Category: VAT

In business, return of goods by customers is common. The return of goods can be of the entire quantity supplied or of a partial quantity. This could be due to various circumstances, such as goods being damaged during transit, goods not received as per the specification, etc.

With the introduction of VAT in UAE, the tax aspect on the goods supplied and returned also comes into play. When the goods are sold, VAT is charged at the standard rate. When the goods sold are returned by the recipient partially/fully, the VAT charged on the goods returned has to be reversed. The document to be issued by a supplier when goods sold are returned by a customer, is called Tax Credit Note. A Tax Credit Note serves the purpose of reducing the tax payable to the FTA by the supplier on the supply by as well as reducing the input tax eligible to be recovered by the recipient on the supply. Let us understand how a supplier can issue a Tax Credit Note for return of goods by customers.

Example: Ali Automobiles, a registrant in Dubai, supplies 10 cars @ AED 50,000 each to Fatima Transports, a registrant in Ajman. VAT @ 5%, amounting to AED 25,000 has been charged on the supply. Out of the cars supplied, Fatima Transports returns 2 cars as they are damaged during the transportation. The Tax Credit Note to be issued by Ali Automobiles for return of 2 cars by Fatima Transports appears as shown below:

A Tax Credit Note is an important document under VAT in UAE. The VAT Law has laid down the details that are mandatorily required in a Tax Credit Note. Registered businesses should ensure that these details are given in every Tax Credit Note issued.

Let us now answer some FAQs that businesses have, with respect to Tax Credit Note.

FAQ 1: Should the Tax Credit Note necessarily contain details of the sales invoice to which it relates?

Answer: Yes, a Tax Credit Note should provide the details of the Tax Invoice, i.e. the supply to which it relates. In the above Tax Invoice, the ‘Buyer’s Ref’ field shows the details of the Tax Invoice to which the Tax Credit Note relates.

FAQ 2: Is there a time limit within which a Tax Credit Note relating to a supply has to be issued?

Answer: No, no time limit has been laid down for issue of a Tax Credit Note for a supply.

FAQ 3: Should a Tax Credit Note necessarily contain the reason for its issue?

Answer: Yes, a Tax Credit Note should contain a brief explanation of the circumstances leading to the issue of the Tax Credit Note.

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Continuous supplies refer to supply of goods or services on a recurrent basis, under a contract for which the supplier invoices the recipient on a periodic basis and receives the payment before the completion of the contract. This usually applies to a contract having a longer duration. This is also known as progressive billing because series of invoices are prepared at different stages of the project to seek payment for the percentage of work that has been completed.

The time of supply for continuous supplies or contract which involves progressive billing will be the earliest of the date of tax invoice, the due date of payment as shown on the tax invoice or the date of receipt of payment.

Note: This is applicable only if periodic payments or consecutive invoices does not exceed one year from the date of the provision of such goods and services.

The introduction of VAT in UAE has been a major change for almost every kind of business in UAE. However, for the gold and diamonds sector, which is one of the vital national economic sectors, the introduction of VAT has hit the sector badly. Under VAT, businesses purchasing gold and diamonds were required to pay VAT at the time of purchase. This VAT paid could be recovered by them only at the time of filing of returns. Due to this, businesses dealing in gold and diamonds were facing severe cash flow and liquidity issues. The FTA, having recognized these issues, has decided to apply the reverse charge mechanism on the purchase of gold and diamonds by registered businesses. Let us understand more about VAT applicability on supply of gold and diamonds in UAE.

VAT on gold and diamonds

When a business supplies gold and diamonds to a person registered under VAT, who is purchasing the goods for resale, or to produce or manufacture gold and diamond-based products, the supplier is not required to charge VAT on the supply. Instead, the recipient has to account for the VAT due on the supply and report this VAT due in their VAT return. The recipient can also recover VAT on the supply in the same VAT return, provided it meets the conditions for input tax recovery. 

For example: A One Gold and Diamonds LLC supplies gold for value of AED 10,000 to a registrant, Razzaq Jewellery, who is purchasing the gold for resale purpose.

Here, A One Gold and Diamonds is not required to charge VAT @ 5% on the supply. Instead, Razzaq Jewellery has to account for the VAT due, i.e. AED 500 and report the same in their VAT return. Razzaq Jewellery can also recover this VAT in the same VAT return. This means that in effect, Razzaq Jewellery does not have to incur any cash outflow on account of the purchase of gold.

New rule for VAT on gold and diamonds

Previously, when a business registered under VAT supplies gold and diamonds to another registrant, the supplier was liable to collect VAT on the supply from the recipient. The recipient was eligible to recover input tax on the supply only at the time of filing of VAT return. This led to cash flow issues for registered businesses purchasing gold and diamonds.

Which goods will be covered under this scheme?

The goods covered under this scheme are:

• Gold
• Diamonds
• Products where the principal component is gold or diamonds. For example: Jewellery

Hence, the change in VAT applicability on supply of gold and diamonds among registered businesses is certainly a relief to the sector. The earlier applicability of VAT on forward charge, wherein, VAT is collected by the supplier at the time of supply, led to cash blockage for businesses purchasing gold and diamonds. This has now been changed to reverse charge, wherein, the supplier will not collect VAT on the supply and the recipient can report the VAT due on the supply as well as recover input tax on the supply in the same VAT return. This ensures that in effect, there is no cash blockage on account of VAT for businesses purchasing gold and diamonds. In our next article, we will learn about the conditions to be satisfied to be eligible for this scheme and the exceptional scenarios where this scheme is not applicable.

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VAT on Supply of residential buildings in UAE is, based on whether the supply is the first supply or a subsequent supply. Let us understand what is meant by the term ‘residential building’ and the VAT treatment of supply of residential buildings.

Residential Buildings

A residential building is a building which is intended and designed for human occupation. This includes:

• Any building or part of a building that a person occupies, or that it can be foreseen that a person will occupy, as their principal place of residence
• Residential accommodation for students or school pupils
• Residential accommodation for armed forces and police
• Orphanages, nursing homes and rest homes

A residential building is not:

• Any place that is not a building fixed to the ground and which can be moved without being damaged, such as a movable home
• Any building that is used as a hotel, motel, bed & breakfast establishment, or hospital
• A serviced apartment for which services in addition to accommodation are provided
• Any building constructed or converted without lawful authority

Note: A building is still considered to be a residential building if a small proportion of it is used as an office or workspace by the occupants, if it includes garages and gardens used together with the property, or if it includes any features that may be said to comprise part of a residential building.

First Supply of a Residential Building

The ‘first supply’ of a residential building includes a supply of the building by either sale or lease. The first supply of a residential building will be zero-rated under VAT in UAE. However, the condition for this is that the first supply should be made within 3 years of the building’s completion date. Since the first supply of a residential building is zero rated, the VAT incurred on costs relating to the first supply of the building can be recovered in full.

Note, this is regardless of who the building is supplied to (a registered person, a non-registered person, a related party, etc.). The important point to ensure here is that the first supply should be made within 3 years of the building’s completion.

What is Completion Date?

The completion date of a building is:

• The date the building is certified as being complete by an appropriate qualified authority or
• The date the building is occupied, whichever is earlier

Subsequent supplies of residential buildings

Any subsequent supply of a residential building after the first supply, is exempt from VAT. Note that even if a subsequent supply happens within 3 years of the building’s completion, it will be exempt from VAT.

Since subsequent supplies of residential buildings are exempt from VAT, VAT paid on costs incurred by the supplier related to the subsequent supply will not be eligible for input tax recovery.

For example: VAT paid on agent fees, costs related to general upkeep and maintenance of the property, etc. for the subsequent supply, will not be eligible for input tax recovery.

Hence, the VAT treatment of residential buildings depends upon whether the supply is the first supply or a subsequent supply. If the supply is the first supply of the residential building, which is made within 3 years of the building’s completion, it will be zero rated. However, if the supply is a subsequent supply of the residential building, even if it is made within 3 years of the building’s completion, it will be exempted from VAT.

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In business, there are scenarios where unregistered businesses import goods and have to pay VAT on import. As these businesses are unregistered, the VAT to be paid on import is not collected at the time of return filing. Such persons need to pay VAT on import in a different manner. There are 2 main methods for payment of VAT on import by unregistered persons. The method to be chosen depends on the scenario of import. The 2 methods for payment of VAT on import by unregistered persons are:

• Pay VAT on import
• Pay VAT through e-guarantee

In this article, let us discuss the scenarios where unregistered persons should pay VAT on import and the process for the same.

Scenarios for VAT Payment on Import

The scenarios where unregistered persons should pay VAT on import are:

• Import of goods from outside UAE to the UAE mainland
• Import into UAE to export the goods to non-GCC VAT implementing States and it is not considered under customs duty suspension
• Import into UAE to export the goods to a GCC VAT implementing State and it is not considered under customs duty suspension

Let us now understand the process by which unregistered persons have to pay VAT on import in these cases:

Process for VAT Payment on Import

1. Customs declaration

The importer should prepare and submit the customs declaration in the respective Customs portal and do the following:

• Provide the necessary details about all the goods being imported
• Submit customs declaration for processing by Customs

Once the declaration is approved, it moves to ‘Pending tax payment’ status.

2. Await settlement by Customs

A customs official will validate the declaration details and approve the declaration. The importer will receive a notification that the declaration is approved.

The Customs declaration will be sent to the FTA by the Customs Authority.

Note: Once the Customs declaration is sent to the FTA, the customs system will not allow any further editing of the form. The status of the declaration form can only be changed to either ‘Approved’ or ‘Declined’.

3. Create an e-Services account on FTA portal

Unregistered persons should create an e-Services account on the FTA portal to pay for VAT Payment on import.

The sign-up process is as follows:

• Sign up as a new user by entering your email ID and a unique password.
• You will receive an email at the registered email ID asking you to verify your email ID.
• Once your email ID is successfully verified, your e-Services account will be created and you can login to the FTA e-Services portal.

4. Login to the FTA portal and make the payment of VAT Payment

The final step is for unregistered persons to login to the FTA portal and pay the VAT due on import. Import VAT is calculated on the value of the goods + Customs duty + Excise duty.

The steps to pay VAT on the FTA portal have been discussed in detail in our article ‘Steps to pay VAT in FTA portal’.

Hence, the process for unregistered persons to pay VAT on import of goods is different from the process for registered persons. In our next article, we will see the process for unregistered persons to pay VAT on import of goods through e-guarantees.

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In a significant development, voluntary disclosures made by UAE based businesses on their actual VAT obligations will be charged with late payment penalties, reaching up to 300 per cent of the dues.

Not just that, the penalties will apply from the due date of the tax return – and not from the date of voluntary disclosure. This is according to a ruling by the UAE Federal Supreme Court judgment on an appeal filed by the UAE Federal Tax Authority.

“Based on this judgment, taxpayers submitting voluntary disclosures could be subject to penalties of up to 356 per cent of the tax due,” says an update on the ruling issued by the law firm firm Baker McKenzie Habib Al Mulla.

“The Federal Supreme Court’s judgment reverses the position that had been established over the past 18 months.”

During this period, penalties imposed were limited to administrative ones. But now, “the Federal Supreme Court takes the view that voluntary disclosures are merely amended tax returns in nature.

“This is a major development in the UAE tax landscape, as the judgment may affect upcoming decisions to be issued by the various Tax Dispute Resolution Committees and Federal Courts.

“We expect that this judgment will have a significant impact on critical business sectors involved in transactions.”

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The Federal Tax Authority (FTA) has released a new Public Clarification on the VAT registration of ‘Sole Establishments’.

As defined by the FTA, the term ‘sole establishment’ refers to a legal form of business which is 100% owned by a natural person. Considering that a sole establishment does not have a legal personality that is independent of its owner, the sole establishment is considered to be the same person as its owner.

The FTA highlights that the Clarification does not apply to a One-Person Company LLC or other similar legal entities that are distinct and separate legal persons from their owners.

WHAT’S NEW?

The FTA clarifies that a natural person owning several sole establishments needs to obtain only one VAT registration for all its sole establishments. The VAT Registration in such cases should be obtained ideally in the name of the natural person who owns the sole establishment. However, it is also allowed to obtain the VAT registration in the name of one sole establishment of the person.

For assessing whether the VAT registration threshold has been exceeded, the value of taxable supplies made by the natural person and the value of taxable supplies of the sole establishment should be considered collectively.

WAY FORWARD

• Review of previously submitted VAT registrations of sole establishments

The FTA notes that if the natural person has already received separate VAT registrations for different sole establishments, the FTA will review such registrations in certain cases and will notify the registrants on the corrective steps they should take. No action is required to amend the VAT Registration unless specifically requested by the FTA.

• Ensure that taxable supplies of all sole establishments and the natural person have been declared

In light of the Public Clarification, the natural person is required to carefully analyze whether any of its sole establishments or its own taxable supplies are disregarded for VAT purposes. For instance, this may be in the case where the taxable supplies of the sole establishment have not yet reached the VAT registration threshold on a standalone basis.

If the person identifies any undeclared output VAT, it is required to inform the FTA through the submission of the Voluntary Disclosure.

• Comply with the Public Clarification for all future registration applications of Sole Establishments

Following the release of the Public Clarification, the FTA expects that all future registration applications of Sole Establishments should adhere to the Public Clarification.

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Essential foods, medicine, education exempt from levy

IDman is planning to introduce a 5 per cent value-added tax in April, following the lead of Gulf neighbors. Essential food items, medical care, education and financial services will be exempt from the planned levy, ac-cording to a royal decree de-tailing the tax yesterday.

Crude prices

Oman, the biggest oil ex-porter outside Optec, was among the more vulnerable economies in the six-nation Gulf Cooperation Council even before it was lashed by falling crude prices and the coronavirus pandemic. Its budget deficit as a share of gross domestic product is

 anticipated to be among the highest in the region, according to the International Monetary Fund. The UAE and Saudi Arabia, also impacted by the drop-in oil prices, imposed a 5 per cent VAT in 2018. Saudi Arabia tripled its tax this year.

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In our article ‘VAT on supply of real estate’, we have learnt the different scenarios of supply of real estate and VAT applicability in each case. Let us now answer the major FAQs with respect to supply of real estate under UAE VAT.

FAQs on Supply of Real Estate

FAQ 1: What is a supply in relation to real estate in UAE?

Answer: A supply of real estate may include the sale, lease or giving the right in any real estate.

FAQ 2: Is a residential property subject to VAT in UAE?

Answer: The first supply of a new residential building within the first 3 years of it being constructed will be zero rated. All subsequent supplies will be exempt, even if they are made within the first 3 years of it being constructed.

FAQ 3: Is commercial real estate subject to VAT in UAE?

Answer: All supplies of commercial properties are subject to VAT @ 5%.

FAQ 4: Can a real estate owner recover VAT paid in relation to real estate?

Answer: An owner of a residential building will be able to recover VAT in respect of expenses related to the first supply of the building, if it is supplied within 3 years of its completion. This is because the first supply of a residential building, within 3 years of its completion, is zero rated. However, for subsequent supplies of residential buildings, the owner will not be able to recover VAT on expenses, as it is an exempt supply.

Answer: An owner of a residential building will be able to recover VAT in res>An owner of a commercial building will generally be able to recover VAT in respect of expenses related to supply of the building, as it is a taxable supply.

FAQ 5: How is a mixed-use building (residential and commercial) treated for VAT?

Answer: An owner of a residential building will be able to recover VAT in res>Answer: The rent or sale of the residential part of the building will be treated as zero rated or exempt, depending on whether it is a first supply or subsequent supply.

The rent or sale of a commercial part of the building will be treated as subject to VAT @ 5%.

Answer: An owner of a residential building will be able to recover VAT in res>The tax incurred by the owner of the building needs to be apportioned when there is an exempt supply and the portion related to the taxable supply (at 0% and 5%) can be recovered.

FAQ 6: Does a person owning real estate need to register for VAT?

Answer: An owner of a residential building will be able to recover VAT in res>Answer: The owners of residential buildings do not have to register under VAT if they do not have any other business activities. Where owners have other business activities, they should check whether their turnover exceeds the threshold limit for registration. You can learn the threshold limit for registration in our article VAT registration threshold calculation.

Answer: An owner of a residential building will be able to recover VAT in res>The owner of any building that is not residential will have to register if the value of supplies over the preceding 12 months exceeds AED 375,000 over the coming 30 days.

FAQ 7: Will VAT be charged to a tenant on the property he/she is renting in UAE?

Answer: The rent of residential buildings will generally be exempt from VAT. The rent of commercial buildings will be subject to VAT @ 5%.

FAQ 8: What is the VAT rate applicable to different types of supply of real estate?

Answer: The following is the VAT treatment of different types of supplies of real estate:

Standard rated supplies (Taxable @ 5%)

• Lease or sale of commercial property
• Car parking and hotels

Zero rated supplies (Taxable at 0%)

• First supply of residential buildings within 3 years of its completion
• First supply of Charity related buildings

Exempt supplies

• Supply of residential buildings
• Bare land

Answer: An owner of a residential building will be able to recover VAT in res>Hence, the supply of real estate under VAT in UAE is taxed differently based on the type of supply. It is essential that persons dealing in the real estate sector understand the tax applicability on real estate supplies.

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Under VAT in UAE, the UAE Government has proposed a VAT refund scheme for UAE nationals when they construct a new residence. Let us understand the new residence VAT refund scheme in detail.

What is the new residence VAT refund scheme for UAE Nationals?

The new residence VAT refund scheme is applicable to UAE nationals who newly construct a building to be used solely as a residence by the person or his/her family. This is applicable when the person owns or acquires land in UAE on which he builds or commissions the construction of his own residence. Under this scheme, such a person will be entitled to claim a refund of the tax paid on the expenses of constructing the residence.

What are the conditions to be eligible for this scheme?

The conditions to be fulfilled in order to be eligible for this scheme are:

• The claim should be made by a natural person who is a UAE national.
• The claim should relate to a newly constructed building to be used solely as residence of the person or the person’s family.
• The claim should not be made in connection with a building which will not be used solely as a residence by the person or his/her family.

For example: A hotel, guesthouse, hospital, etc.

When should the refund claim be made?

The refund claim under this scheme should be lodged within 6 months from the date of completion of the newly built residence. A newly built residence is considered as completed on the date the residence becomes occupied or the date when it is certified as completed by a competent authority in UAE, whichever is earlier.

Which are the expenses on which refund can be claimed?

The expenses on which refund of VAT paid can be claimed under this scheme are:

• Services provided by contractors, including services of builders, architects, engineers, and other similar services necessary for the successful construction of the residence.
• Building materials, being goods of a type normally incorporated by builders in a residential building or its site. This does not include furniture or electrical appliances.

What happens if the person later uses the property for commercial use?

When a person who has claimed refund of VAT under this scheme, later uses the property for commercial use, he/she will be required to repay the tax that was refunded earlier.

The new residence VAT refund scheme is an attractive scheme for UAE nationals who newly construct their residence in UAE. They can reduce the expenditure incurred on account of VAT paid on the expenses of constructing the new residence. It is also a measure by the UAE Government to assist UAE nationals to construct residences. UAE nationals can note the conditions of this scheme and use it for their benefit.

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Imports are taxable under VAT. When a person registered under VAT in UAE imports goods or services, the importer has to pay VAT on imports on reverse charge basis. This is in addition to customs duty levied on imports. The scenarios of import can be divided as follows:

• Import by a person registered under VAT
• Import by a person not registered under VAT
• Goods trans-shipped via UAE to other GCC countries
• Goods imported to UAE and exported to other countries

All importers in UAE should register for VAT before 31 December 2017 if their taxable supplies made and imports received exceed AED 375,000 for the last 12 months. Registration for VAT purposes will mean that an importer can defer payment of VAT, so payment shall be due on submission of the return (28 days following the tax period in which the import happened). From 1 January 2018, import of goods that are subject to VAT into the UAE will be affected as follows:

If the Importer wants to pay the VAT on Import he can pay through one of the certified import clearance companies registered with the Federal Tax Authority (FTA) by  Submitting the customs declaration in the FTA e-services portal and also if the Importer wants to provide e-Guarantee he can apply  by , Submitting the customs declaration through the FTA e-services portal.

When a supply is made, usually, the supplier of goods or services is liable to collect and pay tax to the Federal Tax Authority (FTA). This is called forward charge. Under reverse charge, the recipient of the supply is liable to pay the tax on the supply to the Federal Tax Authority. In the case of imports, as the supplier is outside UAE and is hence, not registered in UAE, the liability to pay tax on the import is on the importer registered under VAT in UAE.

On imports, VAT rate of 5% will be applicable. The only exception is import of precious metals, on which VAT rate of 0% is applicable. The rate of VAT applicable on imports is kept same as the VAT rate applicable on domestic supplies, in order to ensure that imports are taxed equally as domestic supplies and the tax paid by the recipient of the supply on imports is eligible for input tax recovery.  The records of imports are required to be maintained for a minimum of 5 years from the end of the year to which the invoices pertain.

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