With the completion of one year of Value – Added Tax (VAT) being implemented in UAE, there has been a paradigm shift in the approach placed by businesses in setting their priorities to comply with this new levy. The nation witnessed its second Federal Tax Law being implemented on 1 January 2018 (after the implementation of Excise Tax on 1 October 2017 thereby largely ending the pre-tax era, and requiring trade and commerce to gear up to prepare themselves for this new journey in a post-tax era. However, the major highlight of 2018 was the Federal Tax Authority’s (FTA) close co-operation with the business community and key stakeholders at large and consequently releasing several clarifications and guides. This approach of the FTA, supplemented by the advance tax management system which encouraged auto-compliance by business with the tax procedure, along with maintaining transparency and accuracy of the details, is clearly a step in the direction towards making the UAE one of the best tax-managed countries in the world in the coming years.
The first year of VAT was a year full of challenges and new experiences for the FTA as well as for businesses. According to an official press release by the FTA at the end of 2018, the UAE had over 296,000* registered businesses submitting 650,000* VAT returns. According to the FTA, the high compliance rate in the very first year of VAT implementation was made possible due to a simplified process for filing VAT returns and payment of taxes through the official website of the FTA. The FTA aims to continuously upgrade its tax management system which is designed to meet the highest international standards in order to increase efficiency and ensure compliance with tax procedures and laws. The FTA further mentioned about the close co-operation in order to link the FTA’s electronic network with the Customs Authority. This facilitated smooth implementation of the tax system without disrupting the foreign trade activities and the movement of goods to and from the UAE thereby continuing to position the UAE as the hub for global trade.
The press release further stated about the FTA addressing over 453,500* phone calls and email enquiries, releasing 30* guides on VAT procedures and legislation, issuing 136* public clarifications in order to raise awareness of VAT procedures among businesses, and issuing 50* newsletters relating to VAT legislation and procedures. In a bid to further intensify its efforts to raise tax awareness, the FTA also organized 90* seminars and training workshops which were attended by approximately 28,000* experts from various sectors.
The FTA also conducted more than 35* meetings in the past year with all business groups and representatives of relevant sectors including banking, insurance, financial markets and brokerage, importer-exporter, telecommunication, travel and tourism, diplomatic missions, free zones, shipping, accounting and auditing, maritime operations, real estate, charity, health, education, hotel, bullion and diamond trade, etc. Thus, it was able to successfully clarify industry-specific queries and concerns through such meetings and sector specific VAT guides released.
Another key highlight was the introduction of the ‘VAT refund for tourists’ scheme which became operational in November 2018 under which approximately 5000* transactions are processed on a daily basis with 7200* participating retail shops across the UAE. Tourists travelling from 12* designated air, land and sea ports are being covered under the scheme.
Another major highlight was the Cabinet decision released by the FTA with respect to the VAT treatment of gold and diamonds which clearly sought to provide an adequate environment and related infrastructure and legislation to industry players for driving business growth and maintaining adequate cash flows among registered gold and diamond investors, suppliers and traders.
The FTA currently has 12* accredited tax accounting software vendors who can provide technical support to businesses with accounting and bookkeeping tools to facilitate calculation of due and recoverable taxes and subsequent filing of VAT returns. It further has 122* accredited freight forwarders and customs clearance companies.
Presently, 176* tax agents have been authorized by the FTA to provide counsel and other assistance to taxable persons in relation to UAE VAT matters. These tax agents also play a key role in raising tax awareness in the business community, and support them in their endeavor to comply with the tax system and help strengthen relationship with the FTA.
(*Source: FTA Website)
From a tax administration perspective, some of the key updates provided by the FTA are listed below (Note: The detailed guides are available at www.tax.gov.ae)
|Reference to Update||Subject Matter and Classification|
|VAT Refunds for Business Visitors||A foreign business may be entitled to refund of VAT paid in certain instances subject to fulfillment of conditions.
Who can claim a refund?
|Real Estate Guide||
The real estate guide issued by the FTA has clarified certain aspects associated with real estate transactions in the UAE such as mixed use development of real estate, VAT applicability on various types of supplies between landlords and tenants, VAT refund for new residences of a UAE national, supplies of bare land and commercial real estate, supplies associated with construction industry, etc.
|Director Service Guide||
Services provided by a director (where he is not simply an employee of the company) should be taxable if the director undertakes services on a regular, ongoing and independent basis (such as an individual who acts as an executive or non-executive director on a board or a number of different boards) subject to threshold conditions.
|Designated Zone VAT Guide||
Supplies of real estate which include sale and lease of real estate are treated as supply of goods. The place of supply in case of such supplies is where the real estate is located. The real estate is not treated as consumed when sold or leased within a Designated Zone and therefore such supplies of real estate are outside the scope of UAE VAT.
A Tax Group can be formed between an entity based in the UAE mainland and another based in a Designated Zone subject to fulfillment of conditions. The supplies made between these two entities would be disregarded for VAT purposes. However, where a supply of goods between the tax group members results in movement from a Designated Zone to the UAE mainland, this importation of the goods would trigger the obligation to pay import VAT and accordingly VAT under the reverse charge mechanism would need to be accounted for by the tax group registrant.
A registrant may have a branch or head office located in a Designated Zone and a branch or head office located in the UAE mainland. The supplies made between different parts of the same legal entity are to be disregarded for VAT purposes. Further, where a supply of goods between the head office and branch results in movement from a Designated Zone into the UAE mainland, this importation of the goods would trigger the
|Insurance VAT Guide||
In case where an employer provides health insurance to the family of the employee, input tax will only be recoverable by such employer if there is a legal obligation to provide such insurance to the family members. In case there is no legal obligation by the employer to provide such services, the input tax on such expenses would not be recoverable by such employer. A contractual obligation between the employer and employee to provide such services is not relevant to claim input tax under this scenario.
In case of travel insurance, the supplies shall be subject to VAT at standard rate where the recipient is a resident in the UAE. The said services shall be zero-rated if the recipient is resident outside the GCC implementing states, is located outside the UAE and the performance of the insurance services is not received by anyone in the UAE who would not be able to recover VAT incurred.
|Input Tax Apportionment: Special Methods VAT Guide||
The FTA has accepted that the standard method of input tax apportionment as provided under the UAE VAT laws may not be appropriate in every situation and may give rise to outcomes which might not be reflective of the actual use of goods or services by the business. Consequently, the FTA introduced a number of alternative methods of input tax apportionment to be used where the standard method does not provide an outcome which is reflective of the actual use of the acquired goods or services.
The input tax apportionment methods which are available to taxable persons are:
The above methods can be used by the specified sectors of industry subject to fulfilling specific condition however, prior approval of the FTA is required.
Although it is not compulsory for a VAT-registered person to apply for a special apportionment method, any taxable person may be required to perform annual wash-up calculations as prescribed in the guide and then possibly decide if it needs to apply for the special method.
|Public Clarification VATP005: Input Tax not Recoverable – Entertainment Services||
The FTA clarified certain sundry expenses on which input VAT can be claimed by businesses such as tea, coffee, dates, chocolates or equivalent snacks available in the office or provided during meetings for general use by employees and non-employees for no charge and flowers for display in reception areas, offices or for decoration during special events.
The FTA also clarified certain instances wherein input VAT on costs incurred by an employee would be recoverable by a business:
|Public Clarification VATP010: Bank Interest and Dividend||
The FTA has clarified that passively earned interest income generated from bank deposits does not amount to consideration for a supply. Similarly, dividend income received by merely holding shares in a company does not constitute consideration for a supply. Accordingly, such supplies would be out of scope for VAT purposes.
The above clarification is restricted only to interest earned from bank deposits. Interest income generated from extending loans and credit would continue to remain exempt supplies for VAT purposes.
Further, any amount charged as a “management fee” would be subject to VAT. For example, management fees charged by a holding company to its subsidiaries would be subject to VAT.
|Decision No. 3 of 2018 on Tax Invoices||
The FTA issued this decision clarifying that in case where the mailing address of the recipient of goods or services was included on the tax invoice or tax credit note, such tax invoice or tax credit note may not include the physical address of the recipient of goods or services.
The FTA has set clear goals for 2019 to further improve the compliance rate, promote registration by taxable businesses, combat tax evasion and further increase efficiency in the already robust, modern and fully-electronic tax administration infrastructure. Although there may still be grey areas or challenges on a few aspects with respect to VAT applicability, the FTA has provided an option to businesses of applying for a formal technical clarification wherein it provides its view on specific written queries. They have also provided the option of a re-consideration request wherein, subject to conditions, the registrant may obtain relief from penal consequences on acceptable grounds.
The above backdrop and the expected VAT audits by the FTA makes 2019 a year to watch in terms of the learning and new experiences it would provide to trade, and the tax professionals.
(This article is compiled by Mradul Gupta, Manager, Tax Services Department, Dubai)