What are the ESR changes in 2021? All you need to know

What do you need to know before filing ESR?

Recently the resolution of ESR was changed by the UAE Cabinet of Ministers from the ESR resolution of 2019 and issued an updated regulation through Cabinet Resolution No. 57 of 2020. This new regulation supplies firms with 1 January 2019, as the start of their financial years. Additional guidance for the New ESR was subsequently provided by the UAE Ministry of Finance from Ministerial decision No.100 of 2020. This resolution replaced the previous 2019’s Decision No. 215 and included a relevant guide of the updated Activities attached as an appendix. The Regulations and guidance apply to all UAE jurisdictions, including financial free zones such as the DIFC.

Key points mentioned in the Updated ESR include:

• Branches of any UAE company do not need to file separate ESR notification- The new ESR regulation states that when a UAE company has a branch in UAE with a single parent company for all of them. It is not required for all the branches to file the ESR notification separately. All that you have to do is file a single notification that will mention all your relevant activities of your parent company based in UAE along with the activities of all your branches.
• Licensees’ definition changed- Licensees are required to comply with the New ESR, but its definition changed which now only applies to a corporate person, incorporated outside or inside of the UAE, or an unincorporated partnership where each partner much have a presence in the UAE and conduct a Relevant Activity.

A natural person, sole proprietor, trust, or foundation has been omitted from the list. The Licensees list also includes some exemptions such as investment funds, entities completely owned by residents of the UAE and which carry out their activities only in the UAE, Outside UAE tax residents’ persons, foreign parent companies branch where the income is subject to tax outside the UAE.

Most of the entities owned by the government of the UAE are no longer exempted unless they fall within any of the exempted categories in the updated ESR.

Any Licensee who wishes to be benefitted from the exemption must provide evidence for the same.

• UAE branches of foreign companies are given relaxation for the reporting requirements- For any foreign company whose branch is registered in the UAE does not fall under the new ESR. Provided the income earned by the branch company must be subject to tax in the overseas jurisdiction.
• The definition changed for the group and connected person- Group and connected person’s definition have been changed which will impact the assessment of the headquarters business, service centre business and distributions, as well as relevant activities of the IP Business with high risk.
• The charge of compliance and control has been given to the UAE Federal Tax Authority- The National Assessing Authority to oversee compliance and control of the New ESR has been given to the UAE Federal Tax Authority.
• ESR notification needs to be filed with the UAE Ministry of Finance by Licensees- The new ESR states that if your business qualifies as a Licensee, your notification must be filed with the UAE Ministry of Finance through an online portal, within six months from the end of the financial year.
• Increased penalties- The New ESR has been updated with an increased penalty which also includes the administrative penalties for non-compliance. Penalties are as follows:
• In case of failure in report submission of failure in meeting the requirements of the tests in the first year, a penalty of AED 50,000 has been imposed.
• In case of failure in report submission of failure in meeting the requirements of the tests in the second year, a penalty of AED 400,000 has been imposed.
• In case the Licensee provides inaccurate information to the relevant regulatory authority or Federal Tax Authority a penalty of AED 50,000 to be imposed.
• In case a Licensee fails to submit the notification, a penalty of AED 20,000 to be imposed.
• Changed definition of relevant activity- There have been changes in the definition of relevant activities including Holding Company Business and Distribution and Service Centre Business.
• Economic substance reporting- Licensees who must meet the economic substance test should submit their Report of Economic Substance to the Ministry of Finance within 12 months after the end of the financial year for the Licensee. The report must contain the following information:
• Type of Relevant Activity conducted
• Type and Amount of gross income incurred from the Relevant Activity
• Type and Amount of assets and expenses operating with respect to the Relevant Activity
• Location of the relevant activity of the business and, if applicable, property, plant, or equipment used for conducting the Relevant Activity.
• Number of full-time employees with qualifications and number of personnel who are responsible for carrying out the Relevant Activity
• Core Income-Generating Activity in respect of Relevant Activity being carried out by it
• Financial statements
• Declaration by the Licensee if the business satisfies the economic substance test.

The new ESR regulation requires the Licensee to undertake immediate action to achieve compliance. Therefore, it is a must for all Licensees to revisit their earlier classification of ESR to check them with the newly updated regulations and analyze their current situation to know whether they fall within the purview of the revised regulations and if so, they must prepare for resulting compliance requirements accordingly. 

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UAE: VAT refunds for business visitors; refund opportunities

The UAE tax authority updated its guidance for refunds of value added tax (VAT) for business visitors.

The updated VAT refund guide addresses specific circumstances when non-UAE resident businesses are entitled to claim a refund of VAT on expenses incurred in the UAE. 

Changes

The updated VAT refund guide reflects the following changes:

• A clarification about the effective date for foreign businesses to claim VAT refunds when a country is added to the list of countries having reciprocal agreements for VAT refunds for business visitors
• Amendments to the documentation requirements when submitting a VAT refund request (a certificate of incorporation is no longer required)
• A clarification that system-generated and scanned tax invoices will be accepted as original tax invoices and may be submitted to the tax authority by e-mail (hardcopies no longer required)
• The list of countries with reciprocal agreements for VAT refunds for business visitors (formerly contained in Appendix A) to be published separately

No change to deadline

The deadline to submit VAT refund requests—31 August 2021—has not been modified. 

Refund opportunities

To the extent that a business is registered for VAT in the UAE, the refund scheme will not be relevant. However, a business may need to have non-resident affiliated entities that incurred VAT in the UAE in 2020, and these rules may apply with regard to those entities. The new measures may present an opportunity to claim input VAT that otherwise would be a “sunk cost” for these entities. 

Source : KPMG

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Updated Real Estate VAT Guide

In a move that will be welcomed by both the real estate sector and VAT practitioners, the Federal Tax Authority (FTA) has published two items of note to the VAT treatment of real estate transactions:

• The VAT Real Estate Guide VATGRE1 has been updated to reflect the FTA’s views on a number of topics, including Musataha agreements, the exemption for bare land and the VAT status of Owner’s Associations.
• Public Clarification VATP018 clarifies the FTA’s position on the consequences arising from a change in permitted use since a building has been acquired.

VAT Guide: Real Estate VATGRE1 – update to guide

FTA VAT Real Estate Guide VATGRE1 covers a wide range of matters across the spectrum of the Real Estate Sector.

As with many VAT Guides, this document is updated from time to time to reflect latest FTA thinking and to expand its coverage to new issues that have come to attention. Helpfully, the FTA provides a summary of the latest updates and amendments in Section 15.

In summary, the updates relate to:

• The supply of accommodation in labour camps – clarification that input VAT incurred by employers related to accommodation that is not necessary for an employee to perform their role is not recoverable (see section 3.6).
• A discussion of what the FTA considers to be a “partially completed” building – clarification that temporary movable structures placed on bare land will not cause the land to be considered covered by buildings or civil engineering works and hence cease to be “bare land” for VAT purposes (see section 3.6).
• The development of leased bare land – clarification on the VAT treatment of the supply of leased land, where the land becomes partly or completely covered by buildings or civil engineering works, depending on the application of particular “date of supply” rules. (see section 5.6)
• Importantly, the updated guide now expresses the FTA’s views on the treatment of supplies of land under Musataha agreements, including whether that is a singular supply or an on-going periodic supply, which has particular relevance to such agreements entered into prior to commencement of VAT on 1 January 2018 (see section 5.6).
• VAT recovery of repair and maintenance costs – clarification on the use of the floor space special method of input VAT apportionment to be used for recovery of residual input VAT where the standard method of input VAT apportionment is not appropriate (see section 7.3).
• Management Entities – the section on Owners’ Associations is now updated to include Management Entities and, importantly, will settle some unnecessary confusion in the market that these entities are in fact required to register for VAT in many circumstances (see section 8).
• Outlining a new process for submission of New Residence Refund Requests – confirmation that all applications for refunds for New Residences be made through the FTA e-Services Portal (see section 13.4).

VAT Public Clarification VATP018 “Change in the permitted use of a building”

FTA Public Clarification VATP018 “Change in the permitted use of a building” was released on 27 April 2020. VATP018 clarifies the FTA’s position on the VAT liability of a subsequent supply of a building by a purchaser where there has been a change in permitted use since the building was acquired.

That is, does a subsequent supply mean that the VAT treatment of a prior sale needs to be revisited. In short, the FTA quite correctly concludes that it does not.

The sale of a building by a seller will be subject to VAT depending on the use of that building at the time of supply (exempt or zero rated for residential buildings and standard rate for non-residential buildings). Where the purchaser changes the permitted use of the building prior to making an onward supply by way of sale or lease of the building, the subsequent supply of that building will depend on the use of the building at the time of that subsequent supply (standard rate for non-residential and exempt or zero rate for residential).

Importantly, the FTA makes it clear that the subsequent supply is completely separate and distinct from the original purchase and its VAT liability is solely dependent on the use of that building when it is subsequently sold or leased.

The VAT liability for taxable persons of the initial sale and subsequent supply following change of permitted use is summarized below; the usual definitions in the UAE VAT legislation apply to residential and non-residential buildings:

Source : KPMG

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New Public Clarification on Extended Temporary Zero-rating of Certain Medical Equipment

UAE Publishes New Public Clarification on Extended Temporary Zero-rating of Certain Medical Equipment

The UAE Federal Tax Authority (FTA) has issued Public Clarification VATP025 to clarify the temporary zero-rating of certain medical equipment with effect from 1 September 2020, which replaces Public Clarification VATP023 on the matter.

The main points of the new public clarification are in line with prior public clarification, including that zero-rating is provided from 1 September 2020 for medical face masks, half filtered face masks, non-Medical “community” face masks made from textile, single-use gloves, and Chemical disinfectants and antiseptics intended for use on the human body. However, the key change is that zero-rating is now provided until 31 December 2021 in accordance with Cabinet Decision No. 15/3 O of 2021 (previously provided until 28 February 2021).

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Dubai Custom and UAE VAT Update on Indirect Exports

On a report issued on 17 March 2021, new Export Mechanism in coordination with FTA is issued by Dubai Customs

Problem Faced by Traders in Dubai:

• Traders pay VAT when goods are imported into local market.
• These goods are then sold in local market to overseas buyers.
• Overseas Buyers’ arrange Export Agent to collect goods from different sellers and submits a single ‘Export’ Declaration. Export declaration has single Exporter Business Code and Name.
• Exporter arranges with original Importer to provide Exit Certificate upon Export for purpose of VAT Refund. Export declaration does not mention each original Importer names. This results in non-approval of VAT Refund to original Importer by FTA even after submitting details of Export Declaration and Exit Certificate.
• FTA is unable to refund VAT in the absence of Importer Name and Import Declaration details between original Imports and subsequent Exports.

What is the new system?

• A new Service called “Export Verification Report” will be introduced on 26th March 2021 by Dubai Customs on Dubai Trade Portal for VAT refund against the Cleared Export Declaration for the maximum period of 3months.
• Customs Bureau Officers, FTA users, Importers and Authorized Customs Brokers can generate “Export Verification Report” if the Exporter has mentioned valid M2 Import Declaration No. in Export Declaration and Importer has a Tax Registration Number [TRN].
• Provide an option in Export Declaration to mention valid M2 original Import Declaration No. as a reference [Previous Declaration Number]. VAT refund can be claimed only if Previous Declaration Number is provided in the Export Declaration
• Importers and Authorized Customs Brokers can login to Dubai Trade Portal:
  • “Generate VAT Export Report”
  • “Search VAT Export Report”, View and Download the existing reports
• FTA and Customs Bureau Officer can generate Consolidated “Export Verification Report” of all importers under single Tax Registration Number [TRN] which is associated with multiple Business codes.

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UAE VAT Public Clarification on Bad Debt Relief Adjustment

FTA has published public clarification (VAT P024) on bad debt relief adjustment.

Some of the key highlights of VATP024 are as follows:

• If a supplier does not receive payment from customer, supplier may adjust the Output vat on the bad debt subject to certain conditions. Following four conditions must be met:

1. VAT charged and accounted for (to FTA via tax returns) on the supply
   1. Consideration should have been written off in full or part
   1. More than 6 months should have passed from the date of supply
   1. Supplier should have notified the customer that amount has been written off

• Bad debt relief can only be taken to the extent of consideration written off in the accounts
• During the period of 6 months, FTA considers that supplier should engage with customer to recover the debt
• The notification to the customer for the write-off must include:

• Invoice number
• Date of invoice which has not been paid
• Amount of consideration which has been written off

• FTA considers the requirement of notifying a customer will be satisfied where a supplier sends a letter, email, post, or any other similar communication to the customer stating the amount of consideration that has been written off.
• It is not necessary to have acknowledgment from the customer however evidence of providing notification must be retained
• Adjustment on account of bad debt relief should be made in the “Adjustment column” of Box 1 of the VAT Return and adjustment amount should be the VAT amount only

Source : premier-brains.com

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VAT treatment of the repair/refurbishment work provided by to the Customers including replacement of parts

As per Article 2 of the VAT Decree Law, “VAT shall be imposed on every taxable supply and deemed supply made by a taxable person and import of concerned goods into the UAE”.

The term “taxable supply” is defined in the VAT Decree Law as “a supply of goods or services for a consideration by a person conducting business in the UAE and does not include exempt supply.”

Article 30 (3) of the VAT Decree Law states that for the supply of services related to goods, such as installation of goods supplied by others, the place of supply shall be where said services were performed.

Article 31 of the Executive Regulations states that the export of services shall be zero-rated in the following cases:

“a. If the following conditions are met:

1. The services are supplied to a recipient of services who does not have a   place of residence in the State and who is outside the State at the time the services are performed 
2. The services are not supplied directly in connection with real estate situated in the State or any improvement to the real estate or directly in connection with moveable personal assets situated in the State at the time the services are performed.”

Referring to above, repair or refurbishment services provided by UAE Company in relation to the Goods/ machines located in the UAE cannot be considered as zero-rated export of services as these services are supplied directly in connection with the moveable personal assets (i.e. the machines) situated in the UAE at the time the services are performed.

Note that the word ” moveable personal assets ” is to be construed as “moveable assets”.

Source : gccfintax.com

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New Dubai Tax Dispute Resolution Committees now deciding on 2020 and 2021 objections

Since around September 2020, the tax dispute resolution committee of the Emirate of Dubai has been inoperable (under reformation).

On 25 November 2020, the UAE Minister of Justice issued Ministerial Decree No. 691/2020 on the Formation of Tax Dispute Resolution Committees for the Emirate of Dubai.

The Emirate of Dubai previously had only one tax dispute resolution committee to hear objections against reconsideration decisions of the Federal Tax Authority. However, the Decree formed two tax dispute resolution committees for the Emirate of Dubai (Dubai TDRCs).

The two new Dubai TDRCs began practically operating on 16 February 2021 and had docketed all tax objections lodged in 2021 for review and issuance of a decision.

Decisions for objections filed in 2021 have begun being issued as of mid-March 2021.

As of the fourth week of March 2021, objections filed in 2020 are also being considered by the Dubai TDRCs.

However, taxpayers could be required to communicate with the Ministry of Justice and confirm the validity of the objections and continued request by the taxpayer/objector for the Dubai TDRC to decide on the objection.

The Ministry of Justice may request confirmation as to whether the objector had proceeded to file an appeal before the Federal Primary Court pursuant to Article 33(2)(b) of the Tax Procedures Law which grants objectors the opportunity to challenge the non-issuance of a decision by a tax dispute resolution committee.

(The Tax Disputes Circuit of the Federal Primary Court is responsible to hear challenges against rulings of a TDRC. Both the taxpayer and the FTA may challenge a ruling of the TDRC before the Federal Primary Court, Federal Appeals Court, and finally the Federal Supreme Court.)

 Timelines

 If a person (domiciled in Dubai for tax purposes) disagrees with a decision by the FTA and commences the reconsideration process but does not obtain a favorable outcome, the subsequent procedure would be to object before the Dubai TDRCs.

The objection is lodged with the tax dispute resolution department of the Ministry of Justice that is responsible for lodging the objection with the Dubai TDRCs within two weekdays as of the date of the filing.

Once the Dubai TDRCs receive the objection, a decision must be rendered within a maximum of forty weekdays which comprises of an initial twenty-weekday period and an additional twenty-weekday extension period. The extension can be granted based on the request of the objector or the Federal Tax Authority, or if the Dubai TDRC deems it necessary.

After the procedure before the Dubai TDRC is concluded, either the objector or the Federal Tax Authority can challenge the committee’s decision before the Federal Primary Court.

Source : GCCFintax

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VAT on Transportation Under UAE VAT Law

The UAE Federal Tax Authority or FTA has clarified exemptions that are granted by local VAT regulations to public and private transportation. Cabinet Decision (No 52) of 2017 on Executive Regulations of Federal Decree-Law (No 8) of 2017 Re: UAE Value Added Tax provides specific transactions which are exempt from VAT and considered as zero-rated. The exempt transactions related to transportation or transport operations include:

• Local transport of passengers (not by train or bus)
• Transport originating and ending outside the UAE (outside the scope of VAT)
• transport-related services intended for cross-trade transportation (outside the scope of VAT)

Apart from the exemptions listed above, the following transactions that are related to public and private transport operations are considered as zero-rated under the UAE VAT law:

• Transportation of passengers, inbound and outbound (including intra-GCC)
• Transportation of goods, inbound, and outbound (including intra-GCC)
• Transport-related services that are for transportation, inbound and outbound
• Local transport part or for the purpose of transportation, inbound or outbound
• International transportation, including related supplies
• Supplies of certain air, land, and seas mean of transportation e.g. aircraft and ships

The UAE VAT Law clarified that transportation transactions that are VAT-taxable at the standard rate of five percent are as follows:

• Local transport of passengers in means of transport that don’t qualify for zero-rate or exemption from VAT
• Local transport of passengers in means of transport that qualify for zero-rate or exemption from VAT but for sight-seeing, pleasure, etc.
• Local transport of goods
• Transport-related services that are for the local transport of goods

What means of transport qualify as zero-rate taxability?

As per the local VAT regulations in UAE, the supply of these means of transport, either sea, air, or land, is subject to VAT at zero rates:

• Supply of train or bus that’s designed or adopted in order to be utilized for public transportation (must be for ten or more passengers)
• Supply of boat, ship, or any floating structure that’s designed or adopted in order to be utilized for commercial purposes, but isn’t designed or adapted to provide pleasure, recreation, or sports-related economic activities
• Supply of any aircraft that’s designed or adopted in order to be utilized for commercial transport of goods and passengers, but not designed or specifically adapted for the purpose of sports, pleasure, or recreation

With respect to the aforementioned means of transport and their supply, it’s the responsibility of suppliers to determine whether means of transport supplied isn’t utilized for sports or recreation. Suppliers may ascertain the intended use of customers by obtaining written declarations that specifically state means of transport will be used ONLY for the designated commercial purposes.

Furthermore, the supply of services and goods related to the supply of means of transport designed for operation, maintenance, conversion, or repair of transport will remain zero-rated. Repair and maintenance, therefore, which are provided to any means of transport will be considered as zero-rated in relation to VAT, subject to certain regulatory conditions.

VAT-Related Responsibilities for Transportation Businesses

All businesses in UAE providing transportation-related services need to record financial transactions and make sure financial records are updated and accurate. The following VAT compliances are required of UAE businesses:

• VAT Registration – an entity registered in UAE is required in obtaining registration when the total value of supplies has reached the threshold for mandatory VAT registration or AED 375,000 for the previous twelve months. A VAT registration application can be filed within thirty days from being required to undergo the registration process.
• VAT Returns – all taxable entities are required in filing VAT returns and make VAT payments on or prior to the twenty-eight days of the month after a tax period concerned. When the due date falls on any public holiday or a weekend, the due date will be on the following working day.
• Filing of Voluntary Disclosure – voluntary disclosure is for a taxable entity to notify the Federal Tax Authority regarding an omission or error in the tax return, tax refund, or tax assessment of a business. If there’s an error that resulted in the tax payable amount being less than what’s required by AED 10,000 or more, then the entity has to file a voluntary VAT disclosure twenty business days starting from the date of when the taxable entity was made aware of the mistake. If there’s an error that resulted in the tax payable amount being less by less than AED 10,000, the taxable entity is obligated in submitting a tax return to correct the mistake from the previous ta return for a specific tax period or file a voluntary disclosure.

Source : Farahat

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