Background and Introduction

The Federal Tax Authority (“FTA”) recently published an amendment to The Executive Regulation [Cabinet Decision No. (52) of 2017] to the Federal Decree-Law No. 8 of 2017 on Value Added Tax. This amendment was issued on 28 September 2021.

The amendment has been made vide Cabinet Decision No. 88 of 2021 to amend Article 51 of Cabinet Decision No. (52) of 2017 (“Amended Executive Regulations”). The amendment will be effective from 30 October 2021.

Further, a VAT Public clarification (VATP027) on ‘Goods Supplied in a Designated Zone, and Connected Shipping or Delivery Services’ (“Public Clarification”) has also been issued by the FTA to provide additional guidance on the application of Article 51(5) and (7) in respect of amendment made vide the said Cabinet Decision.

Key clause wise details of the amendments are listed below

With respect to categorization as a Designated Zone (‘DZ’):

In order for a DZ to be treated as being outside UAE, it is required to meet the prescribed conditions. When such conditions are not met with, the DZ will be considered to be located inside the UAE.

The said clause has been re-worded vide the said Cabinet Decision. However, the said amendment shall not result in changing the existing interpretation of the clause.

[Reference is drawn to Clause (2) of Article 51 of Amended Executive Regulations, also provided in annexure below]

With respect to Supply of Goods within a DZ:

  • Given below are the amendments / additions to provisions concerning supply of goods within a DZ which shall be treated as having a place of supply outside the UAE and resultantly would be considered outside the scope of UAE VAT:
    • Where goods were intended to be incorporated into or used in the production of other goods in the designated zone

Existing provisions remain same except for the additional clarity / guidance provided under the Public Clarification with respect to the conditions required to be fulfilled in order to consider such transactions outside the scope of UAE VAT.

[Reference is drawn to Clause (5)(a) of Article 51 of Amended Executive Regulations, also provided in annexure below]

  • Transactions in the nature of export of goods from a DZ, where such goods are delivered outside the UAE1

This new exception requires the suppliers in DZ to maintain additional documentation in the form of customs evidence and commercial or official evidence to prove the delivery of goods outside the UAE.

[Reference is drawn to Clause (5)(b) of Article 51 of Amended Executive Regulations, also provided in annexure below]

Transactions involving movement of goods from a DZ for delivery in the UAE mainland1

There were instances where supplies made by a supplier in DZ for consumption were potentially subject to VAT twice, once at the time of transfer of ownership of goods and thereafter at the time of importation of goods to UAE mainland. The inclusion of this new exception clause addresses this concern of double taxation.

However, for this exception to apply and for such supply to continue to be considered as outside the scope of UAE VAT, certain conditions are required to be met which includes retaining official evidence to prove the movement of goods to UAE mainland and evidence that due VAT has been paid on such import.

[Reference is drawn to Clause (5)(c) of Article 51 of Amended Executive Regulations, also provided in annexure below]

  • Provision regarding treating specific goods located in a DZ as imported into UAE has been slightly reworded in the Amended Executive Regulations. However, it shall not result in any change in the existing interpretation of the erstwhile clause addressing this issue.

[Reference is drawn to Clause (9)(b) of Article 51 of Amended Executive Regulations, also provided in annexure below]

With respect to Supply of Services:

  • In continuation to the above amendments, FTA has also introduced a new clause concerning the taxability of shipping and/ or delivery services provided by a supplier of qualifying
  • As a general rule, the place of supply of any services is considered to be inside the UAE if the place of supply is in the
  • However, now, as an exception, shipping and delivery services provided by a supplier of goods in DZ would be considered out of scope provided they are qualifying goods sold by unregistered supplier who is also non-resident in UAE and are subject to fulfilment of other prescribed
  • Further, there is possibility of relaxation from UAE VAT registration obligation for the non-resident suppliers, subject to fulfilment of the prescribed conditions mentioned above.

[Reference is drawn to Clause (7) of Article 51 of Amended Executive Regulations, also provided in annexure below]

Relevant clauses of Article 51 prior and post the subject amendment to Executive Regulation as well as prescribed conditions for considering the transactions as out of scope of UAE VAT are forming part of the Annexure attached herewith.

These amendments require suppliers in DZ to not charge VAT on certain transactions subject to fulfilment of prescribed conditions which also includes maintaining certain documents, thereby preventing the UAE mainland consumers / customers from a potential double taxation i.e., on the transfer of ownership of the goods as well as on importation thereof.

Suppliers undertaking transaction of supply of goods and its corresponding shipping or delivery services from a DZ in the UAE, must re-evaluate their VAT positions considering the amendments introduced.

[ Source: https://www.tax.gov.ae/en ]

How can PKF help?

  • Businesses in the UAE need to imbibe the Amended Executive Regulation and establish for themselves a tailor-made VAT-oriented business PKF is one such leading firm that provides professional financial advisory and VAT services in UAE.
  • PKF UAE brings world-class capabilities and high-quality service to clients helping them to align their working model to government reporting and compliance PKF UAE can help businesses with VAT registration followed by comprehensive management of the post- implementation processes. Our role as tax advisers could include:
    • Analysing the impact of VAT on your business – A complete analysis of the VAT effect on your business helps us provide tailor-made solutions for the financial, operational and legal aspects of your business
    • Advising on managing the VAT transaction process – Our expert advice will help your business manage VAT transactions effectively without any room for errors
    • Advising on required accounting systems under VAT – with VAT implementation the accounting systems of businesses will need to be changed. Our global level expertise in VAT accounting systems help businesses to achieve a well-structured accounting system that complies with the VAT requirements
    • Invoicing under VAT – we help you to create and manage invoices in accordance with the VAT system
    • IT Migration – as discussed above, the IT systems will also need to be replaced with the updated Hence, our team of technical experts guides you towards choosing and adopting new IT systems

Having more than four decades of experience, PKF UAE ensures full guidance on how businesses can duly comply with VAT. While the ultimate responsibility and accountability to comply with the law are with the business, PKF UAE can advise you at every stage of your business operations. PKF UAE works with an agenda that not only helps your business meet the required VAT standards but also provides inclusive solutions to run the business effectively.

Executive Regulation of Federal Decree Law
VAT Public clarification on Goods Supplied in a Designated Zone

Annexure

With respect to categorization as a Designated Zone (‘DZ’):

Amendments Original Executive Regulations Amended Executive Regulations
Change in wordings of Clause Where     the     Designated    Zone Where the Designated Zone changes the
(2) of Article 51 changes the manner of operating manner of operating or breaches any of
or no longer meets any of the the conditions based on which the area
conditions imposed on it that was specified as a Designated Zone
led to it being specified as a under a   decision   issued   by   the
Designated Zone   under   the Cabinet, the Designated Zone will be
Cabinet Decision,   it   shall   be treated as if inside the State.
treated as if being inside the State.

 

 

With respect to Supply of Goods within a DZ:

Amendments Original Executive Regulations Amended Executive Regulations
Article 51(5) amended to include two additional exceptions with respect to transactions in the nature of sale of goods within a DZ 5. Where a supply of Goods is made within a Designated Zone to a Person to be consumed by him or another person, then the place of supply shall be the State unless the Goods are to be incorporated into, attached to or otherwise form part of or are used in the production of another Good located in the same Designated Zone and itself is not consumed. 5.     Where a supply of Goods is made within a Designated Zone to a Person to be consumed by him or by another person, then the place of supply of these Goods shall be in the State except in any of the following cases:

a.     The purpose was to incorporate the Goods into, attach the Goods to, or that the Goods become part of or are used in the production of another Good in the same Designated Zone and such Good is not consumed.

b.     The Goods were delivered to a place outside the State, and the Supplier retains supporting commercial or official evidence proving that, and customs evidence proving that the Goods were removed from the Designated Zone.

c.     The Goods were moved from the Designated Zone to a place inside the State, and the Supplier retains official evidence establishing that VAT had been applied on that import.

Also refer notes 1 and 2 below.

With reference to Article 51(8) of the       Original                Executive

Regulation    which    has     now

b. The goods are unaccounted for. b. There is shortage in goods.

 

Amendments Original Executive Regulations Amended Executive Regulations
become Article 51(9) of the Amended Executive Regulations

– Change in the wordings of the sub-clause (b).

Notes:

  1. With respect to exception under sub-clause (a), the Public Clarification has clarified that the terms incorporated into / attached to / become part of / used in ‘production’ are to be referred to as production of another
  2. Further, the Public Clarification states that the term ‘consumed’ is to be interpreted broadly as including any utilisation, application, employment, deployment or exploitation of the

With respect to Supply of Services:

Amendments Original Executive Regulations Amended Executive Regulations
Newly                   inserted Clause (7) under

Article 51

 

7. As an exception to Clause 6 of this Article, the place of supply of any services shall be outside the State, where shipping or delivery services are supplied directly in connection with Goods that have a place of supply outside the State according to paragraphs (b) and (c) of Clause 5 of this Article, and all the following conditions are met:
a.     Shipping or delivery services are supplied by the same supplier of the Goods;
b.     The supplier of the Goods is a Non-Resident, and not registered for Tax;
c. These Goods are sold via an Electronic Sales Platform; an Electronic Sales Platform means any type of online sales platform, including websites and electronic applications, which bring together third-party sellers and buyers, and through which Goods may be sold and purchased with or without shipping or delivery services;
d.     The person owning the Electronic Sales Platform is not the supplier of the Goods.
  • With respect to Article 51(5)(a): Goods incorporated/attached to/become part of/ are used in production of other goods

For this exclusion to apply:

  • there has to be a direct connection between the purchased goods and the resulting goods after production, and
  • the resulting goods should not be supplied to be

If the above two conditions are met, the place of supply of the goods will be outside the UAE and, therefore, outside the scope of UAE VAT.

  • With respect to the newly added sub-clause (b) under Article 51(5): Goods delivered outside the UAEFor this exclusion to apply, all of the following conditions must be met:
    • the goods are moved from the designated zone to be delivered outside the UAE;
    • the supplier obtains and retains the relevant Customs documents proving the movement of the goods from the designated zone; and
  • the supplier retains commercial or official evidence that the goods were delivered to a place outside the

In instances where the goods will be moved from the designated zone to be delivered outside the UAE, consumption would generally be regarded as taking place outside the UAE. Hence such instances shall be regarded as having a place of supply outside the UAE

However, in order to prove that the goods were moved from the designated zone, the supplier should obtain and retain the relevant Customs documents reflecting the movement of the goods from the designated zone.

The supplier will also be required to retain commercial or official evidence that the goods were delivered to a place outside the UAE

If the above conditions are met, the place of supply of the goods will be outside the UAE and, therefore, outside the scope of UAE VAT.

If any of these conditions are not met, the place of supply would be in the UAE and within the scope of UAE VAT.

  • With respect to the newly added sub-clause (c) under Article 51(5): Goods delivered in the UAEFor this exclusion to apply, all of the following conditions must be met:
    • the goods are moved from the designated zone to be delivered in the UAE; and
    • the supplier retains official evidence proving that the goods were imported as well as evidence that VAT has been paid on that import.

In instances where the goods will be moved from the designated zone to be delivered in the UAE, consumption would generally be regarded as taking place in the UAE. In this instance, VAT would also be levied on the importation of the goods, resulting in potential double taxation. Hence, the Executive Regulation was amended to allow such supplies to be regarded as having a place of supply outside the UAE, provided certain requirements are met.

In order to treat such supply as outside the scope of UAE VAT, the supplier will be required to retain official evidence proving that the goods were imported as well as evidence that VAT has been paid on that import.

In this context, the term “official evidence” refers to import documents issued by the local Emirate Customs Department in respect of the goods entering the UAE, for example stamped import declarations.

It is acknowledged that the import may take place after the goods are sold, and that it would be impractical in such a case to obtain the proof of import and payment before the goods are actually imported.

The supplier may, therefore, treat such sale as outside the scope of UAE VAT, if it has proof that the goods will be imported into the UAE. This would include instances where the supplier is responsible to import and deliver the goods to an address in the UAE.

Furthermore, the registered supplier shall retain proof that the goods were imported and that VAT was settled on the import before submitting the VAT return for the tax period in which the sale was made in order to treat the sale as outside the scope of UAE VAT.

If any of the above conditions are not met, the sale of goods for consumption shall be treated as being within the scope of UAE VAT and subject to VAT at 5%, unless it qualifies for zero-rating, as well as subject to import VAT

  • With respect to the newly added sub-clause (c) under Article 51(5): Shipping and delivery services

Under the general rule, the place of supply of any service supplied in a designated zone is considered to be in the UAE.

As an exception to the general rule, shipping or delivery services supplied directly in connection with Qualifying Goods will be outside the scope of UAE VAT if all of the following requirements are met:

  • The shipping or delivery service is supplied by the same supplier of the goods;
  • The supplier of such goods is a non-resident, and not registered for VAT in the UAE;
  • The goods are sold via an electronic sales platform; and
  • The supplier of the goods is not the person owning the electronic sales

The term “electronic sales platform” means any type of online sales platform, including websites and electronic applications, which bring together third-party sellers and buyers and through which goods may be sold and purchased with or without shipping or delivery services.

The impact of this amendment is that non-residents who are not registered for VAT in the UAE will not be required to register for VAT if they only sell the goods to which the abovementioned exceptions apply, on an electronic sales platform, and they ship or deliver these goods to customers.

Other references to relevant provisions of Executive Regulations:

  • For the definition of official evidence and commercial evidence, a taxable person can refer the provisions of Clause (4) of Article 30 of the Executive Regulation on zero-rating the export of

Official evidence are the export documents issued by the local Emirate Customs Department (including exit certificates, if required), whereas commercial evidence includes airway bill, bill of lading, consignment note, certificate of shipment.

Contacts

You may email us or can contact any of our team members relating to your queries on this subject:

Stany Pereira
Managing Partner
stany@pkfuae.com

Sarika Dhameja
Director – Tax Services
sdhameja@pkfuae.com

Ronak Desai
Manager
rdesai@pkfuae.com

Mradul Gupta
Manager
mgupta@pkfuae.com

Disclaimer:

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