Category: VAT

The Bureau Expo 2020 Dubai (Bureau) shall be the governing body for the refund scheme. The Federal Tax Authority (FTA) of the United Arab Emirates, in line with the SEE Agreement, has released the Cabinet Decisions No.1 of 2020 on the ‘Refund of Value Added Tax Paid on Goods and Services Connected with Expo 2020 Dubai and a User Guide for its implementation.

The Official Participant incurring VAT on goods and services connected to the Expo 2021 shall be eligible to claim a refund as per the Rule provided under UAE VAT.

We have herewith brought out the salient features of the Cabinet Decision and captioned Guide:

Person eligible to claim a refund

An Official Participant holding a valid Expo 2020 trade license number and who does not use or intend to use more than 20% of the exhibition space or presentation for non-official or commercial purposes will be eligible to claim such refund.

Category of Goods and Services on which VAT Refund is Reclaimable

Following are the only categories of goods and services on which VAT refund can be reclaimed:

• Directly connected with the construction, installation, alteration, decoration, and dismantlement of their exhibition space;
• Directly connected with the operation of their exhibition space and any presentation within the Expo 2020 site;
• Related to the actual operation of the office of the Official Participant, provided that the value of each good/service for which a claim is made is not less than AED 200; and
• For the personal use of the Official Participant’s Section Commissioner-General, Section Staff and the Beneficiaries.

Certificate of Refund Entitlement

In order to be eligible to reclaim VAT on expenses under the first two categories [i.e. (A) and (B)], the Official Participant (whether registered for VAT or not) must be in possession of a Certificate of Refund Entitlement issued by the Bureau. An Official Participant (both registered and not registered for VAT) needs to apply for the Certificate before attempting to claim VAT on goods and services under categories (A) and (B) above. A detailed procedure has been prescribed for obtaining the Certificate of Refund Entitlement.

Manner of refund

Special Case of Imports

In respect of imports made by Official Participants, it should be noted that they may use the special TRN (Tax Registration Number) allocated to the Bureau, in coordination with the Bureau, where the goods fall under categories A and B, and they hold a Certificate of Entitlement. Where the special TRN is used, no import VAT will be imposed in respect of the goods, and such goods should not be included in any refund application.

Requirement of VAT Registration

The Official Participants are required to register with the FTA where:

• The value of the taxable supplies or imports (for commercial or non-official purposes) in the UAE exceeds or is expected to cross the mandatory registration threshold of AED 375,000 or
• Where more than 20% of exhibition space is used for commercial or non-official purposes, then in order to recover VAT.

The Official Participant in the above cases may apply for registration on a voluntary basis

Frequency of the Refund

Sale or Transfer of Non-Commercial Imported Goods by official Participants

Official Participants shall be required to take prior approval from the One-Stop-Shop before the sale or transfer of Non-Commercial Imported goods for consideration or Free of Cost, where VAT has been previously exempted/ not collected or refunded.

Official Participants are also required to pay VAT on such sale or transfer of Non-Commercial Imported goods through defined mechanism if registered under VAT Regulation or through One-Stop-Shop if not registered with VAT Regulation.

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The UAE Cabinet in October 2021 issued guidance—Decision No. 88 of 2021—that amends the value-added tax (VAT) rules regarding “designated zones.”

The amendments are effective 29 October 2021.

The VAT regulations (specifically Article 51(5)) are amended to revise the rules for the following situations when the supply of goods within a designated zone will be treated as having a place of supply outside the UAE so that the supply of the goods will not be subject to (or will be outside the scope of) VAT in the UAE.

• The goods were intended to be incorporated into or used in the production of other goods in the designated zone.
• The goods are delivered to a place outside the UAE (as supported by official and commercial evidence kept by the supplier).
• The goods are imported from the designated zone to the mainland UAE (as supported by proof that import VAT has been paid).

Shipping and delivery services

Existing Article 51(6) of the VAT regulations treats the supply of services within a designated zone as having the place of supply inside the UAE and therefore is subject to VAT. New Article 51(7) has been added to provide an exception to this rule for shipping and delivery services.

There are a number of cumulative conditions that need to be satisfied to qualify for this exception—namely, the services need to relate to goods supplied by a non-resident and unregistered entity, and only if the goods are being sold through an independent electronic platform (which itself cannot be the owner of the goods).

When the supply of the goods will be out of scope by virtue of revised Article 51(5), the related shipping and delivery services will then also be out of scope. 

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News Courtesy: KPMG

A number of family business owners in the UAE have multiple business interests out of which some are structured under a holding company format while others could be sole proprietorships/establishments of the family members.

Such non-company establishments are kept when the family members have businesses that are independent of the overall family business, leading to alienation of their personal interests. We look at two issues that have emerged for sole establishments in the last three-plus years since VAT was introduced.

First, the separate VAT registration granted to independent sole establishments and, second, the issue of VAT grouping of such sole establishments with the LLC entities of the family business. At the time of the introduction of VAT, the UAE Federal Tax Authority allowed a large number of individual owners to VAT register each of their sole establishments as separate entities and given separate Tax Registration Numbers (TRNs).

Do way with multiple TRNs

The FTA later clarified that sole establishments are not independent of their owners and, consequently, there shouldn’t be separate TRNs issued to them. As part of one ownership, they are supposed to be given one TRN.

The FTA clearly mentioned that where separate TRNs have been issued to different sole establishments, the owner need not do anything on his own. Rather, the FTA will itself pick up such cases and instruct the owner to carry out the needed amendments.

It has been observed that the FTA advises owners having multiple sole establishments to retain a single TRN for all entities and de-register the rest. This is specifically seen in VAT registration amendment applications where the FTA has sought a declaration from the owner to confirm if he or she has other sole establishments.

A cumbersome process

Two points emerge from this issue. First, should owners wait for the FTA to come back and instruct them to make amendments to their VAT registrations, specifically when they know that such request would anyways come when any application for TRN amendment is filed with the FTA?

The second – and bigger – issue that would arise from getting one TRN for all the entities and de-register the rest is the hassle of informing vendors and customers of the new TRN (for all sole establishments), making amendments in the banking channels, potential non-recovery of VAT on invoices the vendors may issue using the old TRN. An elaborate way would have to be entered into to ensure no disruption of work.

The FTA in 2018 had also allowed the sole establishments to become part of the VAT group. Technically – and as clarified by the FTA in the VAT Guide – individual owners are natural persons and not legal persons, and natural persons are not allowed to be VAT grouped.

Legal vs. natural

So effectively, some of the sole establishments that are owned by individuals – and therefore to be treated as natural persons – have inadvertently become a part of the VAT group with other llc entities. It is possible that some of the sole establishments that are part of the VAT group could be non-functional and may not have any business activity.

In that case, there is a strong probability of the FTA imposing a penalty for continuing to have a non-functional entity registered for VAT. The imminent need for family business groups is to assess if any sole establishments are still part of the VAT group and, if yes, de-register and register it as an independent sole establishment.

While registering it as a sole establishment, it is important to ensure that the owner does not have any other sole establishment that could already be VAT registered. Similarly, the possibility of converting the sole establishments into LLCs could also be explored to avoid having all the sole establishments under one TRN.

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News Courtesy: Gulf News

The Federal Tax Authority (FTA) has called on Expo official participants to benefit from the Value Added Tax (VAT) refund scheme for taxes paid on goods and services connected with Expo 2020 Dubai, implemented by the FTA in accordance with UAE Cabinet Decision No. 1 of 2020 on the Refund of Value Added Tax Paid on Goods and Services Connected with Expo 2020 Dubai.

“The FTA has been cooperating with all relevant authorities to prepare for a smooth and efficient implementation of the procedures for the refund of Value Added Tax paid on goods and services connected with Expo 2020 Dubai,” explained H.E. Khalid Ali Al-Bustani, Director-General of the FTA. 

“The FTA has established a daily direct communication channel with the Expo 2020 Bureau of International Participants to enhance coordination and ensure fast processing of applications from participants in Expo 2020 Dubai, whether in regard to VAT registration requests by the participating countries, or processing of refund requests, as well as promptly responding to their inquiries.”

Telephone Service

His Excellency stated that the FTA provides a telephone service to facilitate and expedite VAT registration procedures for international participants in Expo 2020 Dubai. The service offers participants clear instructions and details about the registration requirements, delivered by the FTA Registration Department. Priority is given to VAT registration requests from international Expo participants.

He clarified that the FTA had already completed VAT registration processes for several participating countries, and the FTA processes the requests submitted through the electronic system of the VAT refund scheme for goods and services connected with Expo 2020. 

“The FTA also processes special VAT refund requests, submitted through the integrated platform office, dedicated to receiving and processing requests by participants not registered for VAT. The integrated platform office will appoint a tax agent to review the special refund requests and forward them to the FTA on expo2020@tax.gov.ae to be reviewed by FTA experts,” HE explained.

“The FTA is applying the mechanism for the refund of VAT paid on goods and services connected with Expo 2020 Dubai through transparent, accurate and facilitated procedures according to best practices.” HE Al Bustani asserted. “This comes as part of its contribution to the intensive efforts of all relevant bodies in the UAE to ensure the success of this international event, which began on the 1st of October 2021 with the participation of 192 countries. Expo 2020 Dubai is an important international platform for the United Arab Emirates as it brings the world together for six months and embodies its vision of international cooperation.”

Guide for Official Participants in Expo 2020 Dubai

The FTA has issued a comprehensive guide for official participants in Expo 2020 Dubai which addresses five categories of taxes that can be refunded. The first category is VAT incurred by official participants on goods and services in direct connection with the construction, installation, alteration, decoration, and dismantlement of their exhibition space. The second category is the VAT incurred by the official participants on goods and services in direct connection with the works and activities of organizing and operating the official participant’s exhibition space, as well as any presentations and events taking place within the Expo 2020 site.

The guide highlights a third category, which is the VAT incurred by the official participant on goods and services related to the actual operations of the official participant, provided that the value of each product or service claimed is not less than AED 200. The fourth category is VAT incurred by the official participant in connection with all operations, services, and activities provided for the purpose of participation in Expo 2020 Dubai, whether located within or outside the boundaries of the Expo site. The fifth category is the VAT incurred on the import of goods for the personal use of the official participant’s section commissioner-general, section staff, and the beneficiaries.

Certificate of Entitlement

The guide clarified that in order to qualify for VAT refunds for expenses under the first and second category (or expenses in relation to several categories, including the first and second category), the official participant must be in possession of a certificate of entitlement issued by Expo 2020 Dubai, which is established by the virtue of Decree No. 30 of 2014 issued by the Ruler of Dubai. However, where the expenses are not related to the first and second category but are included within the third, fourth, or fifth category, the official participant will not need to obtain a certificate of entitlement to apply for a VAT refund.

The guide – which is available on the FTA’s website: www.tax.gov.ae – clarifies the refund mechanism, the VAT reclaimable, and the special case for imports certificate of entitlement, the eligibility criteria for the certificate of entitlement, how to apply for the certificate of entitlement, the certificate of the entitlement request form, its supporting documents, processing the certificate of entitlement application by EXPO 2020 Dubai, how to apply for a refund, procedures for the offices of Official Participants registered for VAT, procedures for the offices of Official Participants not registered for VAT, supporting documents for the refund request, processing of the refund application by EXPO 2020 Dubai, the frequency of the refund application, and payment of the tax upon the sale of imported goods.

Tax Refund Criteria 

Cabinet Decision No. 1 of 2020 on the Refund of VAT Paid on Goods and Services Connected with Expo 2020 Dubai, which includes nine articles, set out the eligibility criteria for tax refunds where VAT incurred on the import or supply of goods or services is connected with Expo 2020 Dubai. The Decision also identifies all procedures related to applying for a refund, the requirements, the certificate of entitlement, and clarifies the FTA’s jurisdiction in relation to this matter. 

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News Courtesy: albawaba.com

COVID-19 impacted all sectors of the economy including real estate. With a significant drop in business activities, office and commercial property owners faced requests to either reduce the rent or provide a moratorium to delay such payments.

This resulted in multiple negotiations where the landlord either allows the tenant to continue (at a mutually agreed rent, or the discussions falter and result in a dispute. We focus on the VAT impact that arises in such scenarios, potentially ending in two possibilities.

First, where the parties hold over the lease terms beyond the initial lease period, and, second, where the discussions result in litigation.

VAT on holdover leases

Before the expiry of the lease period, the tenant and the landlord often get into a discussion for the renewal of the lease contract. While negotiating, generally the tenant continues to occupy and this period is colloquially known as the ‘holdover’ or ‘spillover’ period. Since the existing lease contract expires while these discussions happen, technically there is no legally binding contract.

Since there is no contract, the landlord neither issues a tax invoice nor receives any payments (since the value of the new contract is not finalized). Once the contractual terms are finalized, the landlord issues a tax invoice and/or receives the first payment for the holdover period.

Under the UAE’s VAT legislation, renting a commercial property is considered a continuous supply of service since it involves a periodic issue of invoices and/or continuous payments by the tenants. The law further mandates that where no invoices are issued or no payments have been made, the last date to issue a tax invoice is the end of the 12-month period (from the date of supply).

The challenge that landlords face while they are in a ‘holdover lease’ period – especially when this period is more than 12 months from the date of expiry of the original lease period – is whether they should charge VAT for the supply of property during the holdover period, considering that the property was occupied and used by the tenant.

The fact that there is no contract, and no invoices were issued during the holdover period, should not result in any VAT obligation on the landlord. The point of tax in such a case triggers only when the contractual terms are finalized and the landlord is in a position to issue a tax invoice or receive any payment.

Dispute situations

Under certain circumstances, the negotiations between the landlord and the tenant may not fructify, resulting in the tenant refusing to vacate. When such cases are directed to courts, a substantial time may elapse by the time tenant is finally directed by the court to vacate the property and the premise is finally returned to the possession of the landlord.

During this entire period, the tenant continues to enjoy the property and no payment is made to the landlord. Although used by the tenant, the basic principles of free consent between the parties are absent. Technically, there is no contract.

The interesting question that arises is whether the time taken by the judiciary should be equated with the holdover period and, therefore, subject to VAT. Or, in the absence of any intention by the landlord to lease the property, there is no supply, and damages received by the landlord as directed by the court should be outside the scope of VAT.

This issue has been clarified in one of the private clarifications by the tax authority, that regardless of the time involved in the judicial process, there is no supply from the landlord to the tenant and – accordingly – no VAT obligation of the landlord.

In the eviction order, the courts may award an amount for the landlord, which is required to be carefully analyzed as ‘compensation’ and outside of VAT as compared to ‘consideration’ which is under the tax purview. The tax treatment may vary on the facts of the case.

It is critical for businesses to carefully assess each transaction from a VAT standpoint, as any carelessness could unnecessarily result in litigation with the tax authority.

News Courtesy: Gulf News

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Brief overview of this user guide

This guide is prepared to help you navigate through the Federal Tax Authority (FTA) website and successfully complete your Value Added Tax (VAT) registration form. It is designed to help you:

• create an e-Services account with the FTA (you will need to do this before you can register for VAT);
• provide accurate answers to the questions on your VAT registration form by explaining what information you are required to provide; and
• Understand the icons and symbols you might see as you complete the registration form.

You should find that setting up an e-Services account is similar to setting up other online accounts. The VAT registration form is also designed to be straightforward and wherever possible it will auto-complete information for you.

If you need help setting up your e-Services account or have questions on specific fields in the VAT registration form, please contact us.

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Businesses recover costs and charges from different stakeholders including employees and entities across borders. The World of Tax categorizes these recoveries as recharges and disbursements. The tax treatment of these recharges and disbursements are sometimes perplexed. A simple answer often is – taxability is determined based on the underlying supply. It is therefore really important to understand what the “Underlying Supply” in each context is.

The predominant context for the underlying supply is usually the contract between the parties or a formal Policy establishing the rules of engagement between parties. An in-depth analysis of the terms therein is paramount for the application of correct tax treatment.

The major categories of recoveries can be bucketed into recharge or disbursement. The authority has laid down the guiding principles for the correct classification in this regard in VATP013- The Public Clarification relating to Disbursements and Reimbursements (aka Recharges).

The attempt here is to analyze how different types of contract terms or rules of engagement between the parties can have varied tax implications for commercial transactions in the nature of recharges (reimbursements) between parties.

1. Disclosed Agent Relationship between the parties

Illustration 1

A, B and X are VAT registered businesses in the UAE. A buys standard-rated goods from X and sells them to B.

1. X charges VAT @5% in his Tax Invoice to A.
2. When A sells the goods to B, he charges VAT @5% in his Tax Invoice to B.

When A is selling goods that have been bought from X, the tax treatment on the onward sale is derived from the taxability of the “Underlying Supply”. In this case, the standard rated goods.

Illustration 2

A is a General Trading Business, B is A’s employee residing in the UAE and X is a telecom Service Provider. A & X are VAT registered businesses having POE in the UAE.

X raises Monthly invoices for telecom services to A. A recovers the personal-use part of the Invoice from B. B, as part of his job, travels outside the UAE at times and uses the roaming services as well. A has a formal policy in place which says its employees are eligible to make personal use of the telecom services. A will recover the charges of such personal usage from the employees based on the Invoice from the Telecom service provider.

Based on the above,

1. X charges VAT @5% and 0% VAT in his Tax Invoice to A based on local and overseas services components.
2. A recovers the personal consumption charges from B. A charges VAT @5% and 0% in his Tax Invoice to B based on the Place of Supply (POS) bifurcation in the Tax Invoice from X.

The question: Whether A can apply 0% VAT to B on the recovery of personally used roaming charges component. If A is the Disclosed Agent of X for the purpose of this transaction, can the underlying supply from A to B can be considered a supply of “Telecommunication Services” here and taxed based on the applicable POS accordingly? There can also be additional considerations like, whether A can “sell” telecommunication services under its commercial entitlement.

2. Service Provider for Support/ Facilitation Services

In Illustration 2 above, the tax lens will view the transaction differently if A is a service provider to B for the transaction in question. A is arranging the telecom connection allowing personal usage to B. A is therefore providing a support/ facilitation service to B. In this case, when A recovers/ recharges the cost of personal usage from B, it provides a service to B that is independent of the first leg of the transaction between X and A. VAT @ 5% will be applicable on the value of supply/ (deduction) from A to B in this case, irrespective of the fact that the underlying charges are for local or roaming usage. The telecom service loses its relevance to the Business Support Service from A to B in this case.

3. Recovery/ Recharge forming part of the Supply

Let us take yet another simple example to analyze the principle of “underlying supply” in cases where recharge is actually forming part of the supply itself.

Illustration 3

X LLC is a car leasing company. An LLC has leased cars from X LLC. An LLC has provided these cars to its employees to use for official purposes related to the business.

1. The Transport authority charged toll charges and fines to X LLC because the cars were under the registration of X LLC.
2. X LLC recovers these from A LLC based on the contractual terms.
3. X LLC has to raise Tax Invoice to A for the monthly lease rental including toll charges and fines.

Question: Whether X LLC should charge VAT on the recharge of Tolls & Traffic Fines to A LLC?

In VATGAM1 – The Automotive Sector Guide issued in June 2021, reference has been made to a similar example, where it has been clarified that toll charges deducted from the lessor’s account are essentially a cost incurred by X LLC to provide car leasing services to A LLC. The recharge of such a cost is subject to VAT and should be included in the taxable value of the supply.

Should the fine charged by the transport authority to the account of X LLC be treated in the same way? Should X LLC recharge the fine to A LLC with VAT and include it in the value of taxable supply as well?

One school of thought says: Fines can be considered “costs” incurred by X LLC’s vehicle leasing business just like tolls assuming the liability to pay fines to the transport authority rests with X LLC and not with the person/ entity driving the car. Going by the explanation on toll charges, recharge of fines by X LLC to A LLC could also be included in the value of taxable supply and subject to VAT at the applicable rate. This is under the pretext that the “underlying main supply” is car leasing and all recharges are incidental to the main supply. Therefore, all recharges should take the tax treatment of the main component.

In case A LLC is considered a disclosed agent of X LLC in the above scenario, an alternative view can be formed based on VATP001- VAT treatment of compensation-type payments. As per VATP001: A fine or penalty charge may be imposed for contravening terms of an agreement, performing an unlawful act, or otherwise be imposed, usually by government bodies, for breaches of statutory obligations. True fines and penalties are not a consideration for any supply and therefore outside the scope of VAT.

VATP001 clarifies, where a payment is not a consideration for a supply, no VAT is due on the payment. VATP001 states “…..In considering whether a payment is a consideration for a supply or is in the nature of compensation, it is important to ignore the labels or titles the parties give to a payment. For example, a description of an administrative payment as a “penalty” or“compensation” will not prevent the nature of the payment from being considered for a supply.”

Let’s assume for a moment that the contract between the parties lays down that A LLC will be liable to fines and penalties from X LLC, in case the cars are driven in non-compliance of any traffic rules and regulations in force, which may/ may not lead to penalties/ fines levied by the authorities on X LLC. Under such circumstances, amounts charged by X LLC to A LLC could be considered in the nature of compensatory payments for breach of contract and not subject to VAT.

However, if that is not the case, the fines may also be considered a cost incurred by X LLC and forming part of the value of its supply to A LLC. The underlying supply, in this case, can be argued to be “Car Leasing” and not “fine”. The tax treatment may follow accordingly.

VATGDS1- Vat Guide on Director’s Services adds yet another dimension to these types of transactions. It says: “An individual may act as a director of a number of companies. For convenience, one company may pay all the director’s fees and then allocate the costs to recover appropriate proportions from the others. The individual’s services, such as attending meetings or approving expenditure, are supplied by the individual to the companies of which they are a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. In this case, there is no supply between the companies and accordingly, no VAT is due on the share of money recovered from each company.”

It is interesting to note that VATGDS1 states there is no supply of services in the case of one company recovering money from the other companies for Directors Services. This can hold good in a disbursement arrangement where the Director is raising Tax Invoices on the respective service recipient companies and the “payment” is done centrally by one company. The payee company then recovering the “payment” from the other companies is not a supply for VAT purposes and therefore no VAT is due on the share of money recovered by the payee company from each company.

Conclusion

It is in the interest of businesses that all commercial arrangements, payments, and recoveries are formalized, defined, and explained in contracts between the parties and/or the P&Ps. Formal contracts and P&Ps can be considered the definitive reference for the nature of amounts paid and recovered thereunder. An in-depth analysis and understanding of contract terms are paramount before arriving at decisions concerning “underlying supply” and the logical tax treatment, even for the simplest of contracts like the ones in our illustrations above.

News Courtesy : GCCFinTax

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With Expo commencing in October 2021, the Federal Tax Authority (FTA) has recently emphasized that the official participants are eligible for a VAT refund on their expenses, without the need to use such expenses for making taxable supplies, if the following conditions are met:

• VAT incurred on purchases that are directly attributable to the construction, assembling, decoration, and dismantling of the pavilions in the exhibition.

• VAT incurred on goods and services acquired or imported for exhibition purposes, provided that the value of each good or service for which the Office of the Official Participant makes a claim is not less than AED 200.

 To provide a cost-benefit advantage to the participants and to make purchases VAT-free, the FTA had introduced a Special Refund Scheme in 2020 to reimburse VAT paid on goods and services connected with Expo. The relevant guide stipulated that the participants who are VAT registered in the UAE may claim VAT refunds through the e-services portal and un-registered participants can submit the VAT refund application to the Expo Bureau which will request a VAT refund from the FTA, subject to the internal audit by Expo Bureau. It is important to note where a refund has been granted to the Official Participant in respect of any goods connected to Expo 2020, the Goods cannot be sold for Consideration or transferred free of charge without the payment of VAT to FTA.

However, all official participants regardless of their VAT registration status must obtain a “Certificate of Entitlement” from the Expo Bureau to be eligible for the VAT refund, subject to the below conditions:

Eligibility Criteria for the Certificate of Entitlement

• The applicant must be an Official Participant of the Expo 2020 in Dubai, holding a valid Expo 2020 license number.

 • Not more than 20% of the exhibition space or presentation is, has been, or is intended to be used for non-official or commercial purposes.

There is a separate application form to obtain this certificate and the same has to be duly filled and submitted to the Bureau along with the set of documents as stipulated by the regulation. If the certificate of entitlement is not granted to the official participant due to failure to satisfy any of the above conditions, the participant will not be able to reclaim the full amount of VAT in respect of Goods and Services acquired for the purpose of Expo 2020. Instead, the Official Participant may need to consider if any VAT related to such Goods and Services may be recoverable under the general VAT rules applicable to VAT-registered person.

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