Out-Law Guide | 28 Sep 2020 | 10:39 am | 8 min. read
The introduction of VAT has been a hot topic with local and international businesses alike since the finalisation of the GCC VAT Framework at the end of 2016. The GCC tax landscape has continued to rapidly progress and expand since then, in line with international standards and local fiscal agendas.
In-house tax leads and CFOs in the region have had to contend with much more than just the introduction of VAT, including country-by-country reporting, economic substance rules and transfer pricing.
While many have been occupied with monitoring, understanding and complying with such a vast array of new tax rules in the region, they have no doubt begun to feel a somewhat "comfortable norm" with the VAT regime. However, businesses should be cautious – the VAT regime will not remain stagnant for long and has already experienced a number of changes, with some such as the Saudi Arabia VAT rate increase taking many by surprise and affecting all industry sectors in a significant way
While VAT was introduced with effect from 1 January 2018 in the UAE, there have been a number of interesting UAE VAT developments over the last few weeks. These include new guidance on VAT and e-commerce; an amendment to the UAE VAT Regulations in order to narrow the scope of certain anti-avoidance provisions; and updated guidance on the National Refunds Scheme for the construction of private residences and the application of zero-rating in the education sector.
E-commerce supply chains can be extremely complex, making transaction identification and VAT analysis challenging. The publication of the much-awaited E-Commerce VAT Guide (30-page / 437KB PDF) by the UAE's Federal Tax Authority (FTA) in August 2020, over two and half years after the implementation of VAT in the UAE, is therefore extremely welcome.
The guide summarises the correct application of the general UAE VAT principles in the context of e-commerce transactions and scenarios, and has also provided further insights on areas of the law specific to e-commerce which continue to be ambiguous to businesses trading in this sector. We have outlined some of the main highlights of the guide below.
The guide has confirmed that "non-residents" may not apply for voluntary registration on the basis of taxable expenses – this is relevant to businesses trading in goods on a 'flash title' only basis without any physical presence in the UAE.
On the supply of goods via an e-commerce platform, the guide clearly summarises the place of supply rules for goods, with particular emphasis on the residency and VAT registration status of both the supplier and the customer together with the physical location and movement of the goods as part of the supply. This is a good "go to" guide for businesses who wish to validate their current VAT mapping of e-sales of goods.
The guide goes on to confirm the application of the reverse charge mechanism for business-to-business (B2B) supplies of goods where the supplier is both non-resident and not already UAE VAT registered and the business customer is a resident taxable person. There is specific emphasis on the burden of proof that rests with the supplier to ascertain its customer's UAE residency and VAT registration status; not simply that the customer is "in business".
The guide covers the VAT rules applicable to imports, particularly with regards to identifying the true importer of record, when the reverse charge mechanism would apply, and the rules for imports undertaken by agents. The guide highlights that import VAT is not deductible by importing agents and should be onward charged to the importer of record via a statement, which acts as a de facto tax invoice, as set out within the law.
Importers of record who do not hold a UAE VAT registration, or who hold a UAE VAT registration but without approval to use the reverse charge mechanism, need to declare import VAT via Form 301 on the FTA e-Services portal or use an importing agent to avoid goods clearance being delayed.
On the supply of electronic services, the guidance introduces the need for there to be "minimal or no human intervention" in order for the service to be viewed as "automatically delivered over the internet". While not stated in the UAE VAT Law, this concept is already used in the EU VAT rules for electronic supplied services. The guide states that "a small degree of human intervention is acceptable to enable or complete a supply", but that this intervention "should not change the nature of the delivery of a service as being essentially automated". It provides two examples to demonstrate the level of human intervention which will be viewed as "minimal" or alternatively which would be viewed as "changing the nature of the delivery". These examples should be referred to by businesses when assessing their own practical scenarios.
The guide sets out that electronic services are taxed in a particular jurisdiction "to the extent" that they are used and enjoyed within that state. In particular, the guidance states that supplies should be apportioned between multiple places of supply where a sufficient distinction exists between the alternate parts of the supply – for example, where the consideration or delivery is split. This may be something which requires attention by businesses that had not previously split supplies in this way.
An application of the law which has been misunderstood by many in the region, and therefore should be warmly welcomed, is that a supply of electronic services by a non-resident supplier continues to be liable to the reverse charge mechanism regardless of whether the supplier is already registered for VAT purposes in the UAE as a result of the supply of electronic services business-to-consumer (B2C).
To date, the UAE VAT law has been somewhat silent on the rules and practical procedures for determining the correct place of "use and enjoyment" for any particular supply of electronic services. The guide now sheds some light on this matter, with two rules of thumb outlined and no visible differentiation between B2B and B2C transactions.
Firstly, where the service is delivered at a specific physical place – for example, where accessed via a hotel desktop computer – "use and enjoyment" is deemed to be at that place.
Secondly, where the service is delivered via a portable device – for example, music downloaded via a portable device with an IP address in the UAE – "use and enjoyment" is deemed to be at the recipient's location at the time the service is delivered. When electronic services are enjoyed via a portable device, the guide provides a list of information which may be gathered and used in order to determine the recipient's location including IP address; country code of SIM card; and bank details. This use of customer and transactional information to determine place of consumption is aligned with the EU VAT regime and is as anticipated by tax professionals in the region.
The guide states that the supplier should "give priority to the factors which give the most precise information regarding the actual place where the electronic services will be used and enjoyed". Further granular guidance will be needed for businesses in this sector in order to deal with more complex scenarios – for example, how a supplier should select the correct place of "use and enjoyment" if the transaction data has a number of contradictory locations. This is especially important considering factors such as that, in today's society, individuals can have a home address and bank details in alternative countries, together with the fact that IP address locations can be easily manipulated.
Prudent businesses, for ease of administration, are likely to continue to apply a place of supply for B2B transactions based on place of establishment of the customer; and a place of supply for B2C transactions based on two or more non-contradictory pieces of transactional data.
The guide confirms that the standard "agent" rules which apply to all industry sectors for disclosed and undisclosed agency arrangements also apply to e-commerce marketplaces. It emphasises that the contractual arrangements, commercial reality and knowledge of each party at the time the transaction takes place are all relevant.
It confirms that third party invoicing by the agent, intermediary or marketplace can still be undertaken using the special invoicing rules available to all industry sectors, depending on which party makes or is deemed to make each supply.
Many global VAT regimes zero-rate the export of services to foreign business customers, or treat such services as outside the scope of domestic VAT in the supplier's jurisdiction. This is on the basis that VAT should be accounted for in the country of consumption. Usually, this legislated zero-rating will include anti-avoidance provisions to ensure that VAT is taxed locally in the supplier's jurisdiction where there is any form of consumption or enjoyment of the services locally.
The UAE has similarly implemented a zero-rating for the export of services along with anti-avoidance provisions, in article 31 of the Executive VAT Regulations. The UAE's legislative wording was updated in June 2020 to clarify that the recipient of services will continue to be viewed as "outside the UAE", and that the anti-avoidance provisions will not take effect, even if the person is physically in the UAE at that time so long as their presence in the UAE is both a short-term presence of less than a month and not effectively connected with the supply.
Along with this brief wording change in the legislation, the FTA published a detailed public clarification (11-page / 397KB PDF) on the same topic. This clarification generally emphasises the need to look at "the most relevant establishment" of parties to a transaction and that any irrelevant establishment or presence in the UAE at the time the services are being performed may be disregarded. This interpretation had already been reached by many businesses and tax professionals in the region, but this clear validation is warmly welcomed as it mitigates risk.
The UAE has successfully attracted a large number of foreign investors, international contractors and other international businesses to trade with the region across various industry sectors. This clarification is likely to help VAT to flow more neutrally through some of these supply chains in circumstances where a short-term presence or unconnected establishment is required in the UAE.
The UAE VAT regime includes a special refund mechanism for VAT incurred on the construction of new private residences, which is available to UAE nationals.
The FTA previously issued guidance providing UAE nationals with further details on how the refund mechanism would operate and how to claim. This guide was updated in August 2020 (24-page / 494KB PDF) to include more detailed definitions of who is eligible to claim a refund; the types of residences and expenses the scheme applies to; the deadline for submission; documentation required; and the process for claiming.
These updates will be of interest to any UAE national intending to take advantage of the special refund scheme – particularly the six month deadline for submission and some interesting expense exclusions, such as garden landscaping and swimming pools, which are common costs of UAE residences.
The FTA has created a new section on its website for informative updates, titled 'Basic Tax Info Bulletins'. The first two of these bulletins are on the education sector: nurseries, pre-school and school (2-page / 185KB PDF); and the higher education sector (2-page / 182KB PDF).
While the first of these does not appear to provide us with any new information beyond that already set out in the Executive VAT Regulations, the latter contains some helpful new insights on additional transactions which the FTA views as liable to the standard rate of VAT at 5%, even when undertaken by a recognised higher education institution. These include:
Entities in the education sector will usually be involved in the supply of a variety of standard rated, zero-rated and exempt transactions. Additional care should therefore be taken in classifying VAT treatments accurately; identifying directly associated and general overhead costs; and calculating correct deduction entitlement, including apportioned deduction rights.
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