Latest updates from Ministry of Finance, UAE on VAT

Latest updates from Ministry of Finance, UAE on VAT

Value Added Tax in United Aarb Emirates

Contents
1. Overview of VAT
2. Important Definitions under VAT
3. Place of Supply – Goods
4. Place of Supply Services
5. Date of supply: When to account for output VAT on supplies
6. Net Tax Payable
7. Input Tax Recovery Conditions
8. Registration: who is required to register for VAT
9. Tax Rates as per GCC Treaty:
10. Record Keeping
11. Penalties
12. Audits
13. Contesting Decisions
14. Annexure : GCC VAT Agreement structure

1. Overview of VAT

  • 1.1 Summary
  • VAT is a form of tax levied on the consumption of goods and services levied at the point of supply
  • Many countries have VAT or an equivalent tax system (eg.GST) but some countries have other consumption taxes.
  • VAT is collected by registered suppliers down the supply chain
  • Not all businesses will be VAT registered suppliers
  • VAT is payable by both businesses and individuals
  • 1.2 History of VAT
  • Vat has been implemented in more than 150 countries around the world
  • All OECD countries except for the US have VAT(or a variation)
  • The concept of VAT was first proposed in 1918 by a German industrialist Dr. Wilhelm von Siemens
  • VAT was first implemented in 1954 by Maurice Laure’, Joint Director of the France Tax Authority (Direction General des imports)
  • 1.3 Important concepts in VAT
  • Economic activity: Economic activity means an activity conducted in a continuous and regular manner and includes commercial, industrial, agricultural or professional activities.[Article 1(9); GCC VAT Agreement]
  • Taxable person: Taxable person means any person (corporation or not) conducting an economic activity for the purpose of generating income
    • Such person is registered or obligated to register for VAT as per the registration threshold in a member state.
    • Taxable person can include business located outside the GCC territory
    • A Taxable person can be any natural person conducting an economic activity. [Article 1(8); GCC VAT Agreement]
  • Supply: Supply means any form of supply of goods or services in exchange for [Article 1(20); GCC VAT Agreement]
  • Input tax: Tax payable by a taxable person on supply of goods and services received or on import of goods and services for the purpose of carrying out economic activities. [Article 1(22):GCC VAT Agreement]
  • Taxable Supply: Supplies on which tax is charged according to the VAT Agreement, whether at standard rate of 5% or at zero rate. A deduction of input tax can be claimed against the VAT payable on taxable supplies.[Article 1(28);GCC VAT Agreement]
  • Reverse charge mechanism: A mechanism under which the recipient of goods or services is required to pay VAT instead of the supplier, when the supplier is not a taxable person in the member state where the supply has been made. [Article 1(18);GCC VAT Agreement]
  • Tax group: Member states may allow two or more persons that are residents of same member to register for VAT as tax group; such group will be treated as a single taxable person for payment and compliance of VAT. [Article 4; GCC VAT Agreement]
  • Exempted suppliers: Suppliers on which no tax is payable for which deduction for input tax cannot be claimed. [Article 1(27);GCC VAT Agreement]

2. Important Definitions under VAT

  • 2.1 Goods and services

It is important to establish whether a tax payer is supplying goods or services since there are different rules applying to each for the purposes of determining where and when the supply takes place.

GOODS

The passing of ownership of physical property or the right to use that property as an owner to another person

SERVICES

Anything which is not a supply of goods is a supply of services

  • 2.2 Consideration: (in the course of supply of goods or services)
  • Consideration equals anything received in return for a supply
  • If the consideration for a supply is just in money, the value of that supply is the amount of money received.
  • The consideration is treated as VAT inclusive, so the amount received in payment includes an element of VAT for taxable supplies.
  • VAT is normally calculated by applying the VAT rate to the VAT–exclusive price
  • 2.3 Business means: (in the course of supply of goods or services)
  • Any continuing activity of making supplies for consideration
  • Frequency activity is vital here, activity should continue over a period of time
  • Isolated transaction will not constitute business
  • Also private or personal activity will not cover under business (non-business)
  • 2.4 Supply: (by a VAT registered trader)
  • Only registered businesses or required to be registered for VAT will be able to make “taxable” suppliers (subject to VAT)
  • Businesses will be required to register under VAT when their turnover reaches a certain threshold
  • Voluntarily registration for VAT is possible only if
    • Mandatory Registration threshold had not reached AND
    • Turnover has reach lower voluntary registration threshold limit
  • 2.5 Place of Supply

Place of supply rules shall be determine based on whether the supply is made in the UAE or outside the UAE for VAT purposes:

  • If the supply is treated as made outside the UAE no UAE VAT will be charged
  • If the supply is treated as made in the UAE VAT may be charged

Place of supply for Goods and Services shall follow below rules:

GOODS SERVICES
Basic rule :

The place of supply is the location of goods when the supply takes place

Basic rules:

The place of supply is where the supplier has the place of residence

 

Special rules shall also come for example:

Cross-border supplies- in which the supplies involves parties in different countries.

Water and energy

 

Special rules shall also come for example:

Cross-border suppliers of  services between businesses

Electronically supplies services-where services are used or enjoyed

 

3. Place of Supply- Goods

  • 3.1 Domestic suppliers
  • No movement of goods outside the UAE
  • Subject to the applicable VAT rate in the UAE- standard or zero-rated

UAE VAT

Latest updates from Ministry of Finance, UAE on VAT

  • 3.2 Exports to outside the GCC
  • Exports of goods: place of supply is still the UAE

Zero Rate

Latest updates from Ministry of Finance, UAE on VAT

  • 3.3 B2B Import into UAE from outside of GCC
  • Import of goods; place of supply is the UAE
  • The recipient accounts for VAT under the reverse charge mechanism
  • Except where goods will be re-exported to another GCC State

UAE VAT Reverse Charge Mechanism

Latest updates from Ministry of Finance, UAE on VAT

  • 3.4 Place of supply – Goods imported to the UAE & transferred to GCC

Where goods are imported into the UAE (i.e. released for consumption here)but the intention is that these goods will be transferred by theimporter into another GCC State, the place of supply of import shall be UAE, However:

  • The importer must pay import VAT without using the reverse charge and cannot recover this VAT.
  • This import VAT should be recoverable in the GCC State to which the goods are transferred.

Import followed by movement of goods within GCC

Latest updates from Ministry of Finance, UAE on VAT

Where import VAT was recovered in the UAE under the expectation that goods would not be transferred to another GCC State, but at a later datethey are moved to another GCC State, The tax payer will be required to “repay“ the import VAT by treating the transfer as a deemed supply subject to VAT.

  • 3.5 Place of Supply Goods supplied within GCC
  • Shall be treated as Exports of goods : place of supply is the other GCC State (e.g. KSA) provided the customer is registered for VAT in that GCC State, and the goods shall be treated as export outside the UAE

B2B Exports to GCC

Latest updates from Ministry of Finance, UAE on VAT

4. Place of Supply Services

  • 4.1 Basic rule: Where the supplier has their place of residence
  • 4.2 Specific rule:
  • Place of supply of services supplied to recipients who are VAT registered in another GCC state is that other GCC state
  • Place of supply of services supplied by a person that is not resident in the UAE to a business that is resident in the UAE is in the UAE
  • Place of supply of services relating to the installation of goods is where the service is performed
  • Place of supply of restaurant, hotel and catering services is where they are performed
  • Place of supply of real estate services is the location of the real estate
  • Place of supply of transport is where the transport begins
  • Place of supply of a means of transport to a person not registered for VAT in the GCC is where the goods are put at the disposal of the recipient
  • Place of supply of telecommunications and electronic services is where the services are actually used and employed by the recipient
  • Place of Supply of cultural, artistic, sporting, educational or similar services is where they are performed
  • 4.3 Services – Reverse charge mechanism
  • VAT registered purchaser has to account for VAT in respect of supplies
  • Basically for cross – border transactions to relieve a non-resident supplier from the requirement to register and account for VAT in the country of purchaser
  • The purchaser will account for VAT return and he may be able to claim that VAT back on the same return, subject to the normal VAT recovery rules
  • It will apply in UAE, where a VAT registered person imports goods or services into the UAE which would be subject to VAT if purchased in the UAE

Place of Supply Reverse charge mechanism

5. Date of supply: When to account for output VAT on supplies

  • 5.1 Basic tax point for goods
  • Date of removal of goods (in case of supply of goods with the transportation) [Article 23(2a);GCC VAT Agreement]
  • Date on which goods made available to customer (in case of supply not involving transportation ) [Article 23(2b);GCC VAT Agreement]
  • Date of Assemble /installation (supply of goods involving assembly or installation) [Article 23(2c);GCC VAT Agreement]
  • 5.2 Basic tax point for services
  • Date on which performance of service is complete [Article 23(2d);GCC VAT Agreement]
  • 5.3 Special tax point
  • If any of the following event take place before the basic tax point, it will considered as the tax point for accounting for VAT [Article 23(1); GCC VAT Agreement]:
    • Payment is received
    • Tax invoice is issued
  • 5.4 Tax point for supply of continuous services
  • In case of continuous services over a period of several months or years, the time of supply for will be the earlier of [Article 23(3); GCC VAT Agreement]:
    • Receipt of payment
    • Issuance of tax invoice

6. Net Tax Payable

  • VAT-registered business will submit a “VAT return “ document to the FTA (Federal Tax Authority) on a periodic basis mentioning  all out put tax due and input tax recoverable  for the period
  • Net VAT payable or credit recoverable will be calculated as the following

  • “Final customers “(i.e. persons not registered for VAT ) do not submit VAT  returns and cannot recover the VAT they are charged .

7. Input Tax Recovery Conditions

  • 7.1 Conditions for recovery of Input tax

In order for input tax to be deductible by a person,a number of condition must be satisfied by the recipient of supply

  • Recipient must be a taxable person and must be registered for VAT
  • VAT on the purchase must have been correctly charged by the supplier
  • The goods or services have been acquired for an eligible purpose
  • Recipient must receive and retained a tax invoice evidencing the transaction
  • The amount of VAT which the recipient seeks to recover must have been paid in whole or in part ,or indented to be paid in whole or in part
  • Certain incurred VAT is specifically blocked from being recoverable as input tax regardless of whether the above conditions have been met.
  • Input tax apportionment


Calculate recoverable portion of ‘mixed’ input tax by reference to the ratio of input tax relating to taxable supplies to the total input tax incurred
*Note: in certain special cases input tax related to non-businesses activities will be recoverable

8. Registration: who is required to register for VAT

  • 8.1 Threshold turnover
  • Every taxable person resident of a member state whose value of annual supplies in the member state exceeds or is expected to exceed the mandatory registration threshold The threshold for the registration will be –
  • Mandatory registration threshold: AED 375,000/-
  • Voluntary registration threshold: at least AED 187,500/-
  • Threshold is calculated as under
  • Total value of supplies made by a taxable person for the current month and the previous months: or
  • The total value of supplies of the subsequent 30 days
  • The value of exempted supplies will not be considered for computing the annual supplies
  • 8.2 VAT Groups -Registration
  • Each member state may treat the Tax groups as a single taxable person
  • Two or more persons carrying on a business are able to apply for a single “group” VAT registration where:
    • Each person has a place of establishment or a fixed establishment in the UAE
    • The person are “related parties”, and
    • Either one person controls the others, or two or more persons form a partnership and controls the others.

  • Effect: entities within the VAT group are treated as one VAT purposes
  • Results:
    • Supplies made between members of a VAT group are disregarded from VAT (i.e., no VAT is due on the suppliers)
    • Suppliers made by the VAT group to an entity outside the VAT group are subject to normal VAT rules

9. Tax Rates as per GCC Treaty:

  • 9.1 Tax Rates
  • GCC VAT agreement provides that the VAT will be charged at a standard rate of 5 % unless the goods or services are exempt ,zero rated or out of scope (Article 25 :GCC VAT agreement)
  • Each member state will have the flexibility to either exempt of zero rate  the following type of supplies (Article 29 (1)GCC VAT Agreement
    • Education
    • Real estate
    • Health
    • Local transport
  • 9.2 Zero rated supplies in UAE
  • Zero rated supplies are not subject VAT-right to an input tax deduction  on the corresponding expenses
  • Should be applied strictly as they are an exception to the normal rule that VAT should be charged

Examples of zero- rated supplies include:

  • International transport of passengers and goods ,and service related to such transport
  • Certain supplies of means of transport ,and related goods and services
  • New residential buildings
  • Newly converted residential buildings
  • Charity related buildings
  • Educational services, in most cases
  • Exported goods and services
  • Investment precious metals
  • Health care services, in most cases
  • 9.3 Exempt supplies in the UAE
  • Exempt supplies are not subject to VAT – no right to an input tax deduction on the corresponding expenses
  • Exemptions should be applied strictly as they are an exception to the normal rule that VAT should be charged

Examples of exempt supplies include:

  • Some specific financial services
  • Local passenger transport
  • Residential buildings (other than zero rated supplies
  • Bare land

10. Record Keeping

  • 10.1 The following are required to be kept to ensure accurate tax compliance
  • Books of account And any information necessary to verify entries, including but not limited to :
    • Annual accounts
    • General ledger
    • Sales register
    • Purchase register
    • Invoices issued or received
    • Credit notes and debit notes.
  • Additional records required for specific taxes

Different taxes may require different records to be kept in order for tax payers to be complaint, for example: a VAT account.

  • Any other information

As direct by the FTA that may be required in order to confirm,the person’s liability to tax, including any liability to register.

  • 10.2 VAT invoices

VAT invoice issued by a taxable person needs to include the following information,but not limited to:

  • A sequential number which uniquely identifies the document
  • The date of issue of invoice
  • The time of supply (only if different from the invoice date )
  • The name address and TRN number of the supplier
  • For each description ,the quantity of goods or extent of services supplied ,the date of VAT and amount payable ,expressed in UAE Dirham
  • The total amount of VAT expressed in UAE Dirham together with the rate of exchange applied and source of that rate , as below
  • 10.3 VAT obligation – Tax Return filing & Payment
  • Submission online and only in very limited circumstances (and at the sole discretion of the FTA) on paper
  • Deadlines for submission and payment
    • The due date will be within the month following the end of the return period and announced by the Executive Regulations
    • Where the due date falls on a weekend or national holiday, the deadline shall be extended to the first following working day
  • Late submission or payment can result in a penalty levied by the FTA
  • 10.4 Errors and how to rectify
  • Tax incorrectly charged ,wrong amount of tax charged
    • If the tax is higher, than it should be, the supplier should account for the VAT amount stated on the invoice
    • If the tax is lower than it should be ,the supplier should account for the correct amount of tax on its tax return
    • Adjustment of the errors by issuing a credit note or debit note and a new correct invoice
  • Where an error has been made on a VAT returns submitted within the last 5 years .then the taxable person must disclose this error to the FTO within 30 days of becoming aware of the error
  • Depending on the nature of the error and the amount of tax under /over declared , the adjustment to take account of the error could be made
    • Either on the next tax return due for submission
    • Or a via a separate voluntary disclosure to the FTA
  • 10.5 Reporting of transactions at an Emirates level
  • Taxable persons will be required to report details of the value of supplies made in each Emirate on their VAT returns.
  • The mechanism for the allocation of supplies made in each Emirate will be announced in the Executive Regulations later.

11. Penalties

  • 11.1 Administrative penalties
  • Administrative penalties are indented to address non-complianceand encourage compliance
  • The FTA has the power to waive or reduce penalties at its discretion (e.g. taxable person has a reasonable excuse for the error)
  • Few examples of the administrative violation
    • If the person conducting a business fails to keep the required records and other information
    • If the person conducting a business fails to submit the data ,records and documents related to tax in Arabic language when requested by FTA
    • If taxable person fails to submit a registration application with in the period required
  • 11.2 Tax Evasion Penalties – Examples
  • Upto 5 times the relevant tax at stake
  • The FTA can issue penalties for tax evasion
  • Tax evasion is where a person uses illegal means to either lower the tax or not pay the tax due, or to obtain a refund to which he is not entitled under law
  • The imposition of a penalty under tax law does not prevent other penalties being issued under other laws
  • Few examples of instances of tax evasion:
    • Where a person deliberately provides false information and data and incorrect documents to the FTA
    • Where a person deliberately conceals or destroys documents or other material that he is required to maintain and provide to the FTA

12. Audits

The FTA can visit businesses to inspect records and make sure persons are paying or reclaiming the right amount of tax.

13. Contesting Decisions

If a taxable person is not satisfied with a decision by the FTA, they will be allowed to contest the decision. The FTA offers three levels of escalation for dispute resolution.

14. Annexure : GCC VAT Agreement structure

Chapters Titles
Chapter One Definitions and General provisions
Chapter Two Supplies within the Scope of the Tax
Chapter Three Place of Supply
Chapter Four Tax Due Date
Chapter Five Tax Calculation
Chapter Six Exceptions
Chapter Seven Exceptions on Importation
Chapter Eight Persons who are Obliged to Pay Tax
Chapter Nine Tax Deduction
Chapter Ten Obligations
Chapter Eleven Special Treatments of Tax Refunds
Chapter Twelve Exchange of information between Member States
Chapter Thirteen Transitional Provisions
Chapter Fourteen Appeals
Chapter Fifteen Closing Provisions

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