made on existing projects, and lists statistics regarding Value Added Tax (VAT), Excise Tax, Tax Returns, tax payments, and refund requests that have already been processed. Compliance with tax regulations continued to grow across the UAE, and the number of VAT registrants grew to 367,157 at the end of the first quarter of 2022 compared to 358,468 in 2021 marking an increase of 2.42% within three months. Meanwhile, the number of Excise Tax registrants reached 1,398 compared to 1,357 last year, increasing 3.02%. Also, the number of Tax Agents has increased to 446 compared to 433 with an increase of 3%.

Refund of VAT on Building New Residences to UAE Nationals

The report revealed that the Authority approved new applications from UAE citizens to recover the VAT they incurred on building their new residences; the value of refunds reached AED185,038,134 during the first quarter of 2022, compared to AED118,503,245 in the first quarter of 2021 – a record growth of 56.15%. The significant increase reflects the FTA’s commitment to streamlining online procedures for UAE citizens looking to recover the VAT they incurred on building their new residences, in line with the leadership’s vision to develop a modern housing system for citizens and ensure their wellbeing, given that they are the main objective and beneficiaries from the initiatives and projects implemented by all state institutions.

Furthermore, the report noted the results of the implementation of two phases of the ‘Marking Tobacco and Tobacco Products Scheme’, which aims to halt the sale or possession of all types of cigarettes, waterpipe tobacco (Mu’assel), and electrically heated cigarettes that do not carry the Digital Tax Stamps in local markets.

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News Courtesy: FTA

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Tax, VAT

VAT on supply of mixed use developments

alnuaimi May 21, 2022

539 Closed

VAT on supply of mixed use developments

In our previous articles, we have learnt about the VAT treatment of supply of residential buildings and commercial buildings. There can be practical scenarios where a building or plot of land is used for different purposes, i.e. a portion is used for residential use and another portion is used for commercial use. These kinds of properties are called mixed use developments. In this article, let us learn about VAT on supply of mixed use developments.

What is a mixed-use development?

A mixed-use development is a building or plot of land which has clear and distinct areas which are put to different uses, which would have a different VAT treatment when supplied.

For example: A building which has retail units on the ground floor, office space on the middle floors and residential units on the top floor is a mixed use development.

VAT on Supply of Mixed Use Developments

When a distinct part of a mixed use development is supplied, the VAT liability on the supply depends on the use that particular part of the building is being put to.

If the portion supplied is being used for commercial purposes, the supply will be taxable at 5% VAT, whereas if the portion is being used for residential purpose, it needs to be checked whether the supply is the first supply or a subsequent supply. If it is the first supply of the property within 3 years from its date of completion, the supply will be zero rated. If the supply is a subsequent supply, the supply will be exempt from VAT.

When a mixed use development is sold in its entirety, the consideration received for the supply needs to be apportioned between the different parts of the building supplied. The value of the consideration relating to the residential part of the building will be treated as exempt from VAT (or zero rated, when the supply is the first supply) and the value of the consideration relating to the commercial part of the building will be liable for VAT @ 5%.

For example: Noor Properties, a registered dealer in Dubai, supplies a building to an unregistered dealer, Shaan Spaces, for a consideration of AED 5,00,000. The ground floor of the building is used for commercial purposes, consisting of 2 shops. The first floor of the building is being used for residential purposes, consisting of 2 houses. The property is being supplied for the first time, 6 years after its completion date.

Here, the consideration of AED 5,00,000 received by Noor Properties is for a mixed use development, portions of which are being used for commercial and residential purposes. Hence, Noor Properties has to arrive at the proportion of the consideration being used for commercial and residential purposes. Noor Properties arrives at the proportion of the consideration used for residential purpose, which is AED 2,00,000 and the proportion of the consideration used for commercial purpose, which is AED 3,00,000.

On the proportion of the consideration used for commercial use, i.e. AED 3,00,000, Noor Properties has to pay VAT @ 5%, which is AED 15,000.

The proportion of the consideration used for residential use is AED 2,00,000. Though it is the first supply of the property, it is after 6 years of its completion. Hence, this portion of the consideration will be exempt from tax.

Hence, VAT on supply of mixed use developments depends upon the use that the portion being supplied is being put to. Based on whether the portion is for commercial use or residential use, VAT on the supply will be applicable.

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VAT

UAE VAT on additional Gross Floor Area

alnuaimi April 12, 2022

594 Closed

UAE VAT on additional Gross Floor Area

VAT on additional GFA

Over the past years, the UAE has witnessed exponential growth in the development of real estate projects, and it is known for its flamboyant infrastructure. The master developers are creating new communities having residential, commercial, and leisure establishments. In addition, the plot of land is also sold to other builders for similar development purposes. This brings us to an important question on the taxability of Gross Floor Area (‘GFA’).

What is GFA

Prior to the development of any community, the master developer is required to get approval from the Dubai Authority. The developer is required to submit a plan of the project bifurcated into plots having numbers, land usage, area, GFA, number of buildings, number of dwelling units, and maximum building height. Basis the development, GFA is allotted to each plot as well as overall GFA for the project is assigned. Basis such approval, guidelines for the overall support infrastructure i.e. number of parks, open areas, roads, etc. is also assigned for each project.

The master developers sell individual plots along with the permitted GFAi.e.the permissible construction limit on the plot. Interestingly, the value of land is typically determined based on permissible GFA on the plot. These details form part of the Sales & Purchase Agreement (‘SPA’) which is registered with the Lands Department.

Requirement of additional GFA

In many instances, the buyer (post-execution of the SPA) approaches the developer requesting for allotment of additional GFA. The additional GFA is for consideration. For e.g.as per the SPA, the permissible limit was to construct 15 floors accommodating X number of people and now the owner wishes to construct 20 floors accommodating Y number of people. The arbitrage for GFA is requested by the owner from the developer.

In such cases, the master developers approach the respective authority for modification of the Master Plan approved. Based on the revised permitted GFA, the master developer allots additional GFA to the buyer basis, and construction is started by the owner.

There may be multiple reasons for a request for additional GFA such as a change in construction plan, etc. In many cases, the plot would have been resold and additional GFA is being requested by the new owner. This brings us to the possible taxability of the additional consideration received by the Master Developer in lieu of additional GFA sold:

Scenario I –Can the original SPA be amended?
Scenario II – Is allotment of additional GFA a separate supply?

Scenario I – Can the original SPA be amended?

At the time of execution of SPA, certain conditions such as terms of payment, plot details, and GFA would have been mentioned in the contract which is also registered with the Dubai Lands Department (‘DLD’). A view may be adopted that allotment of additional SPA is by way of amending the original SPA. Therefore, any additional consideration should take the color of the original supply which was the sale of bare land. Thus the additional consideration received should also be VAT exempt. However, this is not a straight-forward simple solution as it may trigger the following issues:

A sale of real estate is an indivisible supply, it should get triggered under Article 25 of the UAE VAT Law. The date of supply would have been triggered on the signing of the SPA and the same would have been reported by the Master Developer in its VAT return. The amendment would have to be separately reported.
Is it permissible to amend the SPA post facto. Thus the Legal Team is required to be approached.
It may impact the DLD fee which is computed on the sale value of the SPA and required to be paid by the buyer.

Scenario II – Is allotment of additional GFA a separate supply?

Alternatively, allotment of additional GFA may be considered as a new supply altogether and not be linked with the sale of the original plot of land. This is on the basis that the existing transaction was complete on registering the original SPA with the DLD. Any subsequent request is a fresh allotment which is to be considered as a ‘right is being provided/ permission is being granted by the Master Developer to the current owner of the plot. The UAE VAT Law considers granting, assignment, cessation, or surrender of a right as a supply of services, and thereby the additional consideration should be subject to VAT at 5%.

VAT on Real Estate has been the most complex around the world. With complexities increasing, it is imperative for businesses to involve the respective teams to determine the nature of supply and adopt correct taxability.

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News Courtesy: gccfintax.com

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