Category: inBriefs

The UAE Ministry of Finance has announced the Executive Regulation for the Federal Decree-Law No. (8) of 2017 on Value Added Tax (UAE VAT Legislation) at a Cabinet meeting on 7 November 2017, headed by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, Ruler of Dubai.

It is expected that the Executive Regulation to UAE VAT Legislation will be released this week in draft form on both the UAE Ministry of Finance’s website (www.mof.gov.ae) and the Federal Tax Authority’s website (www.tax.gov.ae).

The Executive Regulation operates in conjunction with, and provides substantive details to many operative provisions within the UAE VAT Legislation.  As such, the UAE VAT Legislation, Executive Regulation and relevant UAE Cabinet decisions are required to be read together for a practical application of UAE VAT law.

In this multi-part inBrief, we will disseminate the most significant provisions for which the release of the draft Executive Regulation has provided additional legislative and procedural detail for the application of VAT within the UAE.

Operative clarifications in a number of specific areas have now been provided in the Executive Regulation, amongst which the most important and anticipated is the intended application of UAE VAT regime with respect to Free Zone entities.

Designated Zones

The Executive Regulation does not specifically prescribe treatment to UAE Free Zone entities or references the term Free Zone, as not all Free Zones will attract the same treatment.

Rather the Executive Regulation introduces a new term, Designated Zone, which is defined by the Executive Regulation as:

Any area specified by a decision of the Cabinet upon the recommendation of the Minister, as a Designated Zone for the purpose of the Decree-Law.

Therefore, as a Designated Zone will be specified by a decision of the UAE Cabinet and such decision has not been published in the UAE Federal Gazette the situation remains that there is no comprehensive guidance on whether a specific Free Zone entity would fall under the Designated Zone VAT provisions, or if they would be treated as a regular onshore entity for UAE VAT purposes.

The operative provisions of the Executive Regulations pertaining to Designated Zone entities however do allow us to provide some certainty to a large number of Free Zone entities.

A Question of Physical Segregation

A Designated Zone specified within a future UAE Cabinet decision will be treated as being outside of the UAE and of the GCC for VAT purposes subject to three conditions.

The Designated Zone is required to be a specific fenced area with security measures and Customs controls in place to monitor entry and exit of individuals and the movement of goods to and from the area. A Designated Zone will also have internal procedures regarding the method of keeping, storing and processing of the goods within the Designated Zone, and the operator of the Designated Zone shall comply with the procedures set by the Federal Tax Authority (FTA). These specific procedures are at this time unknown.

If a Designated Zone fails to maintain the required conditions above, it will cease to be treated for UAE VAT purposes as being outside of the UAE/GCC.

It is apparent that the UAE has chosen to align the concept of a Designated Zone with existing bonded customs procedures both as a concession to compliance (as entities currently trading within such bonded Free Zones would be familiar with the imposition of Customs Duties) and also as a simplification measure (as such areas already have the physical and procedural infrastructure in place to control the flow of goods within a fenced geographic area).

From the required Designated Zone conditions above, a large number of forty five Free Zones within the UAE will not satisfy the physical segregation requirements in order to qualify as a Designated Zone, and thus entities incorporated within these Free Zones will be subject to the same VAT operative provisions as all other onshore entities within the UAE.

Bonded Free Zones

Free Zones such as Dubai Airport Free Zone, Jebel Ali Free Zone, Sharjah Airport International Free Zone, Hamriya Free Zone, Ras Al Khaimah Free Trade Zone, and Fujairah Free Zone currently have geographic segregation, security and customs controls in place and hence have the ability to be scheduled as a Designated Zone in a future UAE Cabinet decision.

Imports of goods from outside the UAE into Designated Zones will not be treated as imported into the UAE and thus will not be liable for UAE VAT until such a time when a supply of goods is made from within the Designated Zone to another person to be used by them, or consumed by the owner within the Designated Zone.

Acquisition of goods within a Designated Zone for incorporation into another unconsumed good located within the same Designated Zone will not be subject to UAE VAT.

Goods may also be transferred between Designated Zones without being subject to tax if the goods are not used or altered during the transfer process, and the transfer is undertaken in accordance with the rules for customs suspension per GCC Common Customs Law. The FTA may require a guarantee equivalent to the tax liability of the goods to be transferred in case the conditions for the transfer of goods between Designated Zones are not met.

The movement or supply of goods into a Designated Zone from within the UAE will not be considered an export of such goods from the UAE,  and as such will not receive zero-rating which an export outside of the GCC would receive.

Service Entities

A large number of entities operating in bonded Free Zones that may qualify to be Designated Zones would provide services as their primary taxable supplies. The Executive Regulation provides that the place of supply of services is considered to be within the UAE if the place of supply is within the Designated Zone  and in effect, aligns the VAT treatment of service entities operating within Designated Zones to similar onshore entities within the UAE.

Conclusion

The draft of the Executive Regulation to the UAE VAT Legislation in respect of Free Zone entities confirmed our view of the expected UAE VAT treatment of Free Zone entities insofar that it would be harmonious to all other onshore UAE entities. Although a number of Cabinet decisions are still to be released pertaining to the implementation of the UAE VAT regime, most Free Zone entities now have reasonable certainty to their UAE VAT outlook. Free Zone entities that have delayed planning or registration for the implementation of UAE VAT on 1 January 2018 have a highly compressed timeline in which to make important internal procedural and operational changes.

The general alignment of UAE VAT and Customs Duty in regard to the definition, operation and compliance of Designated Zones provides some familiarity in changing times to Free Zone entities already operating within the bonded goods warehouse regime, which will reduce administrative compliance overhead to importers and exporters of physical goods.

Please stay tuned for our next installment of this multi-part inBrief as we further disseminate the most significant provisions for which the release of the draft Executive Regulation has provided additional legislative and procedural detail for the application of VAT within the UAE. ■

The United Arab Emirates (UAE) Federal Tax Authority (FTA) has commenced accepting registrations for Value Added Tax (VAT) through its online portal.

Registrations are currently being accepted on a voluntary basis by entities that satisfy the following registration criteria:

• Any business resident in the Gulf Cooperation Council (GCC) making supplies of goods or services in the UAE with a turnover subject to VAT of more than AED 375,000 in the last 12 months, or an expected turnover of more than AED 375,000 in the next 30 days (i.e. entities with mandatory registration requirements).

• Any business resident in the GCC making supplies of goods or services in the UAE with a turnover or expenses subject to VAT of more than AED 187,500 in the last 12 months, or an expected turnover or expenses of more than AED 187,500 in the next 30 days (i.e. entities who can voluntarily register).

• Any business resident outside of the GCC that expects to make supplies of goods or services within the UAE that does not have another entity to account for the VAT liability in the UAE on their behalf (there is no registration threshold for non-established taxable entities).

Businesses that satisfy mandatory registration requirements will need to ensure they are registered prior to 1 January 2018, whilst for businesses under the AED 375,000 threshold, registration at this time is purely voluntary.

For entities that have previously registered for Excise Tax with the FTA and already hold a Tax Registration Number (TRN), registration for vat registration UAE will still be required as a different TRN will be issued for their VAT registration.

Article 15 of the VAT Decree Law No. (8) of 2017 provides an exception to registration if an entity only supplies zero-rated supplies. A VAT registration application must still be completed through the FTA portal, however by answering ‘Yes’ to the question ‘Are you applying for an exception from VAT registration’, the applicant will have satisfied any mandatory requirements from a registration perspective.

It is relevant to note that although the VAT registration has commenced, the Executive Regulation and the Cabinet Decision in relation to the VAT Decree Law No. (8) of 2017, that are likely to contain many relevant operative provisions, are yet to be issued.

VAT Grouping

Each GCC country is provided the choice by the Common VAT Agreement of the States of the GCC to adopt VAT groups. VAT grouping law is domestic, meaning only local entities are allowed to be VAT-grouped together. There is no cross border VAT group concept, as not every country may elect to adopt VAT grouping.

Article 14 of the VAT Decree Law No. (8) of 2017 provides for two or more legal persons resident in the UAE that are conducting business to apply for VAT registration as a Tax Group.

VAT groups will be allowed where one person or one company controls the others. The applicant will need to explain and provide evidence of legal commercial control in order to form a VAT group.

In the UAE it is common to have multiple branches of the same entity registered in different emirates. From a legal and a VAT perspective they are not different entities. There is no VAT accounting needed when moving goods and services between branches as there is no supply to a different entity.

VAT grouping provides quasi branch treatment to entities with common control. VAT grouping is by election. For instance, in a scenario of 100 companies with common legal control, a differing number of companies could be placed in a VAT group based on operational and business priorities, although each company can only be part of one VAT group.

By grouping VAT payers with refund entities, VAT liabilities can be offset, possibly reducing cash flow implications created by the imposition of VAT. However, there appears to be the choice of not establishing any VAT groups and proceeding with individual VAT registrations. If the FTA perceives abuse of the grouping provisions in any situation (e.g. not grouping multiple entities to stay under registration thresholds) then the FTA has the power to refuse VAT grouping or remove entities from a group.

Once a VAT group has been successfully created, only one TRN number will be issued to the group and one VAT return will be required to be filed, resulting in a simplification of VAT administration.

Members of a VAT group become jointly and severally liable for each other’s VAT liabilities and can ignore transactions between entities within the group for VAT purposes.

VAT Registration Process

The FTA estimates that the registration process should take approximately 15-20 minutes to complete. However, this estimate is predicated on the applicant having all the relevant information compiled at the time of making the application. During the application process, various documents (listed in the table below) relating to the taxpayer’s entity will be requested to be lodged on the portal. Soft copies of the relevant documents should be available before commencing the registration process.

Once an application has been submitted with the FTA for processing, it will be assessed to ensure the applicant satisfies all requirements to be eligible for a VAT registration. The FTA may require additional information for certain applications, and they will contact the applicant for clarification before the application is allowed to progress. Applications will be rejected if the FTA does not believe that all registration requirements are met. Once an application has been approved by the FTA, a TRN for VAT purposes will be issued. This will allow the registered entity to submit VAT returns, along with paying any VAT liability due. ■

Source: Federal Tax Authority website (www.tax.gov.ae) article by Afridi & Angell

The UAE has issued substantive law on Value Added Tax (VAT) and Excise Tax.

Federal decree law No.8 of 2017 deals with VAT.  The imposition of VAT will commence in the UAE from 1 January 2018 at a rate of 5%.  The VAT law provides a framework for implementation of VAT in the UAE.  Many operative provisions specific to the UAE are not incorporated in the VAT law and instead will be disseminated in both the Executive Regulation and the Cabinet Decision to be issued in relation to the VAT law.  Once issued, we will receive guidance on a number of areas which currently remain unlegislated.  In the meantime, this inBrief deals with the provisions of the VAT law and information otherwise available in the public domain.

Tax Registration

Registration is mandatory for any taxable person/business if the total value of its taxable supplies made within the UAE exceeds the mandatory registration threshold of AED 375,000 over the previous 12 months period or, if it is anticipated that the taxable supplies will exceed the threshold in the next 30 days.

Voluntary registration is available for taxable persons/businesses that do not meet the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500 subject to the same taxable supply tests above.

A taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%.  Reverse charged supplies and imports are also taken into consideration for this purpose, if a supply of such imported goods and services would be taxable if it were made in the UAE.

Entities which are not based in the UAE but provide goods or services in the UAE are also required to apply for registration if they meet the threshold requirements. Registrations will commence in the fourth quarter of 2017 via the Federal Tax Authority (the FTA) website.

Exempt and Zero Rated Items

The supply by a taxpayer of either an Exempt or Zero Rated good or service will result in no imposition of VAT on that transaction. Although the result of both categories of supply seems identical, these terms are not to be used interchangeably.

The key distinguishing feature between the two supplies is that a supplier of a Zero Rated good or service will be able to claim a refund on any VAT paid on their purchases (input tax) whilst a supplier of an Exempt good or service will be unable to recover any VAT paid on their purchases.

VAT law provides a list of Zero Rated and Exempt supplies. The list includes:

Zero Rated Supplies

• Exports of goods and services outside the GCC;
• International transportation and related services;
• Supplies of certain sea, air and land means of transportation (such as aircraft and ships);
• Certain investment grade precious metals of at least 99% purity (e.g. gold, silver and platinum);
• New residential properties that are supplied for the first time within 3 years of their construction;
• Supply of certain education services, and supply of relevant goods and services;
• Supply of certain healthcare services and supply of relevant goods and services;
• Supply of crude oil and natural gas.

Exempt Supplies

• Certain financial services including sharia compliant products;
• Residential properties (save those which are zero rated);
• Bare land;
• Local passenger transport.

Tax Grouping

VAT law provides for tax grouping which allows companies with common control and / or ownership to be combined together into one entity for the purposes of VAT. Only one VAT registration number will be issued to the group and a combined VAT return will be required to be filed for the group, resulting in a simplification of VAT administration.

Members of a VAT group become jointly and severally liable for each other’s VAT liabilities and no VAT will be payable on transactions among entities within the group.

VAT Interactions within the GCC

Generally a VAT registered customer must account for VAT paid in respect of purchases however certain transactions between entities within the GCC will be subject to VAT by Reverse Charge.

The concept of reverse charging VAT allows the simplification of transactions within a single market (i.e. GCC states). The Reverse Charge removes the obligation to account for the VAT on a sale from the supplier, and places it on the customer. It is a concessional relief measure to assist the FTA with its administration so that foreign businesses do not need to register for VAT.

When a transaction is subject to Reverse Charge, and if your customer in another GCC country is VAT registered, then you will not be required to charge local VAT.

The customer will Reverse Charge VAT (i.e. account for VAT on your behalf) on their VAT return in their GCC country whilst simultaneously claim a VAT refund for the VAT paid on the purchase on the same return (if appropriate).

For the vendor it will effectively result in a Zero Rated transaction, with full entitlement to a refund of any VAT paid locally and no further obligation to account for the transaction.

If a GCC customer is not VAT registered (e.g. a private consumer) then reverse charging does not occur and UAE VAT would be charged until the vendor exceeded the AED 375,000 registration threshold in that GCC jurisdiction, at which time VAT registration would be required.

Note that for the purposes of a single market (GCC) VAT treatment, only those countries will be taken into account that have implemented VAT at the relevant time; the non-implementing countries would be treated like any other foreign country.

Application of VAT in UAE Free Zones

VAT law does not provide guidance to the application of VAT within any of the free zones in the UAE.  It is expected that the Executive Regulation to the VAT law will specify the tax treatment of free zone entities.

VAT Compliance

Registered entities will be required to maintain records for at least a five year period.

Tax invoices issued are required to be denominated in Arab Emirate Dirhams (AED) and if a currency conversion is required to AED, only approved rates scheduled on the UAE Central Bank website may be used.

VAT returns will be required to be completed with summary level data and filed online via the FTA portal. Reporting of Emirate level sales data will be required, summarized per Emirate. This statistical information is important for each Emirate, as revenue from the implementation of VAT will be distributed between the Federal Government and each Emirate. All communications with the FTA will also be facilitated online via the same portal.

The VAT law provides for penalties (imprisonment and/or fines) for contravention of the provisions of the VAT law. Penalty rates have not been set and will be specified by Cabinet Decision. Late returns and errors on VAT returns will be penalized on a tax liability due basis, whilst compliance failures (e.g. persistent non lodgment of VAT returns) will be penalized on a fixed penalty per infraction.

Excise Tax

Federal decree law No.7 of 2017 deals with Excise Tax and became effective in the UAE as of 1 October 2017.  A reasonably high rate of tax on a limited number of goods is imposed by way of an excise tax.  This includes a 50% excise on carbonated drinks and a 100% excise on energy drinks and tobacco products.  It is clear from the items on which excise has been applied that it is a tax to change social behavior by discouraging consumption of such products.

Conclusion

The introduction of Excise and Valued Added Taxation are likely to change the way business is conducted and administratively maintained in the UAE and the GCC.  This is a paradigm shift in a region which was largely free of taxation and the associated tax infrastructure. Although the rate of VAT imposition is set at a low 5% initially, and as such its effect economically will not be severe, the development and eventual maturity of a tax regime will have a much more pronounced effect on the economy and businesses alike. ■