While Value-Added Tax (VAT) as a concept is not new to the world, the GCC region as a whole had none of it hitherto. As a result, the trepidation in the region for this popular form of tax was not completely unexpected. The UAE, as they have in other landmark spheres of development, took the lead in ensuring that along with Saudi Arabia, it was one of the early risers in the GCC to embrace VAT with open arms. On the background of the excise law being implemented on selected goods from October 2017, VAT has been implemented with effect from 1 January 2018.
The foundation for VAT in the UAE was laid down through the following slew of legislation:
- Federal Decree-Law No. (13) of 2016 establishing the Federal Tax Authority (FTA);
- Common VAT Agreement of the States of the Gulf Cooperation Council (GCC) signed in early 2017;
- Federal Law No. (7) of 2017 on Tax Procedures (TPL) and Cabinet Decision No. (36) of 2017 on the Executive Regulation of Federal Law No. (7) of 2017 on Tax Procedures;
- Federal Decree-Law No. (8) of 2017 on VAT released in the third quarter of 2017;
- The Executive Regulations (ER) to the VAT Law released on 28 November 2017 [Cabinet Decision No. (52) of 2017].
VAT in the UAE
The FTA as mentioned above, is the authority responsible for the collection and management of federal taxes. It was established in 2016 and is responsible for administration of the Excise and VAT regimes.
The advent of VAT has been the harbinger of wholesale changes in the way business has been conducted in the UAE. While the fear of the unknown is a normal feature in any business community worldwide when a new tax is introduced, the unique nature of the untaxed corporate world of the UAE has ensured that businessmen re-evaluate the way business practices were conducted here. With a sharper focus on compliance and adherence to the letter of the law, the new tax regime is making waves for the right reasons, with various industries ringing in necessary changes to abolish existing practices and adopt ones that are in line with the new tax laws.
While many industries have adjusted to the new regime there are some that have issues in the treatment of VAT due to their typical nature. Given below is the impact of VAT on a few industries that have more than one issue to grapple and ponder about.
Impact on Key Industries in the UAE
Peculiar issues that the VAT Law and ER have created in some key industries in the UAE are given below:
Real Estate Industry
- Treatment of Off-Plan Sales The first supply of residential property within 3 years of its completion is zero-rated under the VAT Law. However, the same can be true, only if there is an underlying property in existence. VAT determination becomes a matter of deeper and more careful consideration if there is no underlying property in existence. Sales under the ‘off-plan’ model and under the ‘construction’ model are classic examples where more than one way of interpretation on taxability is possible. The industry view on this issue is a hopeful one and is centered around treating off plan sales as zero-rated, depending on many related factual and legal aspects.
- Recovery of input VAT on first sale of residential propertyRecovery of input VAT and its refund is a matter under consideration. The main reason for this is that the developer is engaged in sale of residential property, once the property is completed. The property completion generally takes 3 to 4 years. It needs to be analyzed whether the developer can claim refund of input VAT recoveries and whether the same will be allowed as refund on a periodic basis or at the point of time when first supply takes place. If the latter happens, there could potentially be a huge impact on a developer’s cash flows.
- Apportionment of input tax credit for a mixed-use buildingApportionment of input tax credit is an intricate process in case of a mixed-use building, wherein there is initially supply of residential property, and subsequently, supply of residential and commercial property. The mathematical computation needs to be accurate since inaccurate computations could lead to availing excess or less input tax, which could result in penal tax liabilities for the developer.
Issues in Real Estate Contracting
- Spill Over ContractsBusinesses should have ensured that necessary communications were sent to clients with whom contracts were entered into during the non-VAT regime which are spilling over/ extending into the VAT regime, particularly in cases where such contracts contained no clauses relating to taxes. If such communication(s) were not sent to the clients as per the provisions of VAT law, there can be a commercial risk whereby the client can consider the contract price on an all-inclusive basis. Businesses would have to absorb the VAT in such cases.
- Unadjusted Advances as on January 1, 2018Contracting companies would have unadjusted advances as on 1 January 2018. Such unadjusted advances should be apportioned to the running bills which would be issued on a progressive basis. As per the provisions of UAE VAT Law, contracting companies may need to issue Tax Invoices for such advances and charge the relevant amount of VAT, based on the facts of the case. The unadjusted advances on 1 January 2018 would be deemed to be received on 1 January 2018 and accordingly subject to VAT.
- Retention Money to be Received in VAT RegimeIn the real estate contracting business, retention money is received after satisfying various conditions relating to takeover and defect liabilities as stated in the contract. The retention money is not due to be paid until the conditions relating to takeover and defect liabilities are satisfied. The entire amount of retention monies may be subject to VAT when the tax invoice relating to payment of the retention amount is raised by the business.
- Sales Returns Sales returns are a common feature in the retail industry. For sales returns, a Tax Credit Note is required to be issued. This Tax Credit Note should include a reference to the original Tax Invoice and other required details and then the tax adjustment is required to be made accordingly.
- WarrantiesManufacturers, warranties shall be treated as a composite supply. However, any extension in warranty may attract levy of VAT. The replacement of supplies under warranties may be required to be made under a tax invoice with reference to the warranty claim forms. In case of international warranties, it is possible that although supplies were not made by the UAE entity, the replacement request could be made to the UAE entity. VAT implications on such transactions awaits further clarity from the FTA.
- Netting-off Sometimes, netting-off can be a common practice in a retail business where sales are made directly to the customers. As per the provisions of the VAT Law, no netting-off is allowed and sales transactions are to be made on a gross basis.
- Rebates and DiscountsIn cases where retailers are entitled to pre-sale discounts, etc., the supplier may be required to issue a Tax Credit Note with the VAT adjustment to give effect to such discounts. Further, for reduction in value of supply as a result of discount, provisions of UAE VAT Law provide certain conditions. One of these conditions which merits attention and could potentially pose a challenge is that the supplier should have funded the discount being given.
- Advertised Sales Value The VAT ER provide that in the case of a Taxable Supply, the published prices shall be inclusive of Tax.
- Shortages / LossesWhere there are shortages in the stock of supplies, it would be relevant to justify the cause of shortage / loss. If the shortage / loss cannot be substantiated, it may attract levy of VAT as deemed supplies. Documentation to substantiate such shortages/ losses may require deliberation.
- Penalty for Incorrect Tax Invoices
Some key penalties to be noted:
- Failure by the Taxable Person to issue the Tax Invoice or an alternative document when making any supply – AED 5,000 for each tax invoice or alternative document.
- Failure by the Taxable Person to issue a Tax Credit Note or an alternative document – AED 5,000 for each tax credit note or alternative document.
- Failure by the Taxable Person to comply with the conditions and procedures regarding the issuance of electronic Tax Invoices and electronic Tax Credit Notes – AED 5,000 for each incorrect document
It is important to examine and confirm that businesses ensure that their invoices contain all the necessary information as notified by the UAE VAT Law and ER.
The VAT ER defines a Designated Zone (DZ) as follows:
- Having a specific fenced geographic area and security measures and customs controls in place to monitor entry and exit of individuals and movement of goods to and from the DZ.
- Having internal procedures regarding the method of keeping, storing and processing of goods.
- The operator of the DZ complies with the procedures set by the FTA.
Certain benefits/ issues have been created by the distinction of DZs from the regular free zones:
- A DZ that meets the conditions specified in the VAT ER shall be treated as being outside the State.
- No VAT for transfer of goods between designated zones, subject to certain conditions.
- Transfer of goods from one entity to another within the same DZ, as long as it part of a supply chain and not meant for final consumption by the receiving entity, will not be subject to VAT.
- For provision of services, being in a DZ offers no locational advantages, as VAT is chargeable at the standard rate.
The FTA released a list of 20 areas as DZs in the first week of January. The list is given below:
- Free Trade Zone of Khalifa Port
- Abu Dhabi Airport Free Zone [ADAFZ]
- Khalifa Industrial Zone [KIZAD]
- Jebel Ali Free Zone (North-South) [JAFZ]
- Dubai Cars and Automotive Zone (DUCAMZ)
- Dubai Textile City
- Free Zone Area in Al Quoz
- Free Zone Area in Al Qusais
- Dubai Aviation City
- Dubai Airport Free Zone [DAFZ]
- Hamriyah Free Zone [HFZ]
- Sharjah Airport International Free Zone [SAIFZ]
- Ajman Free Zone [AFZ]
Umm Al Quwain
- Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
- Umm Al Quwain Free Trade Zone on Shaikh Mohammad Bin Zayed Road
Ras Al Khaimah
- RAK Free Trade Zone [RAKFTZ]
- RAK Maritime City Free Zone
- RAK Airport Free Zone
- Fujairah Free Zone [FFZ]
- Fujairah Oil Industry Zone [FOIZ]
Contrary to predictions by some market pundits VAT is here to stay. Tax in a land to whom the word ‘tax’ is foreign will be challenging. However, there have been continuous efforts from the FTA, through its awareness campaigns in the print media and reference materials that are available on the FTA website, to clarify various challenging areas that businesses are facing or will face in the near future. These are all directed to make businesses in the UAE as ready as possible for the new tax in the new year. Apart from other key aspects, businesses’ immediate attention should be focused on VAT registration, VAT invoices and related documents and getting the systems ready for VAT reporting if they haven’t already done so.
The views given herein are not binding on any authority or Court, and hence no assurance is given that a position contrary to the opinions expressed herein will not be asserted by any authority and/or sustained by an appellate authority or a Court of law. Further, unless specifically requested and agreed, we are not obligated to update the suggestions made herein for subsequent changes or modifications to the law, to the rules/ regulations, or to the judicial and administrative interpretations thereof.
(This article is compiled by Sarika Dhameja, Director, and Chaitanya G. Kirtikar, Senior Manager)