The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published an updated version of the Executive Regulations to the Federal Decree Law No. 8 of 2017 on Value Added Tax (VAT), on its website.

This version includes updates made through Cabinet Decision No. 46 of 2020, however, the specific Cabinet Decision has not been published separately.

The main update includes a change made in Article 31(2) on the Export of Services rules. The Article now reads:

“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”.

In the updated article above, the word “AND” replaces the word “OR” and thus requires both conditions included in this Article to be met in order for a supply of services made to non-resident persons to be zero-rated for VAT purposes.

This change to Article 31(2) appears to direct that supplies made to overseas businesses which have a fixed establishment in the UAE, such as a branch or representative office, are within the scope of UAE VAT and there are limited circumstances where zero-rating is applicable.

Accordingly, where a UAE business provides a taxable service to a business established outside the UAE, further due diligence will be required to determine whether the zero-rate can be applied in practice.  

The obligation to prove that a local establishment of an overseas business is not present in the UAE may lead to an additional layer of administration for the supplier, in order for the supplier to gain comfort that VAT should not be charged.

 The ability of the UAE branch to recover the input tax incurred will need to be considered in line with the normal VAT recovery rules.  There may also be practical challenges for branches in cases where the branch may have to fund the cost of VAT (and the cost of services), where the branch considers that it has not actually been the recipient of the services at hand.

Given the change has been made to the Executive Regulations by way of a Cabinet Decision, this is a change to the existing legislation which is expected to have prospective effect, however the FTA’s interpretation of the effective date of this change has not been confirmed.

Businesses should assess the implications of this change and undertake a review of all contracts on which the zero-rate has been applied to exported services in order to determine whether this warrants any changes to the VAT treatment applied to date.

The process of determining the VAT liability applicable to such services should also be carefully reviewed, and consideration given to introducing additional controls in order to ensure that zero-rating is applied only where the conditions in the Executive Regulations are met.

UAE Economic Substance Regulations(ESR) Updated notification :

The UAE Economic Substance Regulations(ESR) Test requires a Licensee to demonstrate that: the Licensee and Relevant Activity are being directed and managed in the UAE; the relevant Core Income Generating Activities (“CIGAs”) are being conducted in the UAE; and. the Licensee has adequate employees, premises and expenditure in the UAE

In UAE Economic Substance Regulations(ESR) Updated notification filing requirements,the approach of the different authorities in relation to which entities should be filing the initial notification is currently inconsistent, and therefore it is important to monitor announcements/ clarifications that are made by the relevant Regulatory Authorities.

Immediate actions

To avoid non-compliance with these rules and potential penalties, as a first and immediate step all UAE entities (both companies and branches) should assess whether they fall under the UAE Economic Substance rules (in 2019) and which of the below compliance obligations they may have (if any):

• Notification filing
• Having sufficient substance in the UAE and how to demonstrate this
• Filing of an annual substance return

If the entity does fall under these rules and has to demonstrate sufficient substance in the UAE, it should also make an assessment as to whether it can satisfy the economic substance tests prescribed by the regulations.

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The UAE Ministry of Finance in late May 2020 issued an advisory notification that provides certain relief with regard to requirements under the UAE’s economic substance regulations—relief provided in response to the corona virus (COVID-19) pandemic.

Under economic substance regulations, there is a legal requirement for all UAE entities, including branches of local and foreign companies that carry on any of nine relevant activities, to maintain economic substance in the UAE specific to each relevant activity. The nine activities relate to banking, insurance, investment fund management, lease-finance, shipping, headquarters, holding companies, intellectual property, and distribution and service centers.

The economic substance regulations have an effective date of 30 April 2019, with reporting required from financial years ending on or after 1 January 2019. Under these rules, certain annual regulatory filing requirements (that include notification and reporting) must be met in order to comply with the regulations as well as to avoid penalties for non-compliance.

Certain “free zones” have already announced the deadline for the first economic substance notifications—such as, DIFC with a deadline of 12 June 2020; ADGM with a deadline of 30 June 2020; and DMCC with a deadline of 30 June 2020.

In general, economic substance notifications across the UAE must be filed by the deadline of 30 June 2020, and the due date for the economic substance report for FY 2019 is 31 December 2020. However, the UAE Ministry of Finance also granted certain relief concerning the economic substance reporting requirements in response to the COVID-19 situation.

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The Federal Tax Authority (FTA) of the United Arab Emirates has issued a Public Clarification No. VATP017 clarifying the FTA position, about interpretation of Article 55 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (VAT Law), regarding time-period within which input tax should be recovered by a taxable person. A summary of the subject Public Clarification is as under.

Article 55(1) of the VAT Law provides that input tax must be recovered in the first tax period in which the following conditions are satisfied:

1. The taxable person receives the tax invoice; and
2. The taxable person pays the consideration for the supply or any part thereof.

Article 54(2) of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the VAT Law (Executive Regulations) by referring Article 55(1) of the VAT Law provides that a taxable person is treated as having made a payment of consideration of a supply to the extent that the person intends to make the payment before the expiration of six months after the agreed date of payment for the supply.

Reading Article 55(1) of the VAT Law and Article 54 of the VAT Executive Regulations in juxtaposition reveals that input tax must be recovered in the first tax period in which the following two  conditions are satisfied:

1. the tax invoice is received; and
2. There is an intention to make the payment of consideration of the supply before the expiration of six months after the agreed date of payment.

There could be a situation where a taxable person may receive a tax invoice but may not have an intention to make the payment until the internal approval process for the invoice is completed. In such cases, the condition of Article 55(1) of the VAT Law regarding intention to make the payment before the expiration of six months after the agreed date of payment is not fulfilled.

The FTA, in the subject Public Clarification, states that the conditions of Article 55(1) of the VAT Law will only be met when the taxable person completes the internal approval process and forms an intention to make the payment within the prescribed period.

In view of this, before recovering input tax, a taxable person needs to substantiate that in addition to receiving a tax invoice, he has also satisfied the condition of forming an intention to make the payment within the prescribed period.

The subject Public Clarification further states that where a tax invoice is received in one tax period and the intention to make the payment is formed in a later tax period, the input tax can only be recovered in such later tax period.

Further, where the input tax is not recovered in the tax period in which both of these conditions are satisfied, the taxable person can recover the input tax in the immediate next tax period.

The subject Public Clarification further states that if input tax is not recovered in the first two tax periods, a taxable person is required to submit a voluntary disclosure. The voluntary disclosure should amend the input tax reported in the VAT return of one of the two tax periods.

Non-payment of consideration before the expiration of six months after the agreed date of payment

The subject Public Clarification in the end clarifies that in case a taxable person fails to make the payment of consideration before the expiration of six months after the agreed date of payment, the taxable person should reduce the input tax in the VAT Return of the tax period following the expiry of the six-month period. However, once the payment is made, the taxable person will again be entitled to recover the input tax.

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Even with Saudi Arabia hiking its value-added tax (VAT) from July, businesses in the UAE and Bahrain are hopeful these governments would hold back for now. And even if they do raise it, it won’t be to the levels imposed by Saudi Arabia.

“Several business sectors had submitted requests to the UAE authorities for a six-month VAT holiday until things get back to normal and consumers regain their confidence,” said the head of an industry grouping in Dubai. “The Saudi announcement comes as a complete jolt, and it will be difficult for consumers to sustain the tripling of VAT.”

The UAE and Saudi Arabia rolled out VAT on January 1, 2018, and Bahrain followed exactly a year later. The other Gulf states had delayed the transition to a VAT regime. (VAT-generated revenue for UAE in 2018 was Dh27 billion. In mid-November, Saudi Arabia said it had collected 46.7 billion riyals as VAT up to that point.)

Before the COVID-19 crisis, the International Monetary Fund (IMF) had advised Saudi Arabia to increase its VAT rate to 10 per cent.

The UAE is now holding a three-day government summit. Changes to VAT could be on the agenda – more so, with Saudi Arabia announcing its plans on Monday. The UAE has, for now, said there are no plans to hike VAT and match the Saudi move.

Why did Saudi Arabia triple its VAT rate?

The Saudi Finance Minister Mohammed al-Jadaan was fairly candid about the reason. “These measures are painful, but necessary to maintain financial and economic stability over the medium to long term. And to overcome the unprecedented coronavirus crisis with the least damage possible.”

And this time, Saudi Arabia did not attempt to lessen the pain on residents through offering incentives elsewhere. The kingdom will also be withdrawing the cost-of-living allowance offered to Saudi nationals working in the government sector.

According to Reuters, Saudi government had limited options, with revenues from selling oil dropping significantly. Extended restrictions on commercial activity through the COVID-19 lockdown period also hastened the revenue drop.

“Any short- to medium-term austerity measures will be significant and have a dramatic impact on businesses,” said Sachin Kerur, Head of Middle East Region, Reed Smith. “But it is hard to see how the Saudi fiscal position can be controlled without any shock treatment. After that, the fundamentals for Saudi should remain strong and Vision 2030, albeit refined and adjusted, can still play a key role in the beneficial diversification of the Saudi economy.

“Minister Al-Jadaan has said the government could lose half of its oil income, which contributes 70 per cent public revenues, given plummeting oil prices. So this is not a surprise and indeed many businesses in Saudi Arabia had been anticipating this for a little while now.

“Indeed, many expect more measures to come in soon. These latest measures are an obvious and necessary response to the growing Saudi fiscal deficit.”

What about UAE deciding not to raise VAT for now

Retaining VAT rates at the current 5 per cent would give this market a significant price advantage over Saudi retail prices. Wherever such price advantages open up, it creates opportunities for consumers and sellers.

“It’s unclear what the quantifiable advantages will be for cross-border transactions,” said Sameer Lakhani, managing director at Global Capital Partners. “But on the surface, it does appear that certain ‘arbitrage’ opportunities might open up if there are differences in VAT rates.”

Kerur agrees there are gains. “But the reality is that every regional government will implement its own fiscal measures to combat budgetary pressures and these are likely to be tough across the whole region,” he added.

What does it mean for the consumer

Saudi Arabia and the UAE are the two leading gold consuming markets in the Gulf. But there are differences in the demand pattern. In Saudi Arabia, the interest is principally for 21K gold and mostly from national and Arab shoppers.

But in the UAE, 22K rules.

“The Saudi VAT hike to 15 per cent will have a significant impact on domestic demand there,” said Abdulsalam K.P., executive director at Malabar Gold & Diamonds and a member of Dubai Gold & Jewellery Group. “In Saudi Arabia, there are two gold base rates – one for 21K (and which includes making charges) and another for 22K.

“The 22K prices are comparable to Dubai, but 21K is already much higher. With 15 per cent VAT, the price gap will widen further.”

Malabar operates 14 stores in the kingdom and confirmed it will be shutting down two of those keeping in mind market circumstances.

“In the gold jewelry trade, there is a vast unorganized retail sector, and with 15 per cent VAT hike, there are concerns there could be higher incidence of under-reporting of sales,” said Salam.

What it might mean for prices at local level

For Saudi consumers, a VAT increase will have a domino effect on what they will eventually pay at the checkout counter in stores.

Cost of import and delivery will all ratchet up in proportion, and these will add to the cost of merchandise at the store.

“Even if the duty amount is tolerable, the VAT, which is a direct tax, will have an enormous effect on the price of landed goods,” said Thomas Gregory, executive director at Fusion Specialized Shipping & Logistics. “Along with duties, the landed cost is going to be costlier by 20 per cent.

“The direct impact of VAT on exports will not be a significant impact as most services are exempted.”

On the cost of delivery, “Local moves will be impacted big time as the VAT component has increased by 300 per cent. For example, if a local move costs 500 Saudi riyals, with the new VAT rules, it could cost 575 riyals. “With companies working at a 10-12 per cent margin, this could be seen as a step that will increase product prices.

“Customers may refrain from buying non-essentials and luxury goods, but essential commodities must move.

“Logistics is a derived demand, hence there will not be a significant impact on the industry. It is a matter of time to get accustomed to the new realities of life.”

courtesy : https://gulfnews.com/

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The Federal Tax Authority (“FTA”) has recently updated a VAT Administrative Exception Guide.

WHAT IS VAT ADMINISTRATIVE EXCEPTION? 

The UAE VAT Law specifies administrative requirements, which, in general, should be fulfilled by all UAE VAT-registered businesses and individuals, despite the size of the business, volume of transactions, or any other unique aspects of the business.

Often many businesses find it challenging to comply with these administrative requirements resulting in a potential risk of penalties during an audit by FTA.

However, as per the VAT Administrative Exception mechanism, VAT-registered businesses and individuals may apply for concessions/exceptions from UAE VAT Law requirements in respect of the following:

• Tax Invoices and Tax Credit Notes
• Length of the Tax Period
• Stagger
• Extension of the time of Export of goods

WHAT’S NEW?

The updated mechanism provides a new category of VAT Administrative Exception relating to “Evidence to prove export of goods.”

According to the updated Guide, VAT-registered businesses and individuals may submit a request to approve the use of an alternative form of evidence to prove the Export of goods.

WHO MAY APPLY?

Any VAT-registered business or individual who can justify the FTA with actual reasons/circumstances for which the request for usage of an alternative form of evidence may apply for an administrative exception in this scenario.

WHAT THE OUTCOME OF THIS VAT EXCEPTION?

According to UAE VAT Law, the Export of goods shall be subject to the zero-rating relief if the following conditions are met:

• The Goods are physically exported to a place outside the Implementing States or are put into a customs suspension regime in accordance with GCC Common Customs Law within 90 days of the date of the supply.
• The official and commercial evidence of Export or customs suspension is retained by the exporter.

“Official evidence” means Export documents issued by the local Emirate Customs Department in respect of Goods leaving the State.

“Commercial evidence” shall include any the following:

• Airway bill
• Bill of lading
• Consignment note
• Certificate of shipment

If the application for VAT Administrative Exception is approved, the Tax Payer will have official permission from the FTA to use of an alternative form of evidence export documents to be able to consider this Export as zero-rated supply.

The alternative form of evidence export documents may be any of the following:

• Proforma invoice
• Export Invoice
• Packing List
• Sales Contract
• Insurance Certificate, etc.

HOW CAN WE HELP?

Al Nuaimi Auditors as an entity provides VAT advisory, optimization, registration, implementation and compliance services in Bahrain, UAE, KSA, and the GCC.

Our team is here to guide you through the VAT Administrative Exception process and liaise with FTA in obtaining an exception.

Our team of senior qualified tax advisors, finance experts, and tax accountants will ensure timely and cost-effective VAT services.

Based on our local and international experience, we understand that VAT is a complex tax and will certainly suffer numerous changes in the upcoming years. Rethink’s VAT services are aimed to suit both basic and complex returns for SMEs and larger enterprises.

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The Federal Tax Authority (FTA) on Tuesday announced the decision to extend the tax period for excise tax registrants, which began on March 1, 2020, for one month on an exceptional basis.

The Federal Tax Authority (FTA) on Tuesday announced the decision to extend the tax period for excise tax registrants, which began on March 1, 2020, for one month on an exceptional basis.

The FTA said it is fully committed to support taxpayers and enabling them to fulfil their tax obligations during these exceptional times, as authorities’ ramp up their precautionary efforts to prevent the spread of the coronavirus (COVID-19).

The tax period now covers the months of March and April 2020, and ends on April 30, 2020, allowing registered businesses sufficient time to fulfill their tax obligations before the deadline.

New deadlines

Excise tax registrants are required to file two separate tax returns, one for March and one for April 2020, and settle the total amount due for the two months no later than Sunday, May 17, 2020.

A statement from FTA said that the new deadline takes into consideration the date set by the UAE authorities to impose the 24-hour restrictions on movement for individuals and vehicles, implemented in certain areas of the UAE.

“The FTA appreciates that current conditions may prevent taxable persons from fulfilling these obligations within the legal timeframes, the statement continued. The taxable persons registered for excise tax – constituting 1,100 registrants – are required to submit several declarations detailing their production, import, or release of excise goods from designated zones.

Online services

The FTA said that it will continue providing all of its services remotely, facilitating registration procedures, as well as the filing of periodic tax returns and payment of due taxes. The advanced electronic system promotes and facilitates self-compliance, as it allows Taxable Persons or their representatives to complete all transactions quickly, easily, and with no need for personal contact or paper documents. The Authority said it is fully committed to maintain contact with all stakeholders in the tax system, answering their enquiries, and providing them with the information they need on systems, legislation, and executive procedures. Registrants can get in touch through the call center or by email.

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source : https://gulfnews.com/business/federal-tax-authority-extends-tax-period-for-excise-tax-registrants-1.1586887271846

The Federal Tax Authority (FTA) on Tuesday issued a directive on an exceptional basis providing an alternative date of May 28, 2020 for the deadline of submitting value-added tax (VAT) returns and the payment of due tax for the tax period ended March 31, 2020, enabling taxable persons to meet their tax obligations without facing any difficulties.

This decision has been taken to support VAT registrants and the unprecedented intensive precautionary measures undertaken by the UAE to curb the spread of the novel Covid-19 coronavirus imposing restrictions on the movement of individuals and vehicles implemented in certain areas of the UAE, which coincided with deadlines for filing VAT returns.

In a press statement issued on Tuesday, the FTA confirmed that, as per the directive, VAT registrants who have monthly tax periods must submit their returns, and settle the payable tax for the tax period from March 1 to 31, 2020, no later than Thursday, May 28, 2020.

Meanwhile, VAT registrants having quarterly tax periods must submit their returns and settle the payable tax for the tax period from January 1 to March 31, 2020, by Thursday, May 28, 2020.

The FTA urged VAT registrants to ensure the data they include in their VAT returns is accurate, and to also ensure that the FTA receives the payable tax for the tax period ending March 31, 2020, by Thursday, May 28, 2020, calling on all registrants to continue to abide by all other tax obligations as usual.

This exceptional directive for the deadline pertains only to VAT Returns for the tax periods that ended on March 31, 2020, and does not affect any other tax periods where the deadline for filing tax returns and settling of payable taxes does not fall in April 2020.

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Source : https://www.khaleejtimes.com/business/vat-in-uae/deadline-for-submitting-vat-returns-extended-in-uae

The FTA has made the provision for qualified and licensed persons to assist Taxable Persons in compliance under VAT. These persons are called Tax Agents. Let us understand more about Tax Agents under VAT.

Who is a Tax Agent?

FTA and assist in fulfilling his/her tax obligations and exercising his tax rights. A Tax Agent can assist taxable persons to fully meet their tax obligations and save them the time and effort required in compliance.

What are the duties of a Tax Agent?

The duties of a Tax Agent are the following:

• Assist Taxable Persons with their tax obligations as per the contractual agreement between the Taxable Person and the Tax Agent.
• Maintain the confidentiality of any information obtained in the course of performing his/her duties as a Tax Agent.
• Refuse to participate in any work or plan which may result in the breach of any Law by any person or which may jeopardise the integrity of the tax system.
• If and when requested by the FTA, provide all information, documents, records and data required regarding the Taxable Person he/she represents.

What are the conditions to register as a Tax Agent in UAE?

A person wanting to register as a Tax Agent should fulfil the following conditions:

• Be of good conduct and behaviour and never have been convicted of a crime or misdemeanour prejudicial to honour or honesty
• Should hold a certified Bachelor or Master degree in tax, accounting or law from a recognised educational institution. If the applicant holds a bachelor degree in any other field, he/she should submit a tax certification from an internationally recognised tax institute
• Should hold a certification of relevant and recent experience of at least 3 years in tax, qualified accounting or Law
• Provide a certificate proving their verbal and written communication in both Arabic and English
• Pass the FTA’s Tax Agent exam
• Provide a medical fitness certificate
• Hold professional indemnity insurance

When can application for registration as a Tax Agent be rejected?

The FTA will reject an application for registration as a Tax Agent in the following 2 cases:

• The applicant does not meet the registration requirements
• The person’s registration as a Tax Agent will adversely affect the integrity of the tax system in UAE

What is Tax Agent register?

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In the United Arab Emirates (UAE), the Federal Tax Authority (FTA) is the regulatory body for UAE VAT Laws and takes charge of managing and collecting federal taxes and fines. Being aware of the tax laws is always beneficial to business organizations and individuals. There are situations where the taxpayers are not satisfied with the decision given by the authority. In such cases, you may apply for UAE VAT Reconsideration.

The authority is ready to review its decision and give relief to the taxpayers if they prove the case by filing for UAE VAT Reconsideration.

What is the UAE VAT Reconsideration?

Any person who has received penalties can apply to the Federal Tax Authority (FTA)’s for VAT reconsideration within 20 working days from the receipt of such penalty.

Whether any objections can be raised to the FTA if penalties are imposed?

Yes, if you are not satisfied with the Federal Tax Authority (FTA)’s decision and if they have imposed any penalties, then you can file a VAT reconsideration request to the authority to review the decision made by the FTA.

How to Apply for VAT Reconsideration in the UAE?

The Federal Tax Authority is ready to review its decision on the levy of penalties on business entities. The UAE VAT reconsideration application can be submitted online to the authority appealing the authority to review the case and reverse the penalty. This application is to be submitted within 20 working days from the receipt of the penalty.

Any person who has received the penalty can submit UAE VAT reconsideration for any decision taken up by the FTA, and such an application must be submitted online in Arabic only.

How does FTA respond to the VAT Reconsideration filed?

The authority will review its decision and facts of the case and issue a new decision within 20 working days from the receipt of the application. The Authority will inform the applicant of its decision within five business days of issuing the decision.

The authority can either remove the penalties imposed or can take the stand of retaining the penalty which depends on case to case basis.

Applicable provisions of the Law

Article (27) of the Federal Law No. (7) of 2017 on Tax Procedures speaks about application and procedures for reconsideration

1. Any person may submit a request to the Authority to reconsider any of its decisions issued in connection to him, in whole or in part, provided that reasons are included, within 20 business days from him being notified of the decision.
2. The Authority shall review a request for reconsideration if it has fulfilled the requirements and issue its justified decision within 20 business days from receipt of such application. The Authority shall inform the applicant of its decision within five business days as of the issuance thereof.

VAT Penalties in the UAE

The authority may impose penalties if they come across a situation that has led to tax evasion from the taxable person in the UAE.

VAT Administrative Penalties in the UAE

These penalties are imposed by the Authority for non-compliance and breaching the provisions of this Decree-Law or Federal Law No. (7) of 2017 on Tax Procedures.

Tax Evasion penalties in the UAE

These penalties are imposed on persons who are involved in any kind of tax evasion ow lowering of the tax due illegally. 

What are the circumstances that invite VAT penalties in the UAE?

1. Late Registration for VAT
2. Late Deregistration
3. Failure to file VAT Returns within the time frame
4. Submission of wrong documents or incorrect information
5. No proper records

What are the Seven information’s required to file the VAT Reconsideration Form?

1. VAT Registration certificate
2. Emirates ID for the responsible person for registration
3. Passport copy for the responsible person for registration
4. Registered Mobile number and Memorandum of association to verify the authorized person.
5. The amount of penalty
6. The date of the penalty
7. A detailed summary of the case.

Based on all this information the VAT reconsideration can be filed. Also, note that this application and the supporting documents need to be submitted in Arabic only. There are no fines and penalties when submitting the VAT reconsideration form.

Example of UAE VAT Reconsideration 

ABC LLC a company registered in the tax group wanted to leave the tax group and register separately. However, in the process of applying for separate registration, they received a late registration penalty of AED 20,000/- from the Federal Tax Authority.

So, the UAE VAT Reconsideration was filed indicating the facts of the case to the authority. The authority has accepted the filed UAE VAT reconsideration and has reversed the penalty that was imposed.

What are the other options ahead if you are not satisfied with the FTA’s decision?

If you are not satisfied with the decision taken by the FTA even after submitting the VAT Reconsideration Form, then in such circumstances the case can be taken to the Tax Dispute Resolution Committee.

An objection can be raised if the VAT reconsideration request is rejected by the authority to the Tax Dispute Resolution Committee within 20 business days from the date of notification.

However, you cannot raise the objection to the committee in these two circumstances:

1. If the reconsideration was not filed with the FTA previously
2. If the penalties levied by the authority are not settled

The committee will review the case again and make a decision within 20 working days from the date of receiving the objection. In certain situations, the committee will extend the time frame to an additional 20 business days if the authority finds any reasonable facts about the case.

The Tax Dispute Resolution committee’s decision will be final if the penalty amount or the tax payable is less than AED 100,000/-

Further, the taxable person who has the penalty of more than 100,000/- and wants to challenge the decision of the committee can approach the federal court within 20 working days from the date of notification of the objection.

The application of the Designated Zone (DZ) rules is a known area of focus for the United Arab Emirates (UAE) Federal Tax Authority (FTA) when conducting checks on repayment returns, and for broader FTA audits. In our experience, many businesses are facing material exposures to tax assessments and penalties arising from incorrect application of the DZ rules and associated requirements to account for import Value Added Tax (VAT).

Who is this alert for?

Any business which operates and make supplies from a DZ for VAT purposes in the UAE and any business that receives goods from suppliers located within a DZ in the UAE. More specifically, we would expect this alert will be of particular interest to those businesses involved in supply chains which involve the movement of goods within, between, to and from DZ’s, particularly where goods cross the UAE border.

Designated Zones rules – recent issues

We have seen a number of recent examples where businesses are facing material exposures to tax assessments and penalties arising from the incorrect application of the DZ rules, either in relation to their own supplies or as a result of the VAT treatment applied by vendors.

In our experience, many businesses struggle to apply DZ rules to the practical examples they face in their business on a day to day business. As a result,businesses are being required to make adjustments to supplies previously treated as out of scope of VAT, in order to charge VAT at 5% to their customers. Such corrections can attract significant penalties which increase over time and can be up to 350% of the original tax due.

In addition, the recent Public Clarification VATP012 on Importation of goods by agents on behalf of VAT registered persons, raises some important points about the eligibility to recover VAT paid on import. In certain cases, this will lead to businesses being required to make adjustments to the value of import VAT automatically populated in Box 6 of the VAT return. In many cases, businesses appear not to have fully considered the implications of the Public Clarification on their current business and reporting practices.

If you are a business involved in supply chains which include movements of goods within, between, to and from DZ’s there is a risk that VAT rules may be applied incorrectly in many cases, including:

• Supplies made under a Delivered Duty Paid (DPP) incoterm, or similar arrangements involving delivery of goods to premises in the UAE mainland
• Supplies where the Importer of Record (IOR) is not owner of the goods at the time of import e.g. where the customer imports the goods under their own import license before legal title transfers·        
• Supplies where goods are entered into a DZ under an import license which authorizes imports into a different DZ or UAE Free Zone·        
• Supplies of goods made where the customer intends to consume the goods within its own business or for private purposes·        
• Supplies of goods where the supplier is unaware of the purpose to which the customer will put those goods·        
• Supplies involving or related to real estate situated within the DZ, amongst others

Where supply chains involve goods which are also subject to Excise Tax, further
complications can arise.

List of Designated Zones in the UAE

Designated Zones – Abu Dhabi

1. Free Trade Zone of Khalifa Port
2. Abu Dhabi Airport Free Zone
3. Khalifa Industrial Zone
4. Al Ain International Airport Free Zone
5. Al Butain International Airport Free Zone

Designated Zones – Dubai

1. Jebel Ali Free Zone (North-South)
2. Dubai Cars and Automotive Zone (DUCAMZ)
3. Dubai Textile City
4. Free Zone Area in Al Quoz
5. Free Zone Area in Al Qusais
6. Dubai Aviation City
7. Dubai Airport Free Zone
8. International Humanitarian City – Jebel Ali

Designated Zones – Sharjah

1. Hamriyah Free Zone
2. Sharjah Airport International Free Zone

Designated Zones – Umm Al Quwain

1. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port 
2. Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road

Designated Zones – Ras Al Khaimah

1. RAK Free Trade Zone
2. RAK Maritime City Free Zone
3. Al Hamra Industrial Zone – Free Zone
4. Al Ghail Industrial Zone – Free Zone
5. Al Hulaila Industrial Zone – Free Zone

Designated Zones – Fujairah

1. Fujairah Free Zone
2. FOIZ (Fujairah Oil Industry Zone)

Designated Zones – Ajman

Ajman Free Zone

Under UAE VAT Law, the responsibility to levy, collect and pay tax to the government is on the person who is making taxable supplies i.e. on the supplier. This means, whenever a registered supplier is making a taxable supply, he needs to charge VAT and pay the same to the government. The mechanism of collecting tax by a registered supplier from his customers is known as forward charge mechanism. For example, A-One Spares Ltd sold spare parts worth AED 100000 to General Automobiles Ltd and collected VAT of AED 5000 at the rate of 5%. The VAT of AED 5000 is collected on a forward charge basis. However, the UAE VAT Law and Executive Regulations notifies certain type of supplies on which VAT need to be charged on Reverse Charge Mechanism.

Before understanding those supplies which are liable for Reverse Charge VAT, first let us understand the concept of reverse charge mechanism.

What is VAT Reverse Charge Mechanism?

Under reverse charge mechanism, on certain notified supplies, the recipient or the buyer of goods or services is responsible to pay the tax to the Government, unlike in the forward charge, where the supplier is liable to pay the tax. The key change is the shift in the responsibility of paying tax, which is moved from the supplier to the buyer.

Why VAT Reverse Charge Mechanism?

In order to ensure that the VAT is collected on the supply of goods or service where the supplier is not a taxable person and the supply has been made in the state of UAE, the government has introduced the concept of reverse charge mechanism. Due to this, the recipient or the buyer is treated as a person making taxable supplies to himself and will be responsible to pay VAT to the government.

What are the supplies liable for Reverse Charge VAT in UAE?

In UAE VAT, broadly the import of concerned goods or services and supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy are under reverse charge VAT. The UAE VAT Law has listed the following supplies which will be liable for VAT on reverse charge mechanism, provided the applicable conditions are met as prescribed in UAE Executive Regulations:

• Imports of concerned goods or concerned services for business purpose
• Taxable supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy by registered supplier to registered buyer in the State of UAE
• Supply of goods or services by a supplier who does not have a place of residence in the state to a taxable person who has a place of residence in the State of UAE.

All of the above mention supplies are liable to reverse charge mechanism. However, for each of the above supplies, specific conditions are mentioned in the UAE VAT Executive Regulations which need to be full filled, to be liable for reverse charge VAT.

Reverse Charge VAT Example

In order to ensure that VAT is collected on the supplies where a supplier is not a taxable person in the state of UAE, the concept of Reverse Charge Mechanism is introduced in the UAE VAT. Under this, the recipient or the buyer of goods or services will be liable to pay tax to the government. Thus, as a recipient or buyer of goods or services under reverse charge mechanism, the following responsibility needs to be discharged:

• Determine the value on which tax needs to be levied
• Account the VAT due on reverse charge supplies
• Remit VAT to the government
• Claim Input Tax, if eligible.
• Maintain the records such as invoice and other documents to substantiate the tax payment and input tax claim

In order to make the concept of Reverse charge mechanism clearer, let us understand this with an example:

A-One Spare Ltd, a registered dealer in spare parts and accessories in Dubai imported spare parts worth AED 5500 from Speed Motors Ltd, located in India.

Here, A- One Spare Ltd, being a registered importer, is required to pay VAT @ 5% on AED 5500 i.e. AED 275 to the government.

How different is Reverse Charge VAT compared to Forward charge mechanism?

Let’s make the comparative analysis of VAT on forward charge and reverse charge with an example of domestic supplies of goods at 5% versus the import of similar goods.

If you closely observe the illustration, the net result of reverse charge mechanism is same as that of forward charge basis. The only difference in reverse charge VAT is the shift in the responsibility of paying VAT which is moved from supplier to the recipient. In the above illustration, it is moved from ABC Firm to XYZ firm. In a way, the concept of reverse charge mechanism helps to alleviate the difference between local and international suppliers and puts both into the same position.