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The UAE is the fifth largest market in the world in terms of global retail. Many businesses in UAE solely or mostly supply goods and services to recipients who are not registered under VAT.

For example: Supermarkets, retail outlets, restaurants, etc. There are also many businesses which mostly supply goods and services to registrants and once in a while, supply to persons who are not registered under VAT in UAE.

In these cases, should such businesses issue the detailed Tax Invoice for such supplies, containing all the mandatory details that are required in a Tax Invoice? For businesses which deal mostly with customers who are not registered under VAT in UAE, it is a difficult task to provide all the details required in a VAT Tax Invoice, such as the address of the recipient. At the same time, issue of an invoice evidencing that a supply has taken place is of utmost importance.

To solve this dilemma, the VAT Law provides for the facility to issue ‘Simplified Tax Invoices’ when a person registered under VAT makes supplies to persons who are not registered under VAT. Here, the recipients could be retail customers as well as businesses whose turnover does not exceed the threshold limit to register under VAT. You can visit our blog ‘Registration under VAT’ for more details of the requirements to register under VAT in UAE.

Let us take an example to understand how a registrant can issue simplified Tax Invoices under VAT.

Example: Jehan & Co., a registrant in Abu Dhabi, supplies 2 keyboards to a consumer, Mr. Ali, in Dubai. The simplified Tax Invoice to be issued by Jehan & Co. appears as shown below:

As you can observe, the details mandatorily required in a simplified Tax Invoice are lesser than the details required in a Tax Invoice. A key benefit of a simplified Tax Invoice is that the recipient’s name and address are not required. This becomes very useful for businesses which regularly deal with consumers or unregistered businesses. Such businesses can now easily configure the software they are using in their business for billing and for processing quicker invoices.

Finally, let us answer some FAQs that businesses have, with regard to simplified Tax Invoices.

FAQ 1: Should the title of simplified Tax Invoice be ‘Simplified Tax Invoice’?

Answer: No, the title of a simplified Tax Invoice’ should be ‘Tax Invoice’.

FAQ 2: What is the key difference between a Tax Invoice and a simplified Tax Invoice?

Answer: The key difference between a Tax Invoice and a simplified Tax Invoice is that in a simplified Tax Invoice, the recipient’s details, i.e. name and address are not required.

FAQ 3: Should VAT be charged on supplies for which simplified Tax Invoice is issued?

Answer: Yes, VAT at the standard rate of 5% should be charged in a simplified Tax Invoice.

FAQ 4: Is a simplified Tax Invoice a valid document for input tax recovery?

Answer: No, a simplified Tax Invoice is not a valid document for input tax recovery, as the recipient’s TRN details are not mentioned therein. Hence, if you are a registered business, ensure that a Tax Invoice containing your TRN is issued by the supplier to you.

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Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister, Minister of Presidential Affairs and Chairman of the Abu Dhabi Judicial Department (ADJD), issued a resolution to establish a court specializing in money laundering and tax evasion crimes.

The court will be set up under the framework of the judicial department’s strategic priority to improve the litigation process and create a fair and just judicial system.

Youssef Saeed Al Abri, under-Secretary of the ADJD, explained that the establishment of a specialist court will support the continuous development of Abu Dhabi’s judicial system, as well as play a major role in ensuring the timely adjudication of relevant cases and enhance the expertise of relevant judges, which will be reflected by the quality and consistency of legal judgements.

“The establishment of the court will also support the UAE’s efforts to combat such crimes and persecute perpetrators, through undertaking a series of steps and procedures, in coordination with relevant authorities and in light of an updated legislative infrastructure, which will reinforce the country’s competitiveness both regionally and internationally,” he added.

The court’s establishment highlights the ADJD’s keenness to support the specialisation of judicial work, to raise performance and achieve excellence and leadership, he further added, noting that the department will organise training courses for judges and prosecutors specialising in money laundering and tax evasion.

News Courtesy : Khaleej Times

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The Federal Tax Authority (FTA) of UAE has announced three new VAT free zones which are known as Designated Zones in VAT Law. With the announcement of three new free zone, the number of designated zones is increased to 23. This is indeed good news for the businesses located in those zones. Because VAT at 5% will not applicable to the transactions done within the new Designated Zones barring few exceptions.

List of New VAT Free Zones in UAE VAT

Among the latest addition, Al Ain International Airport Free Zone and Al Butain International Airport Free Zone are the two new Designated Zone added in Abu Dhabi and International Humanitarian City – Jebel Ali in Dubai.

Effective Date of New Free Zone

The new VAT free zone or the designated zones (Al Ain International Airport Free Zone, Al Butain International Airport Free zone and International Humanitarian City – Jebel Ali) will be effective from 18th June 2018. This implies that from 18th June 2018 onwards, the businesses located in these new VAT free zones need to understand the VAT treatment on supplies carried out by them, assess the impact of VAT on their business and accordingly plan. To know more about the VAT treatment on Designated Zone supplies, please read VAT Computation on Goods Supplied from Designated Zone in UAE

Business Benefits for Businesses located in the New VAT Free Zones

The announcement of new VAT free zones provides major relief to the businesses located in those zones. This because, Designated Zone is a VAT free Zone which is considered to be outside the State of UAE for the purpose of VAT. As a result, on any transfer of goods between Designated Zones, VAT will be not be levied. The following are few benefits available for the business located in the Designated Zone.

• Any transfer of goods between Designated Zones will not be taxable.
• Export of goods from Designated Zone to oversee countries will not be taxable.
• Supply of goods from Designated zone to other GCC countries will not be taxable
• Similarly, import of goods from other GCC countries or overseas countries will be non-taxable

While the designated zones offer various benefits, it is important for businesses to note that they have to comply with the certain prescribed conditions which determine their eligibility. Also, there are few supplies which are taxable even when supplied inside the Designated Zone. To know more about the conditions and tax treatment on different types of supplies, please read our article VAT on Designated Zone in UAE.

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Question #1: My company has already submitted the ESR notification in June 2020 after a thorough review. Are the current amendments on ESR relevant for me?

The short answer is ‘Yes’, essentially for the following three reasons:

a) Since the submission of the ESR notifications in June this year, the scope of the ESR has been significantly revised in August 2020. Companies are required to examine whether they are still, or are now, covered under the amended ESR and ensure if their business is compliant.

b) The Ministry of Finance will launch an online portal to facilitate the electronic filing of the ESR notification. Companies are required to resubmit the ESR notification on the online portal even if the notification was earlier submitted in June 2020.

c) If a company is still covered, or is now covered, under the amended ESR, the company would also be required to submit the ESR Report (as per the recently introduced template) on the online portal.

(The online portal is yet to go-live, however, the MoF has recently issued the templates of the ESR notification and the ESR Report on the public domain or website, which gives insights into ESR compliance on the required data and records.)

Question #2: My company’s trade license does not list any of the ‘relevant activities’ covered under the ESR, should I still be concerned?

It is not enough to review the activities listed in the trade license to determine the applicability of the ESR. A ‘substance over form’ approach should be adopted to determine whether a company is conducting any of the ‘relevant activities’ covered under the ESR.

What is a ‘substance over form’ approach? ‘Substance over form’ is a subjective test whereby the actual essence or nature of a transaction is considered instead of the form or name given to such transaction.

WHAT ARE ‘RELEVANT ACTIVITIES’?

Nine activities are covered as ‘relevant activities’ under the ESR namely, (1) Distribution & Service Centre Business (2) Headquarters Business; (3) Lease Finance Business; (4) Insurance Business; (5) Investment Fund Management Business; (6) Banking Business; (7) Shipping Business; (8) Intellectual Property Business; and (9) Holding Company Business. The scope of each ‘relevant activity’ is explained in detail in the ESR laws and guidance.

Question #3: My UAE-based company (let’s call it ‘Company X’) purchases goods from group companies in Belgium and Germany. To save on the logistics costs, the group companies dispatches the goods directly to the end-customers in the US. Are the transactions of ‘Company X’ covered under the scope of the amended ESR?

Among other changes in the scope of ‘relevant activities’, Distribution & Service Centre (D&SC) business now covers purchasing of goods from a foreign connected person and reselling of such goods. Under the earlier ESR, coverage under the D&SC business required (a) purchasing of goods from a foreign connected person; (b) importing and storing the goods in UAE; and (c) reselling the goods outside UAE

With the removal of condition (b) and (c), purchasing of goods from foreign connected persons for international distribution typically referred to as “Bill To-Ship To” transactions, or for local distribution within UAE, could trigger the ESR compliance.

WHAT IS A ‘FOREIGN CONNECTED PERSON’?

Two or more entities are treated as ‘Connected Persons’ if they are related through ownership, like companies within the same group, trusts and trustees, companies and their shareholders, partners and their families. A ‘Foreign Connected Person’ means a connected person that is not tax resident in the UAE.

Question #4: Does my company need to pay additional taxes if my firm falls under ESR purview? Should the company stop the ‘relevant activity’ henceforth to remain outside the scope of the ESR?

Through international cooperation by over 135 countries, the ESR is aimed to curb tax evasion. However, applicability of the ESR in itself does not involve any additional tax obligation.

If the ESR is applicable on a company then the company needs to demonstrate that the ‘economic substance’ is present in the UAE. Only in the absence of ‘economic substance’ in the UAE, stringent penal consequences are applicable. The penalties for non-compliance could range from Dh20,000 to Dh50,000, further increasing to Dh400,00 and possible cancellation/suspension of trade license in the future years.

DID YOU KNOW?

The Federal Tax Authority (FTA) has now been appointed as the ‘National Assessing Authority’ for the ESR. In addition to VAT and Excise Tax, FTA will undertake assessments to determine compliance with ‘economic substance’ tests by the companies. As per the recent ESR notification template , the companies are required to report if they are registered for VAT or not.

Question #5: My company (let’s call it ‘Company D’) was incorporated on July 1, 2018 with its financial year ending June 30, 2019. What would be the first reportable period under the ESR?

ESR is applicable in relation to financial years commencing on or after January 1, 2019. Accordingly, the financial year of ‘Company D’ from July 1, 2018 to June 30, 2019 would not be covered under the ESR. The first reportable period for ‘Company D’ would be from July 1, 2019 to June 30, 2020.

WHAT ARE THE COMPLIANCE TIMELINES UNDER THE ESR?

For the financial year starting on or after January 1, 2019, a company is required to submit ESR Notification within 6 months from the end of the relevant financial year and the ESR report, if applicable, within 12 months from the end of the relevant financial year. The above timelines could vary depending on the go-live status of the online portal by MoF.

Question #6: My company (let’s call it ‘Company Local’) is a mainland company involved in a local grocery shop business. A UAE national and myself are the only two shareholders of Company Local. Is the company still required to comply with the ESR?

The amended ESR has introduced a category of ‘exempt licensees’ which covers (a) Investment Funds, (b) Licensee that is a tax resident in a foreign jurisdiction, (c) a UAE branch of a foreign entity (if taxed in a foreign jurisdiction); and (d) entities that carry out business in the UAE which are wholly owned by UAE residents/nationals and are not part of a multinational group.

Company Local should be covered under category (d) above and would be required to submit only the ESR notification along with certain prescribed documents on a yearly basis. Based on the category of the ‘exempt licensee’, the prescribed documents could include tax residency certificate of the foreign jurisdiction, details and tax residency certificate of the Head Office (Foreign Company), details of the shareholders of the companies and/or financial statements.

Courtesy: Gulf News.

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A business keeps growing and expanding constantly. In this process, it is important for businesses in UAE to be cognizant of the impact of changes in the business on compliance under VAT rules. Let us understand the type of business changes which have an impact on a business’s compliance under VAT and the steps to be taken in each case.

The changes in a business which impact compliance under VAT can be categorized into 2 types:

• Change in account details
• Change in business circumstances

Let us understand these in detail.

Change in business details

This type of change is applicable to persons who are registered under VAT in UAE. When there are changes in their account details maintained with the FTA, it is important that these changes should be notified to the FTA. The FTA will amend the VAT registration accordingly.

Some examples of changes in account details, which should be notified to the FTA are:

• Name or trading name of the business
• Composition of a partnership
• Address of the principal place of business
• Primary business activity or activities
• Bank account details of the business or
• Details of Customs registration

Certain changes in account details, such as business activities, customs registration information, can be changed online by logging in to the FTA portal. These changes and how to make these changes are explained in detail in our article ‘Online amendment of registration details’.

Certain other changes in account details, such as address of the principal place of business, bank account details, have to be notified in writing to the FTA. These changes have been explained in detail in our article ‘Amendment of details blocked for online modification’.

Change in business circumstances

There are certain changes which occur in a business which lead to a change in the business’s circumstances materially. Examples of such changes are:

• The business ceases to be eligible for an exception from registration
• The business ceases trading or
• Certain taxable activities cease for any reason

These changes in business circumstances will result in a requirement to register under VAT or cancellation of registration.

Administrative penalty for failure to notify FTA of business changes

It is a taxable person’s responsibility to ensure that the information on which their registration is based, is accurate and up to date. In the event of a change in business details, whether it is a change in account details or change in business circumstances, the taxable person should notify the FTA of the change, in the relevant manner. In case a change in business details is not notified to the FTA, a penalty could be levied. The administrative penalty for failure to notify the FTA of business changes is as follows:

Hence, it is essential that taxable persons should ensure to inform the FTA in the event of a change in their business details. This change can be a change in account details or a change in business circumstances. Based on the type of change in business details, appropriate actions to notify the FTA need to be taken.

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In UAE, mandatory VAT registration is required only for those businesses whose value of supplies exceeds AED 375,000 in previous 12 months or anticipated to exceed in next 30 days during the current financial year. For businesses with value of Supplies / Taxable Expenses exceeding AED 187,500 in previous 12 Months or anticipated to exceed in next 30 days during the current financial year, the VAT registration is optional.

All those businesses whose value of supplies are less than the defined threshold limit will not be allowed to register under UAE VAT. However, this does not stop or restrict them to obtain VAT registration in the future, when the value of supplies exceeds or is anticipated to exceed the defined VAT registration threshold. This eventually leads to a business situation, in which, businesses were not registered on the 1st January, 2018, the date on which VAT was implemented but over the period of time, they have exceeded the defined threshold and have been registered under UAE VAT.

If you take a close look at the above situation, there are two phases to the journey of the businesses, Pre-Registration and Post-registration. In pre-VAT registration phase, they had to pay VAT on their purchase/expenses but were unable to recover Input VAT. This is because, only the registered business are allowed to recover Input VAT. In the post-registration phase, they are required to collect 5% VAT on taxable supplies and also, they are allowed to recover the Input VAT paid on purchases/expenses.

While the above discussion looks clear, the confusion is about reclaiming the Input VAT paid before registration? Are businesses allowed to recover the VAT paid before VAT registration?

Yes, the UAE VAT laws allows the recovery of input tax paid on goods, services and imported goods prior to the date of VAT registration. This will be allowed, only if the goods and services were used to make supplies that give the right to input tax recovery upon tax registration. This implies that the purchases / expenses on which VAT was paid before registration were used in making taxable supplies after registration.

The recovery of Input VAT will be in accordance with the general provisions of input TAX recovery and more importantly, the recovery should be done in the VAT Return submitted for the first Tax Period following Tax Registration.

However, the UAE VAT also stipulates certain exceptional scenarios in which VAT paid before registration cannot be recovered. The following are the instances:

• Goods and Services purchased for the purpose of making non-taxable Supplies. This implies that, you can recover VAT, only if it is used for making taxable supplies including zero-rated supplies.
• Input Tax related to the part of the Capital Assets that depreciated before the date of Tax Registration. This implies that If part of the asset is depreciated then Input tax cannot be recovered on such assets to the extent such assets are depreciated. For example, if you purchase a fixed asset with an expected life of 10 years and when you register for VAT the asset has only 3 years of use left. In this case, you can reclaim only 30% of the VAT you originally paid.
• Input VAT on service received more than 5 years prior to the date of tax registration will not be allowed to be reclaimed. This restriction is applicable only for services and not applicable for goods.
• If such goods were moved to another GCC country before tax registration.

Except for the instances listed above, in all other cases, you will be eligible to recover VAT paid before registration, if it is used for making the taxable supply.

Conclusion

Allowing the businesses to recover the VAT paid prior to registration prevents cascading of taxes on the end consumers. The businesses registered after 1st January 2018, should be aware of the benefit provided by this provision in reclaiming the Input VAT. Any absence in knowing this provision of law will lead to loss of Input VAT recovery. Also, it is important for businesses to note that reclaiming of VAT paid before registration is allowed only while filing VAT returns for the first return period post registration. Thus, businesses must ensure to file a return for the first tax period after carefully analyzing the provisions discussed above. After, the filing of return of first tax period, recovery of input tax paid before tax registration cannot be made.

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Entities can recover input taxes if they are not in the blocked category

The Federal Tax Authority (FTA), has confirmed that higher educational institutions making only zero-rated and standard-rated supplies may recover input tax in full, except where recovery is specifically blocked. Blocked input tax includes value-added tax (VAT) incurred on certain entertainment services, and motor vehicles that have been purchased, leased, or rented and made available for personal use, the FTA said yesterday.

The Authority noted that higher education institutions providing exempt supplies are eligible to recover only a portion of the input tax incurred.

Supply of material

The FTA’s Basic Tax Information Bulletin focuses on the tax treatment for the higher education sector in respect of universities and higher education institutions recognized by the competent federal or local government entity regulating the higher education sector where the course is delivered.

Moreover, these higher education institutions may obtain zero-rate educational ser-vices supplied in accordance with a curriculum recognized 10 by the government, provided the institution is either owned by the federal or local government or receives more than 50 per cent of its annual funding directly from the federal or local government (qualifying institution).

 The bulletin said the supply of printed and digital reading material related to an ap-proved curriculum shall be subject to the zero-rate if the supplier is a qualifying institution. The bulletin also noted that the transportation of students from home to the location of the higher education institution, and vice versa, is exempt from tax.

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News courtesy : Gulf News