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Customs & Trade Int'l Tax & Transfer Pricing Tax Updates UAE VAT

Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors

immovable-property-income-in-the-uae-tax-implications-for-domestic-and-foreign-investors

Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors

Explore the complexities of real estate investment taxation in the UAE with the article “Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors.”

This piece, authored by our very own Thomas Vanhee, Priyanka Naik, and Giorgio Beretta, and featured in Tax Notes International on December 18, 2023, offers a detailed look at the new corporate tax landscape effective June 1, 2023.

It provides valuable insights for both local and international investors navigating the UAE’s real estate market.

Click to read the full article and stay informed about these essential tax developments.

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Customs & Trade Int'l Tax & Transfer Pricing Tax Updates UAE VAT

Understanding the Business Response to the OECD/G20’s Pillar Two Initiative: A Survey Analysis

UAE publishes long awaited Cabinet Decisions on Free Zones and Medical Supplies

Understanding the Business Response to the OECD/G20’s Pillar Two Initiative: A Survey Analysis

Our business survey shows how ready businesses are about the OECD/G20’s Pillar Two Initiative.

Aurifer Middle East had the privilege of representing the business community at the UNCTAD’s 8th World Investment Forum held in Abu Dhabi, a reason it conducted a survey for MNE’s operating in the UAE and the Gulf to gauge where businesses stand and their readiness to adapt to the impending changes of the OECD/G20’s Pillar Two Initiative. The data and sentiments captured in this survey were shared in the forum, bringing the GCC business perspective to a global stage.

 Read our survey.

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UAE VAT

Getting your money back from the UAE tax authority

Getting your money back from the UAE tax authority

The UAE has been considered a tax haven for many individuals and businesses, particularly due to its favourable tax regime. Aside from imposing no tax on personal income and personal assets, it only applies a 5% VAT on goods and services, and as low as 9% corporate tax—one of the lowest rates across the world! This is the reason why numerous entrepreneurs, the wealthy or high net worth individuals are drawn to this country. The government is keen to make doing business and living or retiring here as favourable as possible.


In addition, the government also allows easier ways to get VAT refunds for various types of entities, individuals, and organizations—giving them financial relief and attracting them further to invest in and set up a home in the country.


But how exactly do their VAT schemes usually work? We have laid out for you the different types of VAT refunds that exist in the UAE to help you understand how these regimes work.


VAT Refund for Taxable Persons in the UAE

It is obligatory for taxable persons—whether a business, sole trader, or a professional carrying out any economic activity in the country—to file returns at the end of each tax period. Aside from being compliant to the laws and regulations, this also allows them to apply for VAT refund whenever they have a VAT credit. This is provided that the input tax is greater than output tax on a VAT return.

Procedures

According to the Federal Tax Authority, here are the steps to claim for VAT Refund:

  • Login to the FTA e-Services Portal
  • Initiate the form: go to the ‘VAT Tab‘ and then go to ‘VAT Refunds’ tab. Click on
  • ‘VAT Refund Request’ to access the form
  • Fill in details in your Refund Form. Ensure that the information is correct.
  • Click ‘Submit’ button. Once your claim is approved, the amount will be returned within 5 business days.
  • Confirm your balance after the approval

VAT Refund for Business Visitors

This specific Refund Scheme helps business visitors make a claim for refund of VAT settled on the products or services purchased in or from the UAE. The period of each refund claim is 12 months (hence at the earliest after the end of each year). The minimum amount of each refund claim to be submitted will AED 2,000.

Criteria for VAT Refund

  • They have no place of establishment in the UAE
  • They are not a taxable person in the UAE
  • They are registered as an establishment in the jurisdiction where it is established
  • They are from a country that provides refunds of VAT to UAE entities in similar
  • circumstances (reciprocity!)

Requirements

  • A hard copy, original tax compliance certificate in Arabic or English, attested by the UAE embassy in the country of registration
  • Tax invoices
  • A self-declaration in Arabic or English if the applicant undertakes exempt/non-business activities at home
  • Passport copy of Authorized Signatory
  • Proof of Authority of the Authorized Signatory

VAT refund for Tourists

Even the tourists and visitors can enjoy the UAE’s favorable tax refund scheme. These individuals can get VAT refund for their travel purchases in the UAE, through a special device placed at their departure port (airports, seaports, or border ports). They just need to submit the required documents and they can recover VAT from 4,000 participating retail outlets across the UAE.

Criteria for VAT refund

According to the Federal Tax Authority, for a tourist to claim VAT refund on purchases he made in the UAE, he must fulfill certain conditions:

  • Goods must be purchased from a retailer who is participating in the ‘Tax Refund for Tourists Scheme’
  • Goods are not excluded from the Refund Scheme of the Federal Tax Authority
  • He must have the explicit intention to leave the UAE in 90 days from the date of supply, along with the purchased supplies
  • He must export the purchased goods out of the UAE within three months from the date of supply
  • The process of purchase and export of goods must be carried out according to the requirements and procedures determined by Federal Tax Authority.

Requirements

  • Tax-free tags
  • Relevant tax invoices.
  • Boarding pass for air or sea departures
  • Original valid passport or national ID card

VAT Refund for Exhibitions and Conferences

With the aim of enhancing the country’s status as a hub for Meetings, Incentives, Conferences & Exhibitions (MICE), the UAE has allowed businesses or suppliers involved in the industry of exhibitions and conferences to also claim for refund of the VAT charged to their global customers. The scheme is made to guarantee ease of doing business, and to take the burden of tax costs from international customers.

Criteria

  • The Supplier grants either the right to attend or occupy space
  • The Supplier is VAT Registered and has a place of residence in the UAE
  • If Supplier is from overseas, they must provide proof of establishment in an overseas jurisdiction.
  • The Recipient does not have a place of Establishment or Fixed Establishment in the UAE
  • The Recipient is not VAT registered in UAE
  • The Recipient presents written declaration that it has not paid the amount of VAT to the Supplier

VAT Refund for UAE Nationals on New Residences

To provide UAE Nationals monetary relief from building a new residence in the UAE, the government has introduced a refund scheme on VAT incurred on their construction costs.

Criteria

  • Natural person who is a UAE National
  • Must have supporting documentation such as family book
  • Expenses must be related exclusively to the applicant’s new residential construction.

Requirements

  • Copy of Family Book.
  • Copy of Emirates ID.
  • Document to prove building is occupied (e.g., water and electricity delivery bill).
  • Construction contract and completion certificate
  • Refund Form sent to the FTA within 12 months from building’s date of completion

VAT Refund on Charities in the UAE

This VAT refund scheme, amended according to the Capital Assets Scheme, allows certain charities to recover all input tax they paid on their services and supplies. These organizations often create a blend of supplies of products and services where VAT law differ, so if such goods are supplied for a charge, FTA shall deem it as a business activity.

However, tax paid for goods used for making exempt supplies (products or services where the supplier is prohibited from charging VAT), are excluded from this recovery.

Criteria

  • The Charity is on the list of the UAE’s designated Charity
  • The Charity is considered a taxable person
  • The costs related to the activity are liable to VAT
  • Relevant goods or services were not received free of charge
  • For donation concerns, charities must comply with the guidelines issued by the UAE Central bank on Anti-Money laundering and combating the Financing of Terrorism and Illegal organizations

VAT Refund for Mosque construction and operation

The Federal Tax Authority (FTA) in October launched an easier mechanism for the refund of VAT incurred on building and operating mosques. The mechanism includes refunding VAT incurred on mosques on FTA’s e-Services portal, which was formed as a result of the Cabinet Decision No. (82) of 2022 in a bid to offer financial help to mosques—considered the most important place of worship for the progressive Arab nation.

Criteria for VAT refund

  • Complete payment of input tax on services and products connected to the construction of the mosque
  • Proof that competent authorities approved the construction
  • Mosque Operation Commencement Certificate
  • Meeting any of the following conditions:
  • The Mosque has been handed over or is intended to be handed over by the Donor to any other Person for whom the Competent Authority has approved the handover of the Mosque to, including the Competent Authority itself, unless the handover is a Taxable Supply
  • The Mosque is operated by the Donor as per the approval obtained from the Competent Authority.

Requirements

  • Emirates ID or passport
  • Mosque Operation Commencement Certificate copy
  • Bank account confirmation letter/certificate
  • Schedule of expenses incurred for operating the mosque
  • Copy of the five highest value tax invoices.
Categories
UAE VAT

VAT Refunds in the GCC and EU

Categories
UAE VAT

Income Tax, VAT and Excise Tax and Tax Procedures Updates in the UAE – A Breakdown

Income Tax, VAT and Excise Tax and Tax Procedures Updates in the UAE – A Breakdown

We are still awaiting the release of the Corporate Income Tax Law (CIT Law) in the United Arab Emirates (UAE). Meanwhile, there have been a slew of updates and amendments in the months of October and November 2022 in the UAE on the fronts of Income Tax, Value Added Tax (VAT) and Excise Tax. We try and cover the main amendments below.

 

  1. UAE’s new criteria for tax residency:

The UAE issued Cabinet Decision No. 85 of 2022 dated 2 September 2022 (Decision), laying down the criteria for being considered as a tax resident for legal and natural persons. This is the first time that the UAE has formalized tax residency criteria at the Federal level.

The Decision is applicable from 1 March 2023. A legal person is considered a tax resident in the State if any of the following are met:

  • It has been established, formed, or recognized in accordance with the laws and regulations enforced in the UAE, and which does not include branch of a foreign legal entity;
  • It is considered a tax resident under the applicable tax law in the UAE.

It is interesting to note that though this provision does not explicitly refer to the situation where a legal person is ‘effectively managed’ for tax residency purposes, as provided in the Public Consultation Document (PCD) in Paragraph 4.4.

Further, an individual is considered a tax resident in the UAE, if any one of the following are met:

  • His primary place of residence and the center of his economic and personal relations are in the UAE or meets certain criteria and conditions that are determined by the Minister of Finance (MoF),
  • He has been physically present in the UAE for a period of 183 days or more, during a period of 12 consecutive months,
  • He:
    • has been physically present in the UAE for a period of 90 days or more, during a period of 12 consecutive months, and,
    • holds,
      • either the nationality of the UAE,
      • (or) a valid residence permit in the UAE,
      • (or) the nationality of any other Gulf Cooperation Council (GCC) country, and
    • either has a permanent place of residence in the UAE, or a job or business in the UAE.

Given the supremacy of International Law, if any Double Tax Treaty (DTT) specifies any conditions for determining a person’s tax residency, the provisions of that DTT shall apply.

 

  1. Amendments to UAE Excise Tax Law

The FTA also published amendments to the Federal Decree-Law No. 17 of 2017 (Decree-Law) on Excise Tax, effective from 14 October 2022. A summary of the amendments is as follows:

  • An exception is now foreseen from the requirement to register for Excise Tax for the following activities, if not regularly conducted by a Person:
    • Import of Excise Goods,
    • Release of Excise Goods from a Designated Zone.
  • To avail the above exception, the Person is required to inform the FTA of any changes that would subject such person to the registration requirements. 
  • Any Person importing goods for other purposes than conducting business, is also not required to register for excise tax purposes.
  • The benefit of not having to register is without prejudice to the following:
    • The obligation of payment of Due Tax on such import. Persons availing the benefit therefore still to settle the Due Tax when importing the Excise Goods. 
    • The obligation to settle any Due Tax or Administrative Penalty in accordance with the Decree-Law or any other law. 
  • Any amount received by such Person purporting as Excise Tax, or any invoice issued in relation to Excise Tax, is deemed to be Excise Tax due to the FTA and needs to be settled accordingly. This provision is mainly targeted towards taxpayers unduly “charging” excise tax, and therefore profiteering. The practice of mentioning excise tax on an invoice happened sometimes, even though excise tax is not actually chargeable to the customer.
  • Generally, the FTA cannot conduct a Tax Audit or issue a Tax Assessment after the expiry of 5 years from the end of the relevant Tax Period. However, there are now important exceptions to this provision, as below:
    • If the Person is notified of the commencement of the Tax Audit or Tax assessment before the expiry of the 5-year period, provided that the Tax Audit is completed or the Tax Assessment is issued within 4 years from the date of notification of the Tax Audit. 
    • If the Tax Audit or Tax Assessment relates to a Voluntary Disclosure (VD) submitted in the 5th year from the end of the tax period, provided that the Tax Audit is completed or the Tax Assessment is issued within 1 year from submission of the VD). 
    • In cases of Tax Evasion, where the Tax Audit may be conducted or the Tax Assessment may be issued within 15 years from when the Tax Evasion occurred.
    • In cases of failure to register, where the Tax Audit may be conducted or the Tax Assessment may be issued within 15 years from the date on which the Person should have registered.

Where any of the reasons stipulated in the Civil Transactions Law (Federal Law No. 5 of 1985) (Civil Transactions Law), or any other law replacing the Civil Transactions Law occur, the abovementioned Statute of Limitation is to be interrupted (i.e., kept in abeyance).

 

  1. Amendments to UAE VAT Law

 The FTA also published amendments to the Federal Decree-Law No. 18 of 2022 (VAT Law Amendments) where certain Provisions of Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT Law) were amended. The VAT Law Amendments are effective as from 1 January 2023.

A summary of some of the important VAT Law Amendments is as follows:

  • In Article 26(1), which provides for the determination of date of supply in special cases, ‘the date on which one yearhas passed from the date on which goods or services are provided’ has been added as one of the events to determine the date of supply. This means that, apart from the other factors that determine the date of supply, if one year has passed from the date on which the goods or services are provided, Article 26(1) triggers.

According to the Public Clarification issued by the FTA (VATP030), this means that the place of supply of goods supplied under any contract that includes periodic payments or consecutive invoices, shall be the UAE at any time under the execution of the contract.

  • In Article 30(8), which determines the place of supply of services for transportation services, the amendment now includes ‘transportation related services’ within its ambit. This means that the place of supply for ‘transportation related services’ shall also be where the transportation starts.
  • Article 33 was amended and made the words Principal and Agent trade places. According to the Public Clarification issued by the FTA (VATP030), this means that where the activities in the UAE of the agent have as a result that the principal has a place of residence, the principal will be regarded like a regular resident taxpayer, and therefore be subject to the normal Mandatory Registration Thresholds.

The residency criteria for foreign principals is inspired by the legislation covering direct taxes on PEs but includes the holding of stock, which is normally an exclusion under the PE definition in article 5 of the OECD Model Tax Convention. The inclusion of these provisions is not common for VAT purposes.

  • In Article 36, which contains rules for valuation of supplies for related party transactions, the provision now overrides Article 37 (which determines the valuation of deemed supplies). This means that the value of deemed supplies between related parties shall also be the market value, if the following conditions are met:
  • The value of such deemed supplies between related parties is less than the market value,
  • The deemed supply is a taxable supply, and the recipient of goods or services does not have the right to recover the full tax that would have been charged to such supply as Input Tax.

The term “market value” is not an explicit reference to transfer pricing legislation.

Prior to this amendment, the valuation of deemed supplies, based on the total cost incurred by the Taxable Personto make such deemed supplies, was not overridden by Article 36, and hence there was no explicit bar from being applicable to related party transactions.

  • Intended to be of clarificatory nature, in article 45 additional situations are added where the zero rate applies on imports of certain goods.
  • Under Article 48, dealing with the reverse charge mechanism, Paragraph 3 now includes the term ‘pure hydrocarbons’, rather than ‘hydrocarbons’. The term ‘pure hydrocarbons’ has been defined in Article 1 to mean, ‘Any kind of different pure combination of a chemical equation made only of hydrogen and carbon (CxHy).’ This would. for example, exclude hydrocarbons with bonded compounds or impurities of sulphur or nitrogen, such as lubricants and bitumen.
  • Under Article 55, which deals with the recovery of Input Tax, conditions for documentary evidence for claiming input tax on imports have been provided as follows: (i) where goods are imported, the invoices and import documents must be made available, (ii) where services are imported, the invoices pursuant to such import must be made available.
  • Under Article 61, which deals with instances and conditions for output tax adjustments, the amendment now provides that the output tax shall be adjusted after the date of supply, even where the tax treatment was applied incorrectly. This is an important amendment, as this situation was not clear before and is helpful for businesses wanting to correct errors.
  • Under Article 62(2), which deals with the mechanism for output tax adjustment, the amendment provides that a credit note must be issued within 14 days from the date on which any of the provisions of Art. 61(1) occurrs.
  • Under Article 65(4), which provides that where a taxable person issues a tax invoice displaying VAT on the invoice or receiving any amount as VAT, such person will have to pay VAT to the Federal Tax Authority (FTA) on such amount.This provision is usually intended to be an anti-fraud provision and contains the legal basis for the FTA to claim VAT from taxable persons who incorrectly claimed it from customers.
  • Under Article 67, normally an invoice must be issued within 14 days from the date of supply. A clause has been added to provide that the Executive Regulation shall determine cases where the tax invoice must be provided in a different period.
  • Under Article 74, the amendment provides a clarification providing that if no application for recovery of the excess tax is made after the setoff is effected, the excess recoverable tax shall be carried forward to the subsequent tax months.This amendment is a mere formalization of the practice already in place.
  • A new article has been inserted in Article 79 bis on the statute of limitations. This provision is similar to the recent amendments made to the Excise Tax law on the statute of limitation, covered above.
  1. Amendments to VAT Executive Regulations

The FTA also published amendments to the Executive Regulations to the Value Added Tax VAT Law (VAT Executive Regulations Amendments), by way of Cabinet Decision No. 99 of 2022. The VAT Executive Regulations Amendments are effective as from 1 January 2023.

The major changes in the VAT Executive Regulations Amendments are:

  • In Article 3, a new provision is added, which states that functions performed by a natural person who is a member of a board of directors in any government entity or private sector entity, shall not be considered a supply of services. This means that no VAT is due on the income received by the natural person in his capacity as a board member. This not the case when the income is received by a legal person.
  • In Article 72, a provision has been added which states that where the value of taxable supplies made by a taxable person through electronic commerce exceeds AED 100,000,000 (the equivalent of approximately 27,2 M USD) during the calendar year, such taxable person must keep records of the transaction, to prove the Emirate in which the supply is received. The timeframe for such record keeping is as follows:
  • (From the first tax period that begins on or after 1 July 2023) – 18 months, where the Threshold is met, for the calendar year ending 31 December 2022.
  • (From the first Tax period of the calendar year that begins after the date of which the Threshold is met) – 2 years commencing from the tax period.

The record keeping provisions will likely go hand in hand with amended Emirate reporting requirements.

 

  1. Key takeaways, trends and final thoughts

By and large, the changes and the amendments have been issued in light of the Government’s intention to further improve the ease of doing business in the UAE and further the UAE’s reputation of an ideal jurisdiction for Multinational Enterprises (MNEs).

With the formalization of the tax residency criteria, the building blocks of the upcoming, and perhaps imminent, CIT regime have been laid down.

Certainly, one of the most significant amendments has been to the extension of the Statute of Limitation right before some of the claims become time barred. There is also a strong emphasis on measures to counter tax evasion.

Together with the relaxation of the penalties regime last year, and a more rewarding Voluntary Disclosure regime, the face of taxes has evolved since 2017. The new rules will be tested at the event of the five year anniversary of VAT and the implementation of Corporate Income Tax.  

 

Categories
UAE VAT

Almost 5 years down the line for VAT in the GCC – what’s next?

Almost 5 years down the line for VAT in the GCC – what’s next?

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states – and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it’s all not all ‘sticks’ with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance – a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We’ll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

Categories
UAE VAT

Year end checklist

Categories
UAE VAT

UAE VAT Business Refund – File before 31 August 2020 for 2019 expenses

UAE VAT Business Refund – File before 31 August 2020 for 2019 expenses

The deadline for claiming 2019 expenses under the Business Refund Scheme in the UAE expires on 31 August 2020. Attached is an overview of the requirements and the relevant deadlines for all GCC countries which have implemented VAT.

Categories
UAE VAT

eCommerce and UAE VAT Webinar

eCommerce and UAE VAT Webinar

With the publication of an e-Commerce guide and a well established practice since the introduction of VAT on 1 January 2018, this webinar looks at the different aspects of VAT applicable on aspects of e-Commerce. We will give practical examples and show how to comply in practice with the rules. Given the enormous importance of the e-Commerce in the region, this webinar is a must attend for all tax practitioners.

Categories
UAE VAT

UAE considerably restricts application VAT zero rate on services

UAE considerably restricts application VAT zero rate on services

The UAE introduced VAT with effect from 1 January 2018. It based its legislation on the GCC VAT Treaty, which is based on the EU VAT directive, and loosely on a few other jurisdictions. The rules were established in 2017. These were untouched until recently. 

For the first time in 2.5 years after the introduction of VAT, the United Arab Emirates (‘UAE’) updated its legislation. The UAE’s Federal Tax Authority (‘FTA’) published an updated version of the VAT Executive Regulations (‘ER’) to the VAT Federal Decree-Law. 

The updated version incorporates the changes as per a new Cabinet Decision No. 46 of 2020 (Official Gazette issue 680 of 2020 published on 15 June 2020). The updated version amends one article (article 31 (2)) and improves the English translation in a number of places (e.g., article 51 (5) and article 70 (4). It has flagged only the amendment  and not the improvements to the translation. According to the UAE constitution, the amendments enter into effect one month after publication.

This article discusses the change, compares it with KSA and the EU, and analyses the practical complexities and formalities.

Restricting the scope of zero rated exported services 

The UAE Federal Cabinet decided to amend one single, but important word. It changed “or” into “and”. The amendment was made to the conditions for considering a recipient “outside of the State”. That condition is necessary in order to consider the services “exported” and therefore zero rated. The amendment highlighted by the FTA was made under Article 31 (2). 

For the purpose of paragraph (a) of Clause (1) of this Article, before the amendment the law said, a Person shall be considered as being “outside the State” if they only have a short-term presence in the State of less than a month, or the only presence they have in the State is not effectively connected with the supply. 

Now, after the change in law, for the purpose of paragraph (a) of Clause 1 of this Article, a Person shall be considered as being “outside the State” if they only have a short-term presence in the State of less than a month and the presence is not effectively connected with the supply.

Article 31 (2) and (3) of the UAE VAT ER were inspired by the New Zealand GST Act. This can be rather ascribed to a coincidence than a conscious policy choice. Conceptually the NZ GST Act is very different from the GCC VAT Treaty, which is based on the European Union VAT directive (in the UK sometimes informally referred to as the “Principal VAT Directive”). 

The NZ’s GST Act also says for the same provision “or”, like in the original text of the UAE VAT ER (see Article 11 A 3 of the NZ GST Act). Note that the examples given by the NZ tax authority for the application of the condition under which the zero rate cannot be applied are very simple, showing that the intended reach is not wide (see https://www.ird.govt.nz/gst/charging-gst/zero-rated-supplies, consulted on 9 July 2020).

How are services ‘exported’?

To the experienced European VAT adviser the term “exported services” sounds like a badly tuned violin. Yet it is what is referred to as the situation where a service supplier has a customer who is not established in the same country. In that situation, the taxation rights are for the country of the customer, and not the supplier. 

In the UAE, this is translated into a long list of requirements. A supply is ‘zero rated’ when the service is supplied to a recipient who does not have a place of residence in an implementing state (GCC countries) and is outside the State at the time the service is performed. Additionally, the service must not be supplied directly in connection with real estate or moveable personal assets situated in the UAE. 

Furthermore, services are also subjected to the zero rate in the UAE if they are actually performed outside the implementing states or are the arranging of services that are actually performed outside the implementing states (note that these conflict with the place of supply rules and also overlap with article 54, 1, b of the UAE VAT law). If the supply consists of the facilitation of outbound tour packages, it can also be zero rated.

It is important to note that currently, the UAE does not recognize any of the other GCC countries as an ‘implementing state’. Therefore, ‘outside the State’ also includes customers with a place of residence in other GCC countries.

Comparing zero rates for “exported services”

As a comparison, article 44 of the EU VAT directive simply locates any service rendered to a taxable person abroad in the other country. This place of supply rule is the equivalent of the so-called “export of services”. There is no further restriction to this rule, except to prevent double taxation (article 59a of the EU VAT directive). The “best in class” is therefore very liberal in awarding the ‘zero rate’ to services rendered to a recipient outside of the country of the supplier, when the customer is a taxable person.

Article 45 of the same EU VAT directive locates services which are not rendered to a taxable person in the country of the service supplier (unless amongst others article 59 applies).

The export of services in the UAE applies, irrespective of the status of the customer, whereas in the EU it only applies when dealing with a business customer. If the UAE wanted more revenue, then this was perhaps a place to look for it.

The GCC VAT Treaty prescribes almost the exact same thing as the EU VAT directive and is almost identical in its wording (see articles 15 and 16 of the GCC VAT Treaty, which bear very strong similarities with respectively articles 45 and 44). 

The GCC VAT Treaty may however have induced some people in error by using the word ‘taxable customer’ in article 16, which is not a defined term and which should be read equally broad as the term ‘taxable person’ in the Treaty. Note that the GCC VAT Treaty knows no so-called ‘export of services’ and therefore, the rules were likely to be intended to apply as in the EU.

The GCC VAT Treaty does have a cryptic article 34, d, which can actually be considered unnecessary as it solely confirms the rules as they are described above in the Treaty.

KSA has been struggling with the same provision from the GCC VAT Treaty, although it conveniently and surprisingly simply incorporated a Treaty into its domestic laws. 

It initially translated article 15 and 16 of the GCC VAT Treaty into article 33 of the Implementing Regulations differently. In July 2019, KSA amended amongst others article 33 to make it more liberal, and closer to the Treaty. KSA wanted to make it less strict to apply the zero rate. Unfortunately though, in practice many businesses in KSA are still very conservative in applying the zero rate, for fear of making a mistake. The VAT rate hike to 15% now puts additional pressure on this conservative position.

Impact of the change – ‘and’ and ‘or’ make a great difference

Since VAT entered into force in January 2018, Article 31 of the UAE VAT ER has been a recurring topic of discussion. 

Confusion still reigns in a number of situations to decide whether or not to apply the zero rate to a supply made to a client situated outside the UAE. One notable example is that the service provider may not always know the exact set-up of the client (e.g. does the client have a branch in the UAE?).

By replacing the word ‘or’ with ‘and’ in Article 31 of the UAE VAT ER, the UAE narrowed down the possibilities of considering a customer as being outside the UAE for VAT purposes. This move indicates that the legislator expects more situations where businesses restrict the application of the zero rate on their transactions.

For example, under the new rules, possibly a UAE established and VAT registered service provider will have to refrain from zero rating a supply of services to a foreign client who attends one single meeting in the country, which is connected to the services received. 

Vacationing in the UAE is allowed up to 30 days, but the slightest business air that the stay gets, or over staying one day, will make the service provider consider the client as established in the UAE.

The foreign client will then get caught in a situation where it might have to evaluate the extra 5% cost on top of the agreed price for the service.

Even though the UAE has implemented a business refund scheme for non-resident businesses similar to the business VAT refund scheme available in the European Union, the requests take a long time to process, and the approval is not guaranteed. 

Additionally, foreign businesses 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 (the so-called reciprocity condition). The refund request is available only for countries that are specified in a list published by the FTA. 

This one-word amendment might therefore have far reaching consequences. Service providers who are already cautious to apply the zero rate will stay on the side of caution even more. In a number of cases, i.e. cases where no refund is available to the foreign business, it will simply make doing business 5% more expensive. 

The UAE Ministry of Finance denied wanting to increase the VAT rate in the UAE, as KSA did recently when it hiked its standard rate up to 15%. One can imagine the additional cost if it did. The UAE therefore adds itself to a list of countries which favor tax revenue. Adding taxes to ‘exported services’ makes domestic service providers less attractive.

Furthermore, it is also not clear if this change to Article 31(2) intends to prevent the zero rate on supplies made to foreign customers who have a fixed establishment in the UAE (e.g., branch or representative office).

Formally prove your client is outside the State

Perhaps I draw too much from the legislation of the old continent, but it remains the system with the longest experience. In the EU, it suffices that your customer has a foreign VAT number to consider him outside of the state of the service supplier. If the customer is outside the EU, the supplier can use a certificate issued by the client’s tax authority, a VAT number or similar, or any other proof to determine the customer is taxable (Article 18 Council Implementing Regulation No 282/2011 of 15 March 2011).

The UAE’s legislation does not have such criteria, and the tax authority has not stated much in this respect. The supplier is left to his own discretion and will try to collect proof of the establishment of his client abroad. However, there’s only so much one can do. Rechecking the client’s status every time an invoice is issued, may increase the burden on a supplier considerably.

Proving that the conditions for exporting a service are met, is up to the supplier. If the FTA wants to audit these conditions, we may end up in a situation where a supplier needs to give an impossible negative proof, e.g. prove to me that the client did not come to the UAE. How does one do that, other than having the client declare that he did not come. Auditing this point will prove very tricky.

Are you inside the State for the export of services but inside the State for input tax recovery?

The change created ambiguity because the same expression is also defined under Article 52 (2) of the UAE VAT ER. However, this Article was not amended by Cabinet Decision No 46 of 2020.

Article 52 of the UAE VAT ER provides rules for the input VAT recovery in respect of exempt supplies and should be read in conjunction with article 54 (1) (c) of the UAE VAT law, which provides that input tax is recoverable if incurred in respect to supplies that are made outside the State which would have been treated as exempt had they been made within the UAE. 

According to Article 52 (2) of the UAE VAT ER, “a Person is outside the State even if they are present in the State, provided it is only a short-term presence in the State of less than a month, or that his presence is not effectively connected with the supply.”

The interpretation of this stand-alone extract could lead one to think that the legislator intended to give businesses a stricter approach to zero-rate a supply while providing a broader understanding when granting input tax credit.

It is not likely that the legislator wanted this, but the truth is that once Cabinet Decision No 46 of 2020 enters into effect, the UAE VAT legislation will have two different understandings of the term “outside the state.”

Small word big change

The small change made to the UAE VAT ER via Cabinet Decision No 46 of 2020, is expected to have a significant impact on resident and non-resident businesses operating in the country. 

It added an additional layer of administrative burden on UAE suppliers who now have to prove to the tax authority that their customers are outside the UAE as per the new definition of Article 31 (2) of the UAE VAT ER.

Service providers in the UAE, including consultancy firms and law firms who provide services to non-residents businesses must carefully review their transactions and put in place additional administrative mechanisms to ensure that the zero rate is applied only where the conditions of Article 31 are entirely fulfilled. 

Foreign businesses who source services in the UAE must also be aware of the new rules and the risk of incurring 5% extra costs on the services received in case they are not considered as being outside the State at the moment the service is provided.

These businesses need to assess the impact of these amendments on their operations and take the necessary actions to be fully compliant with the new VAT requirements.