Category: Tax

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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Invoicing being a key function of every business and e-invoicing is a norm related to it, it is super critical for businesses to understand the concept of e-invoicing and the preparedness that allow you to adapt to the new system of issuing of invoices.

e-invoicing is a process through which business to business (B2B) transactions are authenticated with a unique number known as IRN and QR code by the invoice registration portal (IRP). Read What is e-Invoice in GST? to know more.

What e-invoicing requires?

In the e-invoice system, as a supplier, the moment you create an invoice for your customer, it should be uploaded to IRP where the validation will be done, and IRN along with the QR code will be issued. Next, you need to print the invoice with QR code before issuing it to your buyer.

How is current practice different from e-invoicing?

There is a drastic change if you compare the new norm with the current practice which doesn’t require you to authenticate the invoice. In current practice, as a supplier, you print the invoices, issue it to the buyer and then periodically report the details in GSTR 1. Post that, the buyer gets the visibility of invoices in GSTR -2A.

The other mandate that comes with e-invoicing is that an invoice is valid only if the invoice is authenticated by IRP and the QR code (which is embedded with an IRN) is printed on the invoice. In another way, any invoice without QR code that is authenticated by IRP will remain invalid. This implies that the buyer will be eligible for input tax credit only on the invoices that are authenticated by the IRP portal.

The change and the technology

The new mandate requires you to upload the e-invoice details in prescribed format (JSON) to IRP. Next, download the output file (JSON) that is authenticated by IRP with IRN and QR code. Later, you need to print QR code and IRN on the invoices before issuing it to the buyer.

As a result, the current practice of invoicing will change. First, businesses need to make a provision for real-time upload of invoice data and printing of QR code. This will emphasize the necessity of businesses to have a right technology which assists in real-time and instant generation of e-invoices without need to change the invoicing process.

Secondly, the business behaviour is expected to change where the buyer will drive the supplier to upload the invoices to the government system to confirm his eligible ITC. Therefore, it is evident that buyers will appreciate doing business with the suppliers who recognise the importance of quick and accurate upload of invoices.

Businesses who are using software that directly integrates with the IRP portal will find it easy to manage the e-invoicing requirements. Because the direct integration helps you automatically upload the e-invoice data to the portal and instantly print the QR code into the invoices. This way, you can continue the invoicing process as always without the need to change.

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Introduction to VAT Registration in UAE

Being registered under the VAT law means that a business is acknowledged by the government, as a supplier of Goods and Services and is authorized to collect VAT from customers and remit the same to the government. Only VAT registered businesses will be allowed to do the following:

• Charge VAT on taxable supply of goods and services
• Claim Input Tax Credit on VAT paid on their purchases, which will be deducted from VAT liability on sales
• Payment of VAT to the government
• Periodic filing of VAT return

Apart from the above, all registered businesses have to align their business reporting structure in line with the compliance requirements such as accurate and updated books of accounts, tax paid documents such as Tax invoice, credit notes, debit notes, records to all inward supplies and outward supplies etc. are required to be maintained.

Therefore, understanding the fundamentals of VAT will be one of the important steps for your VAT preparation and obtaining VAT registration will be the first step towards transiting your businesses to the VAT era.

Who should register under VAT?

Are all businesses liable to register under VAT? No, only those businesses crossing the defined annual aggregate turnover threshold are liable to register under VAT. Based on the registration threshold, a business will either be mandated to register or as an option, a business can apply for registration or can seek exemption from VAT registration

On this basis, VAT registration in UAE can be classified into the following:

• Mandatory VAT Registration
• Voluntary VAT Registration
• Exemption from VAT Registration

VAT registration Deadlines in UAE

As a move towards implementation of VAT in UAE on 1st January 2018, the Federal Tax Authority (FTA) is inviting applications for VAT registration. The FTA has opened its portal to allow the businesses to register online. The early call for online registration allows the businesses to be prepared well in advance and be ready to charge VAT from 1st January 2018. The UAE VAT registration in the FTA portal is carried out in a phased manner depending on the turnover of the business.

VAT Turnover Calculation for Registration in UAE

In UAE VAT, businesses whose annual turnover exceeds the mandatory registration threshold of AED 375,000 and the voluntary registration threshold of AED 187,500 are allowed to apply for VAT registration. Therefore, it is crucial for businesses to understand what type of supplies are considered in deriving the annual supplies turnover and how to calculate the VAT turnover for registration in UAE.

How to Apply for VAT Registration in UAE

In UAE, the businesses whose turnover exceeds AED 375,000 have to mandatorily apply for VAT registration. To facilitate the businesses to register, the Federal Tax Authority (FTA) has opened its portal for online VAT registration. The deadlines based on the turnover of businesses are already announced by FTA and the registration will be carried out in a phased manner. While it is crucial for businesses to determine their obligation towards VAT registration, it is also important for businesses to know how to apply for VAT Registration and understand the level of details required to complete the online registration process.

This is because, before applying or starting the online VAT registration process, having a good understanding about the type of details required and steps to complete the online VAT registration will help you to prepare well in advance. As a result, the registration process can be completed easily and can avoid unnecessary delays due to furnishing of incorrect details which could even lead to rejection of registration application.

• Creation of e-Service Account
• Login to your e-Service Account
• VAT Registration Form: The online VAT registration form contains 8 sections as shown below, in under which the details need to be furnished for completing VAT registration
  • About the applicant
  • Details of the applicant
  • Contact details
  • Banking details
  • Business relationships
  • About the VAT registration
  • Declaration
  • Review & submit

VAT Group Registration

In UAE VAT, any person conducting business is not allowed to have more than one Tax Registration Number (TRN), unless otherwise prescribed in the UAE Executive Regulation. Thus, even if you are operating via branches in more than one Emirate, only one VAT registration is required. With a similar objective, if two or more persons are related or associated parties in the businesses, they are allowed to apply for VAT group registration.

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To determine whether the value of supplies has exceeded the mandatory registration threshold limit or the voluntary registration threshold limit, the following needs to be considered.

• The value of taxable supply of Goods and Services: Taxable supplies refers to all the supplies of goods and services made in UAE on which VAT is levied at the standard rate of 5% including zero-rated supplies. This does not include the notified supplies which are exempted from VAT.
• The value of reverse charge Supplies: Reverse charge supplies are those notified supplies on which the recipient or the buyer are required to pay the VAT to the government unlike forwarding charge, where the supplier will collect VAT from the buyer and pay. The value of such supplies needs to be considered in arriving at the turnover threshold for VAT registration.
• Imports: The value of taxable goods and services imported on which the importer is liable to pay tax.

Let us understand how to calculate the VAT Turnover threshold with an example

Rose General Stores is a supermarket in UAE, engaged in supply of groceries and all types of household products. They also import certain home furnishing products from other countries and supply it to the customers in UAE as well as export it to other countries. The following are the different types of supplies made by Rose General Stores.

To determine Rose General Trader’s eligibility for registration in UAE, taxable supplies + exports (zero-rated supplies) + imports + reverse charge supplies should be considered. Exempt supplies will not be considered in arriving at the registration threshold. The registration threshold calculation of Rose General Trader is given below:

The turnover of Rose General Stores for VAT registration is AED 625,000 which has exceeded the mandatory registration threshold of AED 375,000. Thus, Rose General Stores is required to mandatorily register under UAE VAT.

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Mandatory VAT Registration in UAE

All the businesses who have a place of residence in the state of UAE and whose value of supplies in the member states in previous 12 months has exceeded AED 375,000 should mandatorily register under UAE VAT. Also, if the businesses anticipate that the total value of supplies will exceed the mandatory registration threshold of AED 375,000 in the next 30 days, then they too will have to register under UAE VAT.

Those businesses, who do not have a place of residence in the state of UAE, will have to compulsorily register under VAT irrespective of the registration threshold.

Voluntary VAT Registration in UAE

All the businesses having a place of residence in the state of UAE who are not required to mandatorily register under VAT, are given an option to voluntarily apply for registration. This can be done, only if the annual supplies or taxable expenses incurred is not less than voluntary registration threshold. The Voluntary Registration Threshold is AED 187,500 which is 50% of the mandatory registration threshold.

Here, the registrations are not mandatory, it is optional for business to decide whether they would want to register. The inclusion of taxable expenses as criteria to determine the eligibility for voluntary registration provides an opportunity for all the start-up business to register under UAE VAT. This is because, as a start-up, the turnover or value of supplies may be lesser but there is a high possibility that huge amount of taxable expenses would have been incurred in starting the business or during the initial stage of the business. As a result, the inclusion of taxable expenses as a criteria for voluntary registration would enable all the start-up business to register with zero turnover.

VAT Registration Exemption

The businesses whose value of supplies in the member states is below the voluntary registration threshold of AED 187,500 are not allowed to register under UAE VAT. Also, the businesses who are engaged in making only zero-rated supplies may request for VAT registration exemptions.

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What is a VAT Group Registration?

In UAE VAT Registration, two or more persons conducting businesses may apply for Tax Registration as a tax Group. A tax group is a group of two or more persons registered with the FTA as a single taxable person subject to fulfilment of conditions under UAE VAT Law. This group registration is only for the purpose of tax.

Conditions for Applying VAT Group Registration

To be eligible for applying for VAT Group registration, all of the following conditions need to be fulfilled.

Each person shall have a place of establishment or fixed establishment in the State:

This implies that each person should have either of the below-mentioned establishments in UAE :

• Place of Establishment: The place where a business is legally established in UAE pursuant to the decision of its establishment, or a place in which significant management decisions are taken and central management functions are conducted.
• Fixed Establishment: Any fixed place of business, other than the place of establishment, in which the person conducts his business regularly or permanently and where sufficient degree of human and technology resources exist which enables the person to supply or acquire Goods or Services. This includes branches, which are also considered as the fixed establishment.

The relevant persons shall be Related Parties:

Here related parties refer to two or more persons who are not separated on the economic, financial or regulatory level, where one can control others either by Law, or through the acquisition of shares or voting rights.

One or more persons conducting business in a partnership shall control the others:

This implies that one or more person who are related, controls the other business. For example, officers or directors of one another’s businesses, partners in each other’s business etc.

VAT Group Registration Illustration

As illustrated above, Mr. Abdul is a Director in Rose Trading Ltd and a Partner in A-One Trading Ltd. Mr. Rizwan, is a Director of A-One Trading Ltd. Also, Mr. Rizwan is a Partner in Rose Trading Ltd. Therefore, Mr. Abdul and Mr. Rizwan will be treated as related parties and will be eligible to apply for VAT Group Registration provided the conditions are fulfilled.

VAT Group Registration Benefits

The following are the benefits of VAT Group Registration for the business

• All the entities within a VAT Group will be treated as ‘ONE’ entity for VAT purpose. This will help the businesses in simplifying accounting for VAT, and also compliance reporting like VAT returns are required to be prepared and reported at the group level instead of entity level.
• Any supplies within the entities of a VAT group, are out of the scope of the VAT. This means, VAT will not be levied on the supplies between the entities of a VAT Group. However, supplies made by the VAT group to an entity outside the VAT group are subject to VAT.

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