Author: Thomas Vanhee

Customs & Trade Int'l Tax & Transfer Pricing

Just how spectacular are the new UAE Economic Substance Regulations for the UAE?

Post author By Thomas Vanhee
Post date July 1, 2019
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Just how spectacular are the new UAE Economic Substance Regulations for the UAE?

At a glance

On 30 April 2019, the United Arab Emirates (“UAE”) issued Cabinet Decision No. 31 concerning economic substance requirements (“Economic Substance Regulations”). UAE onshore and free zone entities that carry on specific activities mentioned in the regulations will need to examine whether they meet the economic substance requirements. Failing to meet those will trigger penalties. But why is this at first glance inane looking piece of legislation so important for the UAE?

Background

The introduction of a legal framework regulating the economic substance criterion in the UAE is a direct consequence of the Organisation for Economic Co-operation and Development’s (“OECD”) ongoing efforts to combat harmful tax practices under Action 5 of the Base Erosion and Profit Shifting (“BEPS”) project.

It also follows the increased focus by the European Union (EU) Code of Conduct Group (“COCG”) on companies established in jurisdictions with a low or no income tax regime, resulting in the publication of the first EU list of non-cooperative jurisdictions, which currently includes the UAE (“EU Blacklist”). In response to the EU COCG initiatives, the governments of the Bahamas, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and Seychelles introduced economic substance rules with effect from 1 January 2019.

There has also been growing interest and scrutiny from the public opinion as to whether entities established in such jurisdictions should be required to have sufficient economic substance before being able to benefit from beneficial tax regimes.

The purpose of the Economic Substance Regulations is to curb international tax planning of certain business activities, which are typically characterised by the fact that they do not require extensive fixed infrastructure in terms of human and technical capital, in a way which allows profits to be shifted to no or nominal tax jurisdictions, as opposed to taxing profits where the company has actually created economic value.

One of the reasons why the UAE has attracted so many businesses is because there is currently no income tax regime at a federal level. The economic substance legislation is specifically targeted at businesses that do not have genuine commercial operations and management in the UAE.

The main reason why the UAE has decided to introduce economic substance legislation lies in the country’s aim to further align its legislative framework with international tax practice and the standards set out in the OECD BEPS action plan.

What is economic substance?

Economic substance is a concept introduced to ensure that companies operating in a low or no corporate tax jurisdiction have a substantial purpose other than tax reduction and have an economic outcome that is aligned with value creation. In other words, economic substance requirements are used to analyze whether a company’s presence has a purpose besides the mere reduction of a tax liability.

Which entities are in scope?

The Economic Substance Regulations apply to UAE onshore and free zone entities that carry out one or more of the following activities:

Banking
Insurance
Fund management
Lease-finance
Headquarters
Shipping
Holding company
Intellectual property (IP)
Distribution and service centre

Entities that are directly or indirectly owned by the UAE government fall outside the scope of the Economic Substance Regulations.

Economic Substance Test

Entities are required to meet the Economic Substance Test when they conduct any of the above activities.

For each Activity, the regulations have defined the so-called Core Income Generating Activities (“CIGA”). This is a list of activities that must be conducted in order to meet the Economic Substance Test. For example, for intellectual property the CIGA would consist of research and development.

In general, the Economic Substance requirements will be met:

If CIGA are conducted in the UAE;
If the activities are directed and managed in the UAE;
If there is an adequate level of qualified full-time employees in the UAE,
If there is an adequate amount of operating expenditure in the UAE,
If there are adequate physical assets in the UAE.

In case the CIGA are carried out by another entity, these need to be controlled and monitored.

In accordance with EU recommendations, the regulations provide for less stringent requirements for Holding Company Businesses (“Holding Companies”).

Outsourcing

The CIGA may be outsourced, if there is adequate supervision and the outsourced activity is conducted in the UAE. Economic substance requirements will not be met if multiple Licensees outsource the same activity to the same service provider. There is no possibility for double counting the same service provider.

Reporting and compliance

Licensees will need to prepare and submit an annual report to their Regulatory Authority (Free Zone Authority or DED), within a period of twelve months after the end of each financial year. The Regulatory Authority will then submit the report to the Ministry of Finance (“Competent Authority”).

Since the Economic Substance Regulations came into effect per 30 April 2019, for existing entities, the first report will have to be submitted in 2020.

Administrative penalties and sanctions

– Failure to meet the economic substance test

AED 10,000 to AED 50,000 (First Financial Period)

AED 50,000 to AED 300,000 (Consecutive Financial Periods)

– Failure to provide information

AED 10,000 to AED 50,000

In case of continuous non-compliance, Regulatory Authorities may suspend, revoke or deny renewal of an entity’s license.

Exchange of information

If a Licensee fails to meet the Economic Substance Test for a financial year, the Regulatory Authority will inform the Minister of Finance for the financial year in question.

The Minister of Finance will then inform the foreign competent authority where the parent company, ultimate parent company or ultimate beneficial owner is established of the non compliance. This may lead in these countries to denying treaty benefits. This requires that the UAE has entered into a Treaty or similar arrangement with that country.

Takeaway – much ado about?

UAE entities involved in banking, insurance, fund management, investment holding, financing and leasing, distribution and service center, headquarter companies and intellectual property (IP) activities should asses whether their current presence and activity level meets the newly introduced Economic Substance requirements.

Where required, they make the necessary adjustments to ensure that their business is compliant with the UAE regulations which entered into force on 30 April 2019, in order to avoid administrative penalties, and potentially deregistration.

Moving away from the dusty provisions of the law, what consequences does the Economic Substance law now really trigger?

Operational companies should be little worried. They will not be impacted. The very small companies should be slightly worried. The businesses that were attracted by 50 year tax holidays and other promises and failed to develop any substantial activity in the UAE should be more worried.

How much the UAE will be effectively policing this legislation remains to be seen. Merely taking the example of Switzerland, that country had signed up to multiple exchange of information obligations but dragged its feet for the longest time.

For now though, the UAE has an argument towards the EU and, more importantly, individual countries, to get the UAE off their blacklists. This is important, since some UAE headquarters are currently being denied double tax treaty benefits in a number of countries, because of its failure to comply with international norms.

The legislation may potentially become obsolete though, if the UAE introduces Corporate Income Tax at a rate considered high enough to no longer be considered as a low tax jurisdiction.

Read our previous article on the introduction of Economic Substance Requirements in the UAE here.

UAE VAT

Ramadan generosity can be costly for VAT

Post author By Thomas Vanhee
Post date June 4, 2019
No Comments on Ramadan generosity can be costly for VAT

Ramadan generosity can be costly for VAT

The Holy Month of Ramadan is the ninth month of the Islamic calendar, observed by Muslims worldwide as a month of fasting, prayer, self-reflection and enhanced community spirit. The annual observance of Ramadan is one of the five pillars of Islam.

Ramadan is regarded as a time of piety, charity and blessings. Charities and foundations are noticeably more active during the Holy Month, providing assistance to those in need. Meals are provided at mosques, malls and other public places in a spirit of generosity.

Businesses see the Holy Month of Ramadan as an opportunity to organize sales and offer promotions, deals, discounts, gifts and benefits of all kinds. For example, companies may offer “buy one, get one free” or “two for the price of one” promotions or combined offers, where certain products are offered for free or at a reduced priced when bought together with another product (e.g. receiving one year of car insurance free of charge when buying a new car).

Traditionally, businesses also celebrate the Holy month by hosting Iftar parties, hand out Iftar snack boxes or give gifts in cash or in kind during Eid al Fitr, the religious feast which marks the end of Ramadan.

This article discuss how to deal with UAE VAT in the spirit of generosity.

There is no such thing as a free lunch?

VAT does not like free items. It taxes so-called deemed supplies, where businesses give things away for free for which it previously deducted input VAT. However, not all free supplies are deemed supplies. Even though both look similar, i.e. a third party seemingly receives something without paying for it, only deemed supplies carry VAT consequences.

As part of its sales strategy, a business may provide a customer with a free item. A supermarket could offer a ‘buy one get one’ formula, for example for shampoo bottles. Although it is providing the second bottle for free, the customer has actually paid a lower price for two bottles. Therefore, this situation is rather a so-called joint offer, and not a deemed supply.

The same reasoning holds for promotional discounts, where a business is slashing its prices with 50% during Ramadan. A business is not offering half of the product for free, but rather a discount on the price.

Perhaps a business considers giving a different item in addition to the item bought. Upon purchase of an electrical toothbrush, the seller offers 2 free tubes of toothpaste. Although the item is given for free, it is still not a deemed supply. The free item is given with the objective of increasing sales of the main item and is ancillary to it.

It is a very different situation when a grocery store decides to donate food supplies to a shelter or to allow all employees to pick an item from its stock for Ramadan. Those constitute deemed supplies and VAT needs to be charged on them. This means that VAT on these deemed supplies constitutes a cost for the business since it is giving the items for free.

If employers upon purchase however already know that they are purchasing items which are not intended for taxable supplies, they cannot recover the input VAT (and the subject of the deemed supplies is not even on the table).

The business making the deemed supplies needs to issue a tax invoice for the deemed supply and ideally deliver it to the recipient. The VAT on the tax invoice is not deductible in the hands of the recipient.

In the UAE, the taxable value of deemed supplies is its cost. This constitutes the taxable basis on which VAT should be accounted for.

However, even though a supply may constitute a deemed supply, two thresholds apply. If a business stays below the thresholds, it can continue to recover the input VAT and does not have to account for VAT on the deemed supply.

There are two thresholds:

The output tax chargeable on all deemed supplies should not exceed AED 2,000 in a 12 month period (i.e. AED 40,000 of costs VAT exclusive), and;
The value per person does not exceed AED 500 in a 12 month period (i.e. AED 10,000 of costs VAT exclusive) and it concerns samples or commercial gifts.

These thresholds allow businesses to occasionally provide small benefits or gifts to their employees and third parties without incurring VAT liabilities.

Given the fact that these thresholds are very low, a business will easily exceed the threshold. Taking into account the substantial administrative burden of having to monitor the thresholds and put a process in place, a business could chose to ignore the thresholds and always account for output VAT. That is also what most informed businesses seem to do.

Entertainment and personal expenses made during Ramadan

VAT is only recoverable when it is paid for goods and services bought for making taxable supplies. However, even though a business may exclusively make taxable supplies, there may still be expenses which are non-recoverable.

When an employer buys items and gives them to its employees for no charge and for their personal benefit, the employer cannot recover the input VAT. For example, if the employer decides to purchase chocolate dates for Ramadan to give to its employees, the input VAT paid is irrecoverable.

The same holds for so-called ‘entertainment expenses’. Entertainment services are “hospitality of any kind”. This includes hotel stays, food and drinks, tickets for shows and events and trips for entertainment.

Therefore, if a business organizes an iftar for its employees and for third parties, the input VAT is not deductible. Even though the event is held with the objective of improving social cohesion and increase sales, and therefore it has a clear business purpose, it is considered an entertainment expense.

In a public clarification published by the Federal Tax Authority, it did confirm however that VAT on certain entertainment costs is recoverable when used for a genuine business purpose, or when incidental to a business purpose. For example, VAT on food and drinks provided during a business meeting, is recoverable, if:

The hospitality is provided at the same venue as the meeting;
When the meeting is interrupted, it is only by a short break for the provision of the hospitality and then resumes as normal e.g. a lunch break;
The cost per head of providing the hospitality does not exceed any internal policy the business has established;
The food and beverage provided is not accompanied by any form of entertainment e.g. a motivational speaker, a live band etc.

On the other hand, where the hospitality provided becomes an end in itself and is the purpose for attending an event, it will be considered as entertainment costs and VAT is not recoverable.

In other words, if the staff comes for the party or for the Ted talk, the business will not be able to recover the input VAT. If the gathering is serious business, the input VAT will be recoverable.

Complex charities

Despite the fact that charities will mostly carry out transactions which are out of scope of VAT, given they do not charge any consideration, they may still occasionally render taxable supplies and therefore incur certain VAT obligations, such as the obligation to register for VAT purposes.

Charities will mostly receive their income from subsidies or donations. Such income is outside of the scope of VAT. Occasionally, it may provide sponsoring opportunities to business, which are subject to VAT.

Under normal VAT recovery rules, input tax is only recoverable where it relates to taxable supplies. In most cases, charities will therefore be required to allocate and apportion VAT recovery between taxable activities (recoverable) and non-taxable activities or exempt activities (non-recoverable). The input VAT recovery may therefore prove to be quite complex.

A special refund scheme applies to so-called Designated Charities, which meet the criteria set by the Federal Tax Authority.

Conclusion

The Holy Month of Ramadan triggers VAT consequences for businesses. Businesses making sales promotions are required to examine the VAT consequences of these sales promotions. Business also may need to not recover input VAT on certain purchases or charge VAT on a deemed supply when providing employees with entertainment or gifts. Charities also do not have an easy task ahead in calculating their VAT liabilities.

Given the very strict penalty framework, it is important to be aware of the VAT consequences of these activities in order to avoid VAT claims or penalties.

Customs & Trade Int'l Tax & Transfer Pricing

UAE economic substance requirements to be implemented

Post author By Thomas Vanhee
Post date May 8, 2019
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UAE economic substance requirements to be implemented

With the impending publication of the drafting of an economic substance law in the UAE, it is important to anticipate the consequences of the introduction of such a law on the UAE and offshore structures in the UAE. The UAE currently has no such substance requirements but has been strongly encouraged by the European Union to implement them. The impact on offshore structures will be substantial.

Current lack of substance requirements

The UAE is a federation of seven emirates. There is currently no direct tax legislation on a federal level in the UAE. However, some Emirates (e.g. Abu Dhabi, Dubai, Sharjah,…) have introduced income tax regimes for oil and gas companies and foreign banks. These decrees only apply to companies which are established in one of the aforementioned Emirates. The Income Tax Decrees do not contain any substance criteria.

Partly as a result of the current lack of substance requirements in the UAE, it has become increasingly important for international companies established or operating in the UAE to prove that the entity or structure has not been set up solely for tax purposes.

Tax residency certificate

Corporations established in the UAE can apply for a ‘tax residency certificate’ (‘TRC’) with the Ministry of Finance of the UAE. A tax residence certificate (‘TRC’) is a certificate issued by the UAE government to eligible government entities, companies and individuals to benefit from Double Tax Treaties signed by the UAE.

The following documents are generally required in order to apply for the tax residency certificate:

Valid Trade License.
Certified Articles or Memorandum of association.
Copy of identity card for the Company Owners or partners or directors.
Copy of passport for the Company Owners or partners or directors.
Copy of Residence Visa for the Company Owners, partners or directors.
Certified Audited Report.
Certified Bank Statement for at least 6 months during the required year.
Certified Tenancy Contract or Title Deed.

Please note that although the requirements do not expressly mention that the certificate can only be granted to local companies, the Ministry of Finance does not issue tax residence certificates to offshore companies (not to be confused with free zone companies).

Although the TRC may be helpful to obtain benefits under double tax treaties, in itself it cannot be considered as proof of economic substance in the UAE.

Developments on substance requirements in the UAE

Background

On 1 December 1997, the EU adopted a resolution on a code of conduct for business taxation with the objective to curb harmful tax competition. Shortly thereafter, the Code of Conduct Group on Business Taxation (COCG) was set up to assess tax measures and regimes that may fall within the scope of the code of conduct for business taxation.

On 5 December 2017, the COCG published the (first) EU list of non-cooperative jurisdictions for tax purposes, in cooperation with the Economic and Financial Affairs Council (ECOFIN).

The EU applies three listing criteria, which are aligned with international standards and reflect the good governance standards that Member States comply with themselves:

Transparency: Jurisdictions should comply with the international standards on exchange of information, automatic (1.1) and on request (1.2). In addition, jurisdictions should sign the OECD’s multilateral convention or signed bilateral agreements with all EU Member States to facilitate such exchange (1.3).
Fair Tax Competition: Jurisdictions should not have harmful tax regimes (2.1) nor facilitate offshore structures which attract profits without real economic activity (2.2).
BEPS Implementation: Jurisdictions should commit to implement the OECD’s Base Erosion and Profit Shifting (BEPS) minimum standards, starting with Country-by-Country Reporting.

The UAE was initially placed on the EU Black list. However, following commitments to take appropriate measures against the above criteria, the EU transferred the UAE to the EU Grey list.

However, due to non-compliance with criterion 2.2, the UAE was subsequently put back on the Black list at the start of this year. Criterion 2.2 requires that a jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.

Therefore, in order to fulfill its commitments to the EU, it is reasonable to expect that the substance requirements are likely to be introduced in the UAE in the foreseeable future.

In accordance with the scoping paper on criterion 2.2 published by the COCG on 22 June 2018 and the associated work of the OECD’s Forum on Harmful Tax Practices (FHTP), the below describes how businesses may be impacted and what substance requirements could potentially be introduced in the UAE in the future.

Expected substance Law requirements

The scoping paper suggest to implement the substantial activities requirement in three key steps:

(1) identify the relevant activities in their jurisdiction;

(2) impose substance requirements;

(3) ensure there are enforcement provisions in place.

According to the Scoping Paper, the economic substance test would be met if:

a) Taking into account the features of each specific industry or sector, the concerned jurisdiction introduces requirements concerning an adequate level of (qualified) employees, adequate level of annual expenditure to be incurred, physical offices and premises, investments or relevant types of activities to be undertaken.

b) The concerned jurisdiction ensures that the activities are actually directed and managed in the jurisdiction. Any UAE substance requirements are likely to further specify when this condition would be met e.g., depending on frequency of board of director meetings, directors physically present, minutes recording strategic decisions and the knowledge and expertise of the directors.

c) The core income generating activities are performed in the jurisdiction. These substance requirements should mirror the requirements used in the FHTP in the context of specified preferential regimes. As per the scoping paper, the core income generating activities for banking could be: raising funds; managing risk including credit, currency and interest risk; taking hedging positions; providing loans, credit or other financial services to customers; managing regulatory capital; and preparing regulatory reports and returns.

Comparison with the other low tax jurisdictions which introduced the substance requirements

Following the EU blacklist of non-cooperative jurisdictions, many other low and nil tax jurisdictions have introduced economic substance requirements. Jurisdictions where substance compliance is required from 2019 include Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Guernsey, and Jersey.

The Economic substance Law of BVI and Cayman Island are inspired by the core requirements in the scoping paper of the COCG and the FHTP requirements. The UAE is expected to follow the same path.

Conclusion

Currently, there are no substance requirements in the UAE. Corporations established in the UAE may apply for a ‘tax residency certificate’ with the Ministry of Finance of the UAE, when they qualify. Obtaining such a ‘TRC’ does not necessarily entail that a company has economic substance in the UAE.

Considering the efforts made by the UAE with respect to compliance with the fair tax competition criteria of EU, we anticipate that the UAE will issue economic substance requirements in the very foreseeable future, similar to the ones published recently by other low tax jurisdictions.

The specific substance requirements in the UAE will likely depend on the type of activities conducted by the relevant business (e.g., banking, shipping and headquarter services would each require different substance requirements).

Businesses in the UAE should already assess their operations against the substance requirements in the light of the COCG and FHTP guidelines.

VAT

Bahrain Real Estate and VAT

Post author By Thomas Vanhee
Post date April 3, 2019
No Comments on Bahrain Real Estate and VAT

Bahrain Real Estate and VAT

In March 2019, the NBR published its fourth VAT Guide, i.e. the VAT Real Estate Guide. This guide aims to provide an overview of the rules and procedures regarding real estate in Bahrain as well as the necessary background and guidance to help taxable persons determine how a supply is treated for VAT purposes. In this article we elaborate on the Bahraini VAT treatment of transactions linked to Real Estate and we included the excerpts from our article “GCC – VAT on Real Estate Transactions – A Comparative View of Saudi Arabia and the United Arab Emirates”and “VAT in United Arab Emirates, Saudi Arabia and Bahrain – Transitional Rules”.

Definition of real estate

Real estate includes any area of land over which rights, interests or services can be created, as well as any building, structure or engineering work permanently attached to the land and any fixture or equipment which makes up a permanent part of the land or is permanently attached to a building, a structure or engineering works. Real estate does not include any furniture, fittings, plant and apparatus which are not attached to land or a building and which can be removed without damaging the property.

VAT treatment of the sale of Real Estate

Under the Bahraini VAT Law, a supply relating to the grant of rights in rem deriving from ownership giving the right to use real estate is considered as a supply of goods. Therefore the place of supply of real estate is there where the real estate is located. This is in line with the GCC agreement and the UAE and KSA apply the same place of supply rule for real estate.

The sale, lease or license of real estate located in Bahrain is an exempt supply, regardless of whether the real estate is residential, commercial or land (bare or partly developed). Even though the GCC VAT agreement allows the implementation of an exemption for both residential and commercial real estate, it is very striking that Bahrain used this opportunity since the KSA and UAE have a stricter exemption.

Some supplies are not considered as real estate for VAT purposes and the VAT implications of these supplies will need to be determined on a case by case basis. The following supplies will not be considered as the sale or rental of real estate and will therefore, be taxable at the standard rate of 5%:

Hotel accommodation
Provision of paid car parking for periods of less than one month
Provision of serviced office space where the customer does not have the right to use a designated space on an exclusive basis
Rental of a function room, hall or similar facility
Providing permission to affix equipment and signage to land or buildings.
Provision of space for retail or promotional stands (e.g. at a shopping mall, retail or entertainment area) for a period of less than one month
Serviced accommodation with a rental agreement for a period of less than a year
Rental of storage or warehousing facilities to a customer without the right to access the space
Provision of labour accommodation which is not the principal place of residence of labourers in Bahrain

In the UAE, the sale of bare land is exempt. The sale and lease of commercial building is subject to VAT at 5% whereas, the first sale of the residential building made within three years of the completion date and lease of the same building is zero rated for VAT purposes. The subsequent sale and lease of the residential building is exempt from VAT.

However, in the KSA sale of both commercial and residential land and buildings is subject to VAT at 5% whereas the lease of residential real estate is exempt for VAT purposes in the KSA.

The difference in the application of VAT on sale of commercial and residential buildings and land makes the VAT treatment of the real estate much more complicated in the UAE and the KSA than in Bahrain. On the other hand, by applying a wide exemption on the supply of real estate , it is more likely that VAT becomes a cost for the real estate sector in Bahrain than in the other countries.

VAT treatment of Real Estate related services

Real estate related services in Bahrain are those services which are directly connected with the real estate. These include, but are not limited to, the following:

Services by real estate experts or agents
Services which involve the preparation, coordination and performance of construction, destruction, maintenance, conversion and similar work
Accommodation services provided at extra charge such as management services, utilities, telecommunications, internet and television etc.
Services by auctioneers, architects, interior designers, surveyors, engineers and others involved in matters relating to real estate

For real estate related services the same place of supply rules apply as for the supply of real estate, which is that the supply takes place where the real estate is located. A resident taxable person making a supply of such services will account for VAT on the provision of these services.

If a non-resident person makes a supply of these services in relation to Bahraini real estate to a Bahraini taxable person, the Bahraini taxable person will need to self-account for VAT under the reverse charge mechanism. That means that the supplier is not liable for Bahraini VAT and should not charge Bahraini VAT on its supply. Where the recipient is not a taxable person, or is a taxable person but not registered, the non-resident will need to register for VAT in Bahrain and account for VAT on the provision of the service.

The real estate services will be taxed at the standard rate of 5%, unless the supply is specifically exempt from VAT or zero-rated.

Apart from the exemption for commercial real estate, the UAE and KSA apply similar rules for the supply of real estate related services.

VAT treatment of construction works

Construction generally means building something such as a house, office, factory, warehouse, road, bridge etc. Construction may also involve demolition, refurbishment/reconstruction of existing buildings or structures and site clearance activities. Construction involves providing a building service but may also involve providing goods as part of such a service.

Construction services and the goods supplied in Bahrain for construction are regarded as taxable supplies if they are carried out by a taxable person. This is irrespective of the type of building (e.g., residential, commercial, industrial building) being worked on or the type of other construction work (e.g., civil engineering works).

Construction services and the goods supplied in the course of providing construction services for a new building are zero-rated for VAT purposes in Bahrain. All other taxable supplies of construction services or supplies of goods used for construction will be subject to the 5% VAT rate.

All types of construction services performed in the KSA and in the UAE are supply of services which is subject to VAT at the 5% rate. This VAT treatment will apply regardless of the type of building which is being constructed.

Transfer of a going concern

The transfer of a going concern in all three concerned GCC states (KSA, UAE and Bahrain), with or without consideration, does not fall within the scope of VAT if certain conditions are met. If a transaction involves real estate (e.g., the sale of the freehold interest in a building with tenants in situ) and all of the conditions for the transaction to be a transfer of a going concern for VAT purposes are met, the transaction will be outside the scope of VAT. If the relevant conditions are not met, the VAT implications of the transaction will need to be considered as it may involve both taxable and exempt supplies.

Output VAT payment

For the sale of Real Estate, VAT becomes due on the date that property is transferred to the recipient. However, VAT can become due earlier if (i) a tax invoice is issued by the supplier before the transfer date or (ii) the recipient makes a payment to the supplier.

Typically, when there is a supply of services, some supplies will be considered as “one-off” services, which will follow the general tax due date rules set out above, whereas other services will be considered as continuous supplies (for example, rentals and lease agreements). In case of continuous supplies VAT becomes due across the period the goods and services are provided, in line with the invoicing and payment arrangements.

When twelve months have passed from the start of the contract or from the previous tax due date, a tax due date will be triggered at that twelve-month point.

A construction contract may contain provisions whereby the customer may withhold a retention amount pending rectification of matters identified as part of the snagging process. The VAT treatment of such retentions often leads to important discussions.

Input VAT deduction

Deduction of input VAT is based on the intended use at the time of purchase. A VAT registered person may deduct input VAT charged on goods and services it purchases or receives for its taxable activities purposes. A person making both taxable and exempted supplies can only deduct the input VAT related to taxable supplies.

For example, VAT incurred on expenses or purchases (i.e., professional legal fees, refurbishment, etc.) that is attributable to making exempt supplies of real estate will not be recoverable by the taxable person. When a taxable person will use the building for the purposes of fully taxable activities, it can recover the VAT on costs on the construction of the new building in full.

The overhead costs/expenses incurred by the taxable person for making both taxable and exempted supplies must be apportioned to most accurately reflect the use of those costs in the taxable portion of the taxpayer’s activities. A prescribed default method of proportional deduction is calculated on the values of supplies made in the year, using the following fraction: value of total taxable supplies made by the taxable person divided by total value of taxable supplies and exempt supplies made by the taxable person. This fraction is identical to the input tax apportionment method in the KSA. However, in the UAE the apportionment is by default made on the basis of relevant input tax incurred.

Transitional provisions

The Bahraini VAT Law provides special rules for contracts concluded prior to the VAT-implementation date. In case the contracts do not contain any tax clauses, the agreed consideration is considered to be inclusive of VAT. Furthermore a zero rate applies for contracts entered into before 1 January 2019 with the government where the supply takes place after the implementation date. This zero rate can only be applied until the date of the contract’s renewal, or its expiration, or 31 December 2023, whichever is earlier.

The transitional provisions in Bahrain are a combination of the KSA grandfathering rule (temporary zero rate on contracts concluded prior to 30 May 2017) and the UAE’s transitional rules (by default inclusive of VAT).

GCC Tax Int'l Tax & Transfer Pricing

KSA Transfer Pricing obligations

Post author By Thomas Vanhee
Post date March 31, 2019
No Comments on KSA Transfer Pricing obligations

KSA Transfer Pricing obligations

Early 2010’s, following the financial crisis and multiple tax scandals, such as the Panama papers and LuxLeaks, the BEPS initiative was launched by the OECD and the G20. The BEPS initiative is a set of international recommendations meant to prevent Base Erosion and Profit Shifting (international tax avoidance).

As part of the BEPS initiative, Transfer Pricing (TP) rules were put on the agenda worldwide as a means to avoid tax evasion. The first detailed and comprehensive TP rules were designed in the 1990’s. The US published regulations in 1994 and the OECD published guidelines in 1995.

Saudi Arabia is member of the G20 and was expected to adopt a comprehensive set of rules to tackle tax avoidance through transfer pricing rules. Recently, it published these By-Laws on Transfer Pricing (GAZT Board Resolution No. [6-1-19] 25/5/1440H (31/12/2018 G).

KSA’s Income Tax Law had already implemented general anti-TP avoidance measures and approved the arm’s length principle, similar to other GCC Member States. However, these new By-Laws are going a lot further in terms of defining the applicable transfer pricing principles and documentary requirements. The new obligations trigger important compliance obligations and require extensive preparation.

What is a transfer price?

A transfer price is the price agreed between entities of a same group for their internal transactions (‘controlled transactions’). Transfer pricing legislation targets the relocation of profit within the Group: one entity located in a tax haven invoices its supplies (services or goods) at an artificially high price to another entity located in a high tax jurisdiction, successfully decreasing its taxable base.

In order to avoid this artificial profit shifting, the transfer price is required to comply with the arm’s length principle. This principle requests that the controlled transaction price is determined as if the transactions were made between unrelated parties.

Who needs to comply?

All taxable persons under the KSA Income Tax Law including mixed ownership entities subject to both Income tax and Zakat must comply with these By-Laws.

Exclusive Zakat payers are not subject to TP bylaws, but must comply with CbCR requirements if they meet the threshold.

What’s new?

The By-Laws determine the applicable methods and documentation inspired directly by the OECD guidelines and BEPS reports.

KSA has approved the 5 OECD transfer pricing methods:

Comparable Uncontrolled Price Method
Resale Price Method
Cost Plus Method
Transactional Net Margin Method
Transactional Profit Split Method

A transfer pricing method other than the ones above can be adopted, provided the taxable person can prove that none of those methods provides a reliable measure of an at arm’s-length result.

Documentation

In line with the OECD recommendations, KSA requires:

A Master File and Local File to detail the Group and entities’ transfer pricing policy (notably an explanation of the applied transfer pricing method) to be prepared on an annual basis at the time of the income tax declaration (only for MNE Group with an aggregate arm’s length value of controlled transactions exceeding SAR 6,000,000 during any 12 month period);
The Country by Country Report (CbCR) to be submitted no later than 12 months after the end of the concerned reporting year for MNE groups with a consolidated turnover of more than SAR 3.2 billion.

In addition, it requires a ‘Controlled Transaction Disclosure Form’ to be submitted on an annual basis along with the income tax declaration (no threshold applies).

The By-Laws do not mention the language in which the documentation is to be maintained and filed. However, the FAQs mention that GAZT encourages to maintain and submit documentation in the official language.

It is important to note that these obligations are already applicable to fiscal years ending on 31 December 2018. This implies that the concerned companies must start preparing the required documentation. The latter must be ready within 120 days following the end of the fiscal year, i.e. by the end of April 2019 for the first concerned MNEs. However, a 60 day extension has been provided for the purposes of maintaining the Local File and Master File.

Exceptions

The draft contains certain exceptions for maintaining the Local file and the Master file. Are exempt from these obligations:

Natural persons;
Small Size Enterprises;
Legal persons who do not enter into Controlled Transactions, or who are a party to Controlled Transactions where the aggregate arm’s-length value does not exceed SAR 6,000,000 during any 12 month period.

Adjustments

Where the price is not at arm’s length, GAZT can adjust the tax base accordingly. This can result in a higher tax liability if part of a tax deduction is rejected or if it considered that the KSA entity should have charged a higher price to its foreign affiliate.

GAZT can also be informed of any TP adjustments made in another country, on a controlled transaction made with a KSA resident, if a treaty is in place with this country. GAZT can ensure the changes by the foreign authority are in line with the arm’s length principle. GAZT can subsequently make the appropriate adjustment to take into account the increase in the taxable base by the foreign tax authority.

In case GAZT disagrees with the adjustment, it can communicate and discuss with the respective foreign authority. An existing mutual agreement procedure (‘MAP’) with the foreign authority will be necessary.

Advance Pricing Agreements

An APA can safeguard companies against tax reassessments, as it provides for an agreed transfer price by the Tax Authority regarding specific transactions.

The By-Laws do not currently provide for an Advance Pricing Agreements (APA) procedure.

Tax Audit and penalties

GAZT has been working on TP for many years and is well prepared to enforce the new TP requirements. A specific tax unit, with experienced auditors, has been created to guarantee the correct implementation of these laws.

The By-Laws do not foresee penalties in case of non-compliance. However, the common penalties relating to corporate income tax apply.

Impact on the GCC

Any GCC company performing controlled transactions with a KSA company will have to comply with the KSA TP rules. The valuation of its intra-group sales must comply with the valuation methods recommended by the KSA TP rules.

In addition, GCC affiliates with a KSA headquarter will have to prepare a local file describing their own transfer pricing policy for the transactions with their KSA related parties. Important accounting information will also have to be gathered and transmitted to the KSA headquarter to be compiled in the CbCR.

Concerned entities must start to plan immediately. Practically this does not only encompass preparing the documentation. Companies must also keep evidence of the invoiced work, especially when intangible (e.g. management fees might be requested to be evidenced by proof of rendered services: announcements of internal seminars, memoranda, presentations, emails…). This implies to retain all data regarding intra-group transactions and to draft and maintain the required documentation or information and keep it up to date.

Finally, these new KSA By-Laws open the door to the implementation of TP rules in the other GCC countries, and notably in the UAE. The UAE committed to introducing a CbCR by joining the BEPS Inclusive Framework earlier in 2018.

Customs & Trade Int'l Tax & Transfer Pricing

KSA publishes long awaited DTT with UAE

Post author By Thomas Vanhee
Post date March 5, 2019
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KSA publishes long awaited DTT with UAE

The Double Tax Treaty (“DTT”) between the UAE and the KSA provides a significant tax incentive for businesses operating in the two contracting states. A positive impact on investment and trade between the two contracting States is expected in the aftermath of its entry into force.

This is the first DTT signed between two GCC countries. KSA is a member of the G20 and a key player in the GCC economy and on the global oil markets. It is keen to reinforce its promising investment environment. On the UAE side, the signing of this DTT reinforces its status as a regional hub for foreign investments and shows its commitment to its continued attractiveness and excellence.

Both contracting countries are members of the BEPS inclusive framework and signed the Multilateral Instrument (“MLI”). Signing such a bilateral DTT is a new step towards compliance with BEPS minimum standards – notably regarding transparency and tax avoidance. It goes hand in hand with the extensive TP legislation recently published in KSA.

This article highlights the key features of the DTT and analyses its tax implications for businesses operating in the two contracting states.

1. About the Treaty

Due to lengthy negotiations, the treaty is based on the 2014 OECD Model Tax Convention, even though the model was updated in 2017.

However, the KSA has already included this DTT in the list of its Covered Tax Agreements (“CTA”) in the MLI. It is yet to be included by the UAE, since the UAE signed the MLI shortly after the treaty.

The treaty will enter into force on the second month of the official notification between the two contracting countries. It is expected that the treaty will apply as of 1 January 2020.

2. Key Features

Persons covered

Only the “residents” of the contracting states shall benefit from this treaty.

This residence principle is generally adopted by the KSA in most of its recent treaties, contrary to the UAE which has recently opted for a citizenship criterion, such as for its recent DTT with Brazil.

Residence

As a primary definition for “resident”, the treaty uses the standard language of the OECD Model Tax Convention.

An additional interesting provision is that the DTT expressly qualifies as resident, any legal person established, existing and operating in accordance with the legislations of the contracting states and generally exempt from tax:

• if this exemption is for religious, educational, charity, scientific or any other similar reason; or

• if this person aims at securing pensions or similar benefits for employees.

Although the treaty does not specify whether the residence concept is applicable to businesses established in the Free Zones (UAE) or the Special Economic Zones (KSA), the competent tax authorities are required to coordinate to determine the requirements and conditions to be satisfied to be entitled to any tax benefit granted by this treaty.

Permanent Establishment “PE” Clause

The PE clause is largely based on the OECD Model Tax Convention, but features two elements inspired by the UN Model. It notably qualifies:

• As a PE: a building site, construction or installation project after 6 months (12 in the OECD Model)

• As a service PE: providing services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose if their presence lasts for a period or periods aggregating more than 183 days in any 12-month period

Taxes covered, rates and double taxation elimination

The DTT covers income tax and Zakat in the KSA and income tax in the UAE, inspite of the absence of a federal income tax law in the UAE.

No withholding tax regime applies in the UAE. The table added to this article shows the impact on the withholding tax rates in the KSA and the consequences of the treaty.

The DTT will not apply for royalty payments in case the beneficiary has a PE in the source country (exceptions apply). Similarly, excessive interest payments made between related parties shall not benefit from the DTT exemption.

The treaty provides for source country taxation only on income from natural resources exploration and development. The elimination of double taxation is performed through the tax credit method.

Zakat and the Treaty

Zakat is covered by the treaty (for the KSA). An interesting provision, introduced in several DTTs concluded by Saudi Arabia (e.g. Georgia, Mexico and Kazakhstan), states that “In the case of the KSA, […] the methods for elimination of double taxation will not prejudice the provisions of the Zakat collection regime.”

This provision may have an impact on Zakat for UAE businesses, considering the recent update of the Zakat implementing regulations. This notably impacts PE headquarters that might be subject to Zakat in the KSA, if specific criteria are met.

3. MAP and other provisions

The treaty provides for a Mutual Agreement Procedure (“MAP”) which can be requested to the competent authority in any of the contracting states within 3 years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention.

Investments owned by Governments (e.g. investments of Central Banks, financial authorities and governmental bodies) shall be exempt from taxes in the other contracting state. The income from such investments (including the alienation of the investment) is also exempt. The exemption does not include immovable properties or income derived from such properties.

There is no provision in the treaty for non-discrimination, assistance in the collection of taxes or territorial extension.

The entitlement to the benefits of the treaty will not be granted in case the main purpose of the transactions or the arrangements at stake is proved to be the enjoyment of such a benefit.

4. Conclusion

Even though this DTT between the KSA and the UAE is largely based on the OECD model 2014, the PE definitions it provides adopted from the UN model, broadens the scope of the activities taxable in the source countries, and will require specific attention.

The relief of withholding tax on royalties and interests, along with the MAP will reinforce the business relationships between these two countries. It is regretful that there is not a clear framework for Free Zone or Special Zone companies.

Finally, it is to be expected that the treaty will soon be notified by the UAE as a CTA under the MLI. In such case, businesses willing to benefit from this DTT will have to satisfy the Principal Purpose Test for the concerned transactions or other investment arrangements.

Customs & Trade UAE Tax

UAE increasingly uses Anti Dumping Measures

Post author By Thomas Vanhee
Post date March 1, 2019
No Comments on UAE increasingly uses Anti Dumping Measures

UAE increasingly uses Anti Dumping Measures

Since the introduction of its Anti Dumping law in 2017, the UAE has recently imposed anti dumping duties again to tackle goods dumped on the UAE market. Even though many countries have had a legal framework in place to take such measures since a long time, the UAE only adopted Federal Law No. 1 on Anti-dumping, Countervailing and Safeguard Measures in 2017.

This law implemented the 2011 GCC Common Law on Anti-dumping, Countervailing and Safeguard Measures. The law only applies to trade practices by non-GCC countries and not between GCC States.

Dumping occurs when goods are exported to the UAE at substantially lower prices than the sales price in the country of export. The sellers can for example offer these lower prices because of subsidies or other financial support provided by the government of the exporting country.

In a wider perspective, as illustrated by the US-China trade war, countries are increasingly looking at trade measures to tackle trade imbalances. In 2015, the US decided to impose a 500% antidumping duty on Chinese steel.

In January 2019, the UAE Cabinet decided to increase customs duties applicable to rebar and steel coils from 5% to 10% as a means to provide trade protection to iron producers in the UAE. This article discusses the provisions of the mechanics of such trade measures in the UAE.

Assessing dumping

Dumping measures are taken after a complaint by the UAE industry or the minister. The complaint demonstrates the link between imports and similar domestic products and the damage caused to the domestic industry.

If the complaint is accepted, an investigation will be started and notified in the Official Gazette and UAE’s top two newspapers.

An Advisory Committee will send questionnaires to interested parties to obtain essential data, notify the countries concerned, inspect the exporter’s facilities, hold public hearings and prepare a preliminary report before making a decision.

The investigation will be terminated in cases the complaint is withdrawn, the dumping margin is less than 2% of the export price, the volume of imports is less than 3% of the total imports or if there is insufficient evidence to support the dumping claim.

What is the damage?

The damage caused to the domestic industry may take the form of material damage (e.g. a drastic drop in sales volume), a threat of material damage or material retardation to the establishment of a domestic industry.

The damage can be demonstrated by an increase in the volume of imports which leads to a significant depressing or suppressing effect on domestic prices.

Determining the dumping margin

The dumping margin is the fair comparison between the normal value and the export price of these goods. This will be the base for levying anti-dumping duties or alternative measures.

The normal value is the comparable price at which the goods under complaint are sold, in the ordinary course of trade, in the domestic market of the exporting country. The export price is the price at which goods are exported to the UAE. It is generally the value at ex-factory level.

Imposing anti-dumping measures

During the investigation, provisional measures can be taken for 4 months. Provisional measures can be for example imposing temporary duties or requesting a security deposit upon import.

The investigation will be suspended or terminated if the exporter is willing to increase prices or cease exports at dumped prices.

The final decision of the investigation will either include the termination of the provisional measures or the imposition of a definitive measure. A definitive measure will be in the form of a duty valid for a maximum of 5 years or until the damaging effects of dumping have been eliminated (or any other trade measure).

The anti-dumping duty on imports of car batteries from South Korea is a prime example of a definitive measure imposed by the UAE since the introduction of the law. The duty remains effective for 5 years starting from 25 June 2017 onwards.

The Advisory Committee will review these measures to ensure that they have the desired effect on the domestic economy. A review will also take place on the need for imposing anti-dumping duties for new exporters of like goods from the same country.

Effect on customs valuation and VAT

In the GCC, anti-dumping duties are levied over and above the normal customs duties applicable on on imports of goods. Customs duties and VAT are intrinsically linked. VAT applies on top of these customs duties. Since in the EU VAT also applies on top of anti dumping duties, presumably VAT also applies on top of anti-dumping duties.

Uncategorized

Saudi Multinationals Face April Documentation Deadline

Post author By Thomas Vanhee
Post date February 21, 2019
No Comments on Saudi Multinationals Face April Documentation Deadline

30 June 2021 - End of transitional period to apply 5% VAT in KSA

Saudi Multinationals Face April Documentation Deadline

Foreign and domestic companies must comply with new intercompany pricing regulations
Short deadline for new compliance burden and accountant certification poses challenges

Multinational companies operating in Saudi Arabia must for the first time submit transfer pricing documentation to the tax authority.

Saudi Arabia’s final transfer pricing regulations, published by the General Authority of Zakat and Tax (GAZT) on Feb. 15, require companies operating in the kingdom to le transfer pricing documentation by April 30, for nancial years ending on Dec. 31, 2018.

Companies must complete controlled transaction disclosure forms, and maintain les detailing the multinational group’s transfer pricing policy and methods. The regulations apply to controlled transactions with an annual aggregate value exceeding 6 million riyals ($1.6 million).

Transfer pricing underlies most, if not all, disputes involving companies and international profit shifting. Global companies use transfer pricing methods to ensure that units within the group sell goods and services to one another at an arm’s-length price that is equivalent to that of transaction between unrelated parties.

Companies must immediately “take the necessary actions in order to be compliant,” Shiraz Khan, head of taxation at Al Tamimi and Co. law rm in Dubai, told Bloomberg Tax by e-mail Feb. 20.

Companies must also prepare transfer pricing master and local les before submission of the tax return, Khan said. The les must be submitted to GAZT within 30 days of the tax authority’s request.

Accountant Certication

A significant change from the Dec. 10 draft transfer pricing regulations is that an accountant must certify that a company’s transfer pricing policies are consistently applied to their taxable entities located in Saudi Arabia.

Companies must file the certification with their controlled transaction disclosure form.

The certication requirement “will place a big burden on all taxpayers,” especially those companies due to report by April 30, said Mohamed Serokh, a partner and Middle East transfer pricing leader at PwC in Dubai.

In the final regulations, the GAZT “encourages the submission and maintenance of documentation in the ocial language to the extent it is reasonably possible.”

If a company doesn’t use the Arabic language when submitting documentation, it is unclear what the tax authority will do, Serokh said by telephone Feb. 19.

While the draft rules didn’t address penalties, the. FAQ document issued with the final regulations states: “All penalties and fines under the Income Tax Law are applicable to all income tax matters.”

“By implication, that means they are also applicable” if companies don’t comply with the nal transfer pricing regulations, Serokh said.

Global Tax Reporting

The final regulations, like the draft rules, require companies with a turnover of more than 3.2 billion riyals ($850 million) to le country-by-country reports.

Country-by-country reports provide a snapshot of a multinational company’s financial data—including taxes paid and number of employees—for each country in which the company operates.

Companies will have to designate which reporting group entity will le their country-by-country report by April 30, 2019, and must file the report with the GAZT by Dec. 31, 2019.

Saudi-owned businesses are also required to comply with the country-by-country reporting rules, according the nal regulations.

Gulf Cooperation Council

Gulf Cooperation Council (GCC) companies engaged in controlled transactions with a Saudi company will have to comply with the Saudi transfer pricing rules, Laurent Bertin, an adviser at Aurifer Tax Advisers in Dubai, said by email Feb. 19. “The valuation of its intra-group sales must comply with the valuation methods recommended by the Saudi transfer-pricing rules.”

The GCC is a political and economic alliance of six countries in the Arabian Peninsula: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.

GCC affiliates with a Saudi headquarters will have to prepare a local file describing their own transfer pricing policy for transactions with their Saudi-related parties, Bertin said. Important accounting information must be gathered and sent to the Saudi headquarters to be compiled in the country-by-country report, he said.

VAT

Bahrain third GCC country kicking of VAT

Post author By Thomas Vanhee
Post date January 2, 2019
No Comments on Bahrain third GCC country kicking of VAT

Bahrain third GCC country kicking of VAT

Following the publication of the VAT legislation in Bahrain and the start of a new year, VAT has now become a reality in Bahrain. Bahrain is the third GCC country introducing VAT and the National Bureau of Taxation (“NBT”) will be policing it. In this article we will touch upon the most interesting and striking parts of the VAT legislation.

Real estate

Unlike the UAE and KSA, the Bahraini VAT legislation provides for an exemption for the supply or lease of both residential and commercial buildings. Bahrain is the first GCC country that implements a VAT exemption for the supply and lease of commercial buildings. The exemption may have far reaching consequences for the real estate market.

Furthermore, a zero rate is applicable on construction services related to new buildings (residential and industrial). Goods supplied by a business that supplies construction services and which are supplied in the course of providing construction services for a new building, are also zero rated. This includes for instance building materials and materials necessary to construct specialised raised flooring for computer server rooms.

However, goods like furniture that is not affixed to the building, swimming pools and decorative lighting, paintings, carpets and murals and other artwork are not zero rated.

The zero rate is also not applicable on restoration works, demolition of existing buildings and architects and interior design fees. VAT incurred on these purchases will therefore constitute a cost for businesses who want to sell or lease their new constructed building.

Food items

Bahrain implemented the optional provision in the GCC VAT Agreement and applies a zero rate on the supply and import of certain basic food items. Bahrain is again the first GCC country doing this. The Bahraini Tax Authority published the list with zero rated items, indicating that 94 types of food will fall under this special rule. The list includes ten categories:

Meat and fish
Fruits and vegetables
Coffee, tea and cardamom
Wheat and rices
Sugar
Children’s food
Water
Salt
Egg products
Bread

Note that the supply of food by restaurants, coffee shops or caterers will still be subject to the standard rate. There is a great deal of conflict expected around the interpretation of mixed supplies which include a zero rated part, or between take in and take out products.

Financial services

Bahrain has taken an unoriginal position in line with KSA and UAE. Financial services are exempt from VAT, except where the consideration for the service is expressly determined as a fee, commission or commercial discount. Financial services are defined as services related to cash transactions in the VAT Executive Regulations.

Additionally the regulations also include a list with examples of financial services that are exempt (e.g. depositing money in current accounts, savings accounts or deposits, granting and transferring loans, borrowings and credit, issue or cancellation of cheques, debit cards and credit cards).

Some services like the issue, allotment, or transfer of ownership of an equity security or debt security and life insurance and reinsurance contracts, will be exempt, irrespective of how the consideration for them is payable.

Furthermore the supply of financial services to non-residents will be zero rated.

In case the financial institution supplies services which do not fall under the VAT exemption nor the zero rate, the standard rate will have to be charged. Consequently the financial institutions will have to issue compliant invoices. In this regard the regulations clarify that a bank statement shall be treated as a tax invoice provided it contains certain information like the name, address and registration number of the bank in the Kingdom and the name and address of the customer.

Transport services

Similar to the UAE and KSA, in Bahrain a zero rate is applicable on the international transport services of goods which begin in, end or pass through its territory, including services and the supply of related means of transport. The zero rate is also applicable on the supply of services and goods directly or indirectly associated with the international transport of passengers and goods, including goods and services supplied for use or consumption on board a means of transport.

A zero rate is also applicable on the local transport services of goods and passengers by land, water or air. Exceptions apply, i.e. the standard VAT rate is applicable in the following five cases:

Transport services provided by a person who does not meet any regulatory or licensing requirements from the authorised body to provide such services,
Services of vehicle rental without a driver,
Transport services for sightseeing or leisure purposes,
Food delivery services provided by a person supplying food,
A transport service which is ancillary to the principal supply of goods or services which is taxable at the standard rate, and is not priced separately to the supply of a good.

Imports

Goods

By default, VAT on imported goods will be payable to Bahrain’s customs authority prior to the release of the goods. The tax authority may allow the deferral of payment of VAT on import if the importer is registered for Tax purposes and if the Taxable Person is bound by Customs Affairs records at the Ministry of Interior.

Further details are expected soon. The import VAT deferral mechanism should be implemented by the end of Q1 2019.

Services

Non-resident suppliers supplying services which are taxable in Bahrain to Bahraini customers, will have to account for the VAT themselves unless the customers are registered taxable persons. In that case the Bahraini recipient will have to account for the VAT himself under the reverse charge mechanism.

Exports

Goods

The export of goods and services are zero rated, provided that certain conditions are met (e.g.). Exporters who are primarily engaged in making exports can apply for a domestic reverse charge on certain purchases that are subject to the standard rate and received from taxable persons in Bahrain, allowing them to benefit from cashflow advantages. This burdensome procedure is also used in France but the French authorities have to spend important resources in policing it.

In order to get the approval from the NBT to apply the reverse charge mechanism, the taxable person should be able to fully recover any input VAT, export more than 50% of its turnover, show that he will be in a refund position on a recurring basis and that the refund will have a material impact on his financial position.

Services

So-called “exports of services” (a term absent in the GCC treaty) supplied by a taxable person in Bahrain are subject to the zero rate if certain conditions are met. For instance the services should be supplied to a person who does not have a place of residence in Bahrain and who was outside Bahrain when the services were provided. The services should be performed and enjoyed outside the country and should also relate to tangible goods or real estate located outside the country. It remains to be seen whether the NBT will take an equally very restrictive view like its KSA counterpart.

Telecommunication and electronic services

Telecommunications and electronic services supplied to a non-registered customer shall be taxable at the place of use and enjoyment of the services on the date of supply. Supplies made to taxable customers will be taxed at the place of residence of the customer.

The regulations provide some further information on the determination of the place of use and enjoyment as well as how to determine the place of residence of a customer who is a taxable person.

UAE VAT

UAE VAT for foreign businesses

Post author By Thomas Vanhee
Post date December 30, 2018
No Comments on UAE VAT for foreign businesses

UAE VAT for foreign businesses

With the influx of more than 25 million visitors expected from around 190 countries for Expo 2020, the UAE FTA has implemented two special VAT refund mechanisms to ensure that business visitors do not incur any VAT.

The first mechanism targets exhibitions and conferences attended by international businesses. The second one benefits business visitors who will be able to claim the refund of VAT paid on expenses incurred in UAE. Below the two mechanisms are discussed.

VAT refund for exhibitions and conferences

The VAT refund for exhibitions and conferences is beneficial for the organizers as well as the business visitors attending such events in the UAE.

This scheme enables both suppliers and their international customers to save 5% VAT payment on selected services. This particular refund mechanism covers services such as the rental of exhibition space or access to exhibitions and conferences.

Only international customers, those who are not established in the UAE or are not registered for VAT purposes in the country, can avail this benefit. The international customer must inform the supplier that the business is not resident in any manner or registered in the UAE for VAT purposes.

The supplier, on the other hand, needs to be registered for VAT purposes in the UAE, as well as inform the FTA before the event takes place to be able to grant this benefit to its international customers.

Once registered, the conference and exhibition supplier should issue an invoice with VAT but not collect VAT on the relevant exhibition or conference services from their customers. Instead, he claims the VAT refund equal to the output VAT charged on the subsequent VAT return.

Since the payment of this VAT will de be deferred to the VAT return and compensated with a simultaneous deduction in the same return, it does not impact the supplier’s cash flow, while also providing the customers with immediate VAT refund.

Refund for business visitors

Similar to the business VAT refund scheme available in the European Union, the UAE has implemented a scheme whereby all VAT costs incurred by a non-resident business which are not registered for VAT in the UAE, are reimbursable through the VAT refund mechanism for business visitors.

Some of the most common expenses by non-residents include the local purchase of goods, employee travel and lodging, training, service charges for vendors and others. It is important to note that the VAT reclaimed must be directly related to the business activities and cannot be for entertainment or any other legally blocked expense, which are specifically excluded from all input VAT recovery.

Foreign business will only be entitled to claim a VAT refund in case they are from a country that has VAT and also provides refunds of VAT to UAE entities in similar circumstances. KSA currently does not provide this refund to UAE businesses. Therefore, the UAE will also not refund businesses from KSA.

The minimum amount of each application for refund of tax is AED 2,000 which may be the amount of single or multiple purchases. The application should be submitted by a calendar year. The FTA will start receiving claims in respect of VAT incurred in 2018 as from April 2019. The opening date for refund applications in subsequent calendar years will be 1st March.

The FTA will soon release further guidance concerning the exact process for claiming the VAT refund. However, it is expected that businesses will have to provide the original tax invoices for which they intend to reclaim the VAT as part of the application.

VAT obligations for non-resident business

Conferences and exhibitions generate significant opportunities for businesses to show their products and close some deals.

However, non-resident businesses who intend to sell goods or provide services during a conference or exhibition in the UAE might need to assess their VAT obligations in the country. For non established businesses, the obligation to register for VAT purposes with the FTA arises from the first taxable supply.

Importantly, non-resident businesses making taxable supplies in the UAE are not entitled to the business visitor refund scheme or to benefit from the VAT refund for exhibitions and conferences.

Overall, these guidelines will not only put UAE top of the list for the hosting of conferences and exhibitions, but it also encourages conference and exhibitions providers, as well as international customers to organize and attend such events in the UAE.

Just how spectacular are the new UAE Economic Substance Regulations for the UAE?

Ramadan generosity can be costly for VAT

UAE economic substance requirements to be implemented

Bahrain Real Estate and VAT

KSA Transfer Pricing obligations

KSA publishes long awaited DTT with UAE

UAE increasingly uses Anti Dumping Measures

Saudi Multinationals Face April Documentation Deadline

Bahrain third GCC country kicking of VAT

UAE VAT for foreign businesses

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