Category: UAE VAT

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UAE VAT

Ramadan generosity can be costly for VAT

Ramadan generosity can be costly for VAT
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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. 

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UAE VAT

UAE VAT for foreign businesses

UAE VAT for foreign businesses
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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.

 



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UAE VAT Uncategorized

UAE Taxman Confirms VAT Due from Transportation Companies

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UAE Taxman Confirms VAT Due from Transportation Companies

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A last-minute public protest against the UAE’s implementation of VAT by leaders of the gold and diamond industry is heartfelt, but also reflects widespread uncertainty over the new tax, practitioners said.

 

Dubai’s status as a world trading hub for gold and diamonds could be threatened by the introduction of VAT in January 2018, industry leaders warned in the first high-profile protest against the new tax. They urged government officials to apply a zero tax on loose diamonds and gold when they publish the executive regulations for the tax.

 

The value of the UAE’s diamond trade in 2016 was $26 billion, up from $300 million in 2002, making it the third-largest wholesale market in the world after Antwerp and Mumbai, said Peter Meeus, chairman of the Dubai Diamond Exchange. “This story should continue in the next decade and all the odds are in favor of further growth. However, the announcement of a possible introduction of VAT on loose diamonds would strongly jeopardize this,” Meeus told the Dubai Diamond Conference Oct. 16 in remarks first reported by Khaleej Times.

 

The UAE and Saudi Arabia are set to lead the six nations of the Gulf Cooperation Council in introducing VAT from January 2018, with the other members following within 12 months, according to an agreement reached last year. The Gulf states are seeking to replace lost revenues from oil, whose price has fallen by about half since 2014.

 

Industry Concerned

 

“The introduction of VAT here in the UAE next year—though lowest in the world—leaves our member companies and even industry generally concerned,” Ahmed bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC), told the conference, adding that volumes in the Dubai gold market were “down 30-40 percent compared to 2016.”

 

“I’m already aware of two gold refineries in the UAE looking to move to Hong Kong. This sends a very negative message if it becomes a reality. Diamonds and gold are critical for Dubai, jointly accounting for $75 billion annually,” Bin Sulayem said, comparing the UAE to Germany and the Netherlands, which he said had hosted Europe’s largest gold and diamond markets respectively until the introduction of tax caused them to migrate to Luxembourg and Belgium.

 

Under Art. 45 of the Federal Decree Law No. (8) of Aug. 23, 2017, the “supply and import of investment precious metals” is zero-rated, but it isn’t clear if that applies to jewelry. The Ministry of Finance is “still in the process of preparing the executive regulation of VAT,” said Younis Haji Al Khoori, Ministry of Finance undersecretary, in an Oct. 17 online statement.

 

The jewelry industry has faced similar issues in India, where a 3 percent general sales tax was introduced in July. “Small businesses are being heavily impacted by compliance issues and we are hoping the government will move to reduce these demands,” said Praveen Shankar Pandya, chairman of India’s Gem and Jewellery Export Promotion Council, according to a DMCC online post on Oct. 11.

 

The comments by Meeus and Bin Sulayem are “the most vocal challenge to date” against the introduction of VAT in the UAE, said Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai.

 

“As demonstrated by historic precedent, the diamond and gold trade is a highly mobile market which is very sensitive to taxation,” Vanhee said by email on Oct. 19. “In the diamond center of the world in Antwerp, sales of diamonds to traders and services associated with the sale of these diamonds are subject to a zero rate.”

 

“Because of the high sensitivity to taxation, the gold and diamond sector will be more at unease than other sectors,” he said. “However, the UAE economy as a whole is currently nervously waiting for the VAT Executive Regulations to be published by the Federal Tax Authority and there is a certain amount of unrest with companies on how VAT will apply to their specific businesses.”

 

Too Late?

The jewelry trade is “unfaithfully mobile,” said David Daly, an accountant and lead partner at Argent Gulf Consulting in Dubai. “Unlike the City of London where a material amount of finance jobs couldn’t practically be moved in reaction to a change, the same doesn’t hold in the gold and diamond market,” Daly said by email on Oct. 18.

 

Even though there is some justification for their concern and the executive regulations aren’t yet finalized, the jewelry executives had left their protest very late, he said.

 

“VAT was formally announced at the beginning of Q3-2016. The question we should ask is why these conversations are happening now, over twelve months later,” he said. “The reality is that most entities are either ignorant of VAT, believe the government will withdraw its launch at the last moment, or refuse to act until the final detailed legislation is released in the executive regulations. Surveys suggest that only 30-40 percent have in any way begun preparing for VAT.”

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UAE VAT

VAT public clarification on Tax Invoice

VAT public clarification on Tax Invoice
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VAT public clarification on Tax Invoice

VAT public clarification on Tax Invoice

The United Arab Emirates’ (“UAE”) Federal Tax Authority (“FTA”) has published a new Value Added Tax (“VAT”) public clarification on tax invoice requirements. The new public clarification is relevant to all businesses making taxable supplies and provides further clarity on the issuance of tax invoices.

VAT Public Clarification VATP006 addresses the application of article 59 of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree Law No. (8) of 2017 on Value Added Tax, which sets out the requirements for when a tax invoice must be issued and the particulars that must be included.

A tax invoice can be defined as a written or electronic document in which the occurrence of a taxable supply is recorded with details pertaining to it and is generally issued by the supplier of goods or services.

The tax invoice plays a crucial role for the supplier as it may dictate the date if supply, thereby determining the tax period in which the output VAT is to be paid. On the other hand, a recipient will need the VAT invoice for the recoverability of the input VAT. 

The Federal Tax Authority (FTA) prescribe certain criteria for who is obligated to issue a tax invoice.

    • VAT registered person making a taxable supply (excluding zero rated supply)
    • VAT registered person making a deemed supply

The FTA requires suppliers to issue the tax invoice within 14 calendar days of the date of supply, providing flexibility to compound multiple monthly transactions for the same customer under a single invoice.

As per the FTA guidelines, there exist certain situations when the obligation of producing the tax invoice is shifted from the supplier. It may be the responsibility of the recipient to issue a “Buyer-created tax invoice”. In cases of consignment of goods to an agent, the agent may issue a tax invoice in relation to that supply with the particulars of the agent as if that agent had made the supply of goods or services itself with a reference to the principal supplier (e.g including the supplier’s name and tax registration number “TRN”).

Where the recipient is not registered for VAT, or where the recipient is registered for VAT and the consideration for the supply is under AED 10,000, optionally a simplified tax invoice can be prepared with requirements as follows:

  • the words “Tax Invoice” clearly displayed on the invoice; 
  • the name, address, and TRN of the registered supplier;
  • the date of issuing the tax invoice;
  • a description of the goods or services supplied; and
  • the total consideration and the VAT amount charged.

In addition to the above, supplies over AED 10,000 necessitate additional requirements for a full tax invoice as follows:

  • where the customer is registered for VAT, the name, address, and TRN of the customer;
  • a sequential tax invoice number or a unique invoice number;
  • the date of supply (where different from date of issue of the tax invoice);
  • for each good or service, the unit price, the quantity or volume supplied, 
  • the rate of VAT and the amount payable expressed in AED;
  • the amount of any discount offered;
  • the gross amount payable expressed in AED;
  • the tax amount payable expressed in AED together with the applied exchange rate; 
  • where an invoice relates to a supply under which the recipient is required to account for VAT, a statement that the recipient is required to account for VAT, and a reference to the relevant provision of the Law.

The public clarification clarifies that there is no requirement for line items to be shown on the simplified tax invoice at a net value. This means that the total gross amount and the VAT amount should be stated in separate lines at the bottom of the simplified tax invoice. 

However, for full tax invoices, the line items must show the tax value and net value, but there is no need to present the gross amounts for each line item as this is reflected in the total gross amount payable.

Whenever a taxable supply is made, a tax invoice must be issued and delivered to the recipient. If the conditions for a simplified tax invoice are met, then a simplified tax invoice can be issued and delivered instead. It is not acceptable to offer only an option of providing an invoice upon request and thus not provide one if the customer does not request one. A tax invoice must be provided in all circumstances where a taxable supply is made. 

However, the Cabinet Decision No. (3) of 2018 on Tax Invoices provides issuers of tax invoices the flexibility of using the mailing address of the recipient as an alternative to their physical address.

Furthermore, the clarification requires that all tax invoices must have the tax amount converted and stated in UAE Dirham even if the transaction is made in some other currency. The invoice may still contain information regarding prices in the original currency. The exchange rate used must be a rate determined by the UAE Central Bank. 

Another important thing to note for a tax invoice is the rounding of amounts to the nearest Fils (that is up to two decimal places) where the invoice amount is a fraction of a Fils (1 Dirham = 100 Fils). The clarification guide instructs to follow the mathematical principles for rounding off. The general rules for rounding off are as following,

  • If the number you are rounding is followed by 5, 6, 7, 8, or 9, round the number up. 

Example: 4.5387 rounded upto 2 decimals as 4.54

  • If the number you are rounding is followed by 0, 1, 2, 3, or 4, round the number down. 

Example: 6.7234 rounded to 6.72

This publication is important as the tax invoice process is relevant to all businesses making taxable supplies, and tax invoices received must be compliant with the UAE’s VAT legislation to enable input tax recovery on the VAT return. In this regard, it is important to note that these requirements are mandatory rather than optional.

Failure to comply with the stated requirements can have a number of implications for the business, ranging from commercial (such as the customers may not be entitled to a Tax Credit for VAT incurred), to the imposition of penalties for the failure to issue and deliver compliant tax invoices. The FTA has prescribed a penalty of AED 5,000 for each tax invoice in case of failure by the taxable person to issue a tax invoice when making any supply. 

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VAT survey shows the tax authorities are very active

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VAT survey shows the tax authorities are very active

Read our survey showing how 23% of businesses surveyed got fined already and 7% got audited.

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UAE VAT

VAT update seminar 10 September

VAT update seminar 10 September
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VAT update seminar 10 September

VAT update seminar 10 September

Come to our VAT update seminar on 10 September 2018 to catch up on the latest VAT developments

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UAE VAT

Dawn of new tax era – Corporate perspectives

Dawn of new tax era - Corporate perspectives
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Dawn of new tax era - Corporate perspectives

Dawn of new tax era – Corporate perspectives

Following the implementation of VAT in the UAE from 1 January this year, this briefing outlines the impact of the new regime in respect of M&A transactions and directors’ duties. This briefing also highlights the potential impact of the UK’s recently implemented corporate criminal offence of tax evasion.

BACKGROUND

In a move to diversify state revenues away from hydrocarbons, the GCC member states have turned their attention to introducing VAT (and excise tax) as an effective method of raising alternative state revenues. Accordingly, on 27 November 2016, all Member States of the GCC agreed to sign the GCC VAT Framework Agreement (Common VAT Agreement), a multilateral treaty which introduced a legislative framework for the implementation of VAT in the GCC region. The GCC VAT system is a traditional VAT system, which draws inspiration from the European VAT directive. According to the treaty, all GCC countries are expected to implement VAT in their domestic legislation by 1 January 2019. The UAE and the Kingdom of Saudi Arabia emerged as frontrunners by opting to introduce VAT as early as 1 January 2018. Since last April we have seen a host of UAE legislation issued to ensure implementation of the UAE’s VAT regime at the start of this year. More recently Cabinet Decisions have been issued confirming, amongst other matters, the status of the UAE Designated Zones, which receive different VAT treatment under the regime.

VAT OBLIGATIONS OF REGISTERED BUSINESSES

It goes without saying that the introduction of VAT will have a significant impact on businesses in the UAE, and Saudi Arabia. Businesses which were previously operating in a virtually non-tax environment will now have to comply with various obligations imposed by the VAT legislation. Not only will businesses have to register and charge VAT to their customers, they will also have to prepare and submit periodic VAT returns and pay VAT to the competent tax authorities. Furthermore, businesses will have to issue compliant invoices and comply with extensive accounting obligations.

VAT’S IMPACT ON M&A TRANSACTIONS

Asset sales

The transfer of a business as a going concern (TOGC) may include the sale of assets that could otherwise be treated as taxable supplies and therefore give rise to a VAT liability. However, under the UAE VAT legislation, a TOGC is not regarded as being a supply of goods or services for the purposes of VAT where the whole or an independent part of a business is sold to a Taxable Person for the purpose of continuing that business. In determining whether a proposed asset sale will fall within the TOGC exemption, there will be a number of factors to consider. In lieu of established practice at this stage, it may be helpful to draw comparisons from other regimes such as the UK. For instance, positive factors suggesting TOGC treatment on a transfer assets would include:
The assets (along with accompanying liabilities) comprise clear independent operations from other parts of the business (shared services are unlikely to be a fatal factor in themselves)
The assets represent a going concern presently and are capable of being operated separately (this would not require the business to be profitable)
The assets have been used to make supplies, not merely used for the overheads of the business
The purchaser will use the assets to run the same type of business without a significant break in trading (although changes to the operation of business, types of products sold etc are typically acceptable in jurisdictions such as the UK). 

In addition, for TOGC treatment, the seller should be a Taxable Person (ie have a VAT registration number) and the purchaser must be a Taxable Person already or become one as the result of the transfer. Transfers within a VAT group are also likely to be outside of the scope without the need to consider TOGC treatment. Cross border transfers will need to be carefully considered – the export rules may apply rather than TOGC and intra-GCC (other than KSA) may remain relatively complicated during the period before full implementation across the region. Where there is uncertainty, a referral to the FTA may be considered, although there is no requirement to do so. In the early years of implementation, until a body of practice has developed, parties may wish to adopt a cautious approach in making such referrals. We understand that the FTA will be developing a ruling practice which can be used to that effect. 

Share sales

Similarly, the sale of shares would fall outside of the VAT rules since such transactions would not be an example of a taxable good or service for business/consumption purposes. Entities that buy and sell securities by way of business should benefit from the financial services exemption relating to the issue, allotment and transfer of equity and debt securities detailed in the VAT Executive Regulations. We are not aware of any present intention to introduce a stamp duty on share transfers.

SPA considerations

VAT covenants and warranties will likely now be expected by purchasers of businesses in the GCC. This will mean, unlike sale processes prior to VAT implementation, a review of tax compliance and future liabilities will now typically be included as part of the diligence phase. A typical tax indemnity on a share transaction seeks to allocate liability for historical tax compliance and warranties would also be sought dealing with issues such as due registration with a tax authority and that no investigations/judgments are pending. Additional provisions may be required if the target is in the seller’s VAT group. Such contractual protections would be different on an acquisition of assets where the seller would generally retain such risk. Nevertheless, the VAT impact on business revenues will remain a key area of focus which sellers may be expected to provide warranties against. From a financial side, transactional analysis would also need to include consideration of VAT assets and liabilities on the balance sheet, the accounting provisions regarding receivables and any outstanding claims or amounts due from the tax authority.

HARSH PENALTIES IN CASE OF INFRINGEMENTS OF THE VAT LAW

To ensure that all taxpayers comply with these extensive obligations, the competent tax authorities in each Member State have been granted the power to impose substantial administrative fines. In addition to these administrative fines, the tax authorities may impose more severe penalties (eg prison sentences) in case of infringements that are considered tax evasion. Moreover, the tax authorities may claim any VAT which is due as a result of incorrect reporting or wrongly deducting input VAT.

WHO IS LIABLE FOR PENALTIES?

Businesses will face a high risk of financial exposure in case of non-compliance with their VAT obligations since they will be liable for any VAT debts or penalties vis-à-vis the tax authorities. Unlike in other jurisdictions, tax procedure laws in the GCC do not provide for a joint personal liability in respect of company directors, executives, managers or any other officers who are responsible for the day-to-day management of the company (Company Executives). In Europe on the other hand, Company Executives can be held liable by the tax authorities in case the company does not comply with its VAT obligations (eg non-payment of VAT or penalties by the company) or in situations where the company has incurred a VAT liability or penalties as a result of the shortcomings of a Company Executive. The ability for tax authorities to pursue Company Executives provides them with an additional opportunity to collect VAT in case of company insolvency and puts additional direct pressure on company directors. By way of illustration, we have included an overview of the applicable liability regimes for a selection of European Member States:

  • In the UK, HM Revenue & Customs (HMRC) has the ability to pursue a Company Executive personally for any penalties that it has been unable to collect from the business, provided that it can prove that the error was a deliberate and dishonest attempt by a Company Executive to evade VAT
  • In Belgium, Company Executives can be held jointly liable in case of a civil error which gave rise to the non-payment of VAT
  • Luxembourg only recently introduced a personal liability for Company Executives (as from 1 January 2017). Company Executives can now be held personally and severally liable in the event of a breach of VAT compliance obligations and/or non-payment of the VAT which is payable by the company which they manage.
 However, given the breadth of directors’ duties under the UAE’s Commercial Companies Law, which are owed to the company, shareholders and third parties, including in relation to errors in management, it is possible that the FTA could seek to impose penalties against directors, particularly where such penalties relate to tax evasion.


NEW EXTRA-TERRITORIAL UK CRIMINAL OFFENCE OF FAILURE TO PREVENT THE FACILITATION OF TAX EVASION

In the context of the UAE’s new tax regime, it is noteworthy that the UK has enacted a new corporate criminal offence of failing to prevent the facilitation of tax evasion by employees and other associated persons. Reflecting a trend to extra-territoriality in UK legislation in recent years, the offence is highly extra-territorial, applies to businesses worldwide, and can apply to the evasion of non-UK taxes as well as UK taxes. The only defence available is for businesses to show that reasonable procedures are in place to prevent facilitation of tax evasion. The offence came into effect from 20 September 2017.


With the advent of the UAE’s tax laws, the extra-territorial scope of this UK criminal offence creates new risks for UAE businesses and UK group companies with UAE holdings. For instance, an offence would be committed if an employee of a UK company deliberately facilitated tax evasion in the UAE. An offence would also be committed if an employee of a UAE (or any other internationally incorporated) entity facilitated tax evasion in the UK. The penalty for being successfully prosecuted under one of these offences is an unlimited fine. However, there is also the risk of considerable reputational damage and there could be potential regulatory consequences for regulated businesses (eg loss of a regulatory authorisation as no longer deemed to be a fit and proper person).

CONCLUSION

Following the introduction of VAT, businesses will be forced to comply with a large number of obligations imposed by VAT and tax procedure laws. The tax authorities have been granted the power to impose administrative fines and other penalties to ensure compliance with these extensive obligations. VAT and VAT liability should therefore be factored in as part of any share or asset purchase diligence processes and documentation. The VAT regime should also be considered in the day-to-day context of a business’ overall liability and the scope of the penalties serve to underline the importance of being fully compliant with VAT legislation in order to avoid the risks of sanctions and/or additional VAT assessments. Taxpayers should carefully consider their VAT position, review their contracts to ensure VAT risk is allocated appropriately, implement efficient processes, and properly monitor their VAT obligations to ensure compliance with the VAT law. Further, given the potential scope of director liability, businesses may want to plan ahead and verify agreements with directors and their liability insurers. In respect of UK tax evasion, businesses may also wish to consider conducting risk assessments in respect of their controls, policies, procedures and provide training to prevent falling foul of the new extra-territorial offence.
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UAE VAT

UAE VAT and entertainment – entertaining distinctions leading to less festivities

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UAE VAT and entertainment – entertaining distinctions leading to less festivities

Practitioners asked for it and here it came, another clarification. The UAE’s FTA published its fifth public clarification, this time on entertainment expenses.

Article 53 of the UAE’s Executive Regulations prevents the recovery of input VAT on entertainment expenses. The FTA distinguishes entertainment expenses for employees and non-employees.

VAT on entertainment expenses provided to non-employees, such as accommodation, food and drinks not provided during a meeting and access to shows or events, or trips provided for the purpose of pleasure or entertainment, is not recoverable. 

This very strict and conservative position disallows pharmaceutical companies inviting their buyers to a conference in a hotel to deduct input VAT. A dealer holding a launch party for a new car model will also be prevented from recovering the input VAT on the food, drinks, band, etc. although it is clearly done with the objective of increasing sales. It is however allowed to provide potential customers with gifts (although these could constitute deemed supplies for which VAT is due).

For employees, VAT on employee expenses is recoverable if there is a legal obligation, a contractual obligation or documented policy (and a proven business practice) or a deemed supply which is accounted for. 

The hotel stay paid to a new joiner before this joiner finds his own home is a recoverable expense. However, the lunch or dinner for employees (e.g. Iftar) is not.

Simple hospitality does not block you from recovering input VAT. Expenses qualify as simple hospitality:
– when the hospitality is provided at the same venue as the meeting
– if the meeting is interrupted only be a short break
– if the cost does not exceed internal policies
– there is no additional entertainment accompanying the food and beverages

A gala dinner where food and refreshments are considered to be so substantial that they constitute an end in themselves, will be considered as an entertainment expense.

Importantly, for conferences and business events, if a fee is charged for attendance input VAT is deductible, if not the catering services will not be deductible.

There are some interesting distinctions as well for sundry and pantry expenses. Tea and coffee is generally deductible, as well as flowers, chocolates and dates.

For staff parties no VAT is recoverable, neither for service awards, retirement gifts, Eid gifts, etc.

The clarification was much needed, as audits in the past few months have shown diverging interpretations of the term entertainment expenses. 

Although seemingly anecdotal in nature, the business versus entertainment nature of expenses has proven controversial in all VAT jurisdictions around the world. It has lead to (Administrative) Supreme Court decisions in various countries.

It can be expected in the UAE that it will also be subject to controversy. Businesses will have to review their expense policies again as a result of the publication of this clarification. Especially documenting certain employee expenses will allow them to still recover the input VAT.

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UAE VAT

U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

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U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

The U.S., the European Union, and Switzerland are challenging the legality of excise taxes on carbonated and energy drinks by Bahrain, Saudi Arabia, and the United Arab Emirates.

The three Gulf countries began applying a 50 percent excise tax to carbonated drinks except water and a 100 percent tax to energy drinks and tobacco products in 2017. The Kuwaiti government said in May that it would accelerate plans to impose similar measures. The measure is supposed to reflect the impact on health but is actually ‘‘discriminatory,’’ with shoppers opting for similar local products that are now cheaper, said Taina Sateri, a trade counselor at the EU delegation to the UAE in Abu Dhabi. ‘‘Consumers have not necessarily reduced consuming these products but have changed their consumption habits to similar types of products which have escaped the tax,’’ Sateri said in a July 19 email.

Fruitless Talks 

The EU has been raising the issue with its Gulf Cooperation Council partners since the GCC framework agreement came to light in 2016, according to Lucie Berger, head of trade and economic affairs in the GCC at the EU delegation in Riyadh. After months of fruitless bilateral negotiations, the U.S., EU and Switzerland turned to the World Trade Or- ganization, most recently at the Council for Trade in Goods on July 3. ‘‘Since the introduction of the selective tax, the industry has noted considerable decline in sales of their products,’’ Berger said in a July 20 email. The tax had a ‘‘severe impact’’ on the sales of energy drinks in Saudi Arabia and slowed sales growth in soft drinks, Euromonitor confirmed in February. Consumers are ‘‘shifting to cheaper products that contain often higher level of sugar and other ingredients such as caffeine,’’ Berger said, adding that the 50 percent and 100 percent tax rates are ‘‘unprecedented’’ and far exceed the 20 percent recommended by the World Health Organization. ‘‘Without scientific evidence, it is difficult to understand why some products have been included—such as sugar free products, or flavored carbonated water— while other products are not subjected to the tax, such as juices or caffeinated drinks,’’ she said.

‘‘The EU understands the need to promote a healthy diet through a variety of tools, taxes included. Taxes should ideally be designed in a way to help consumers make healthier choices, while this particular tax might potentially be discriminatory, pushing consumers towards cheaper—and not healthier—alternatives,’’ she added.

Protecting Health? 

While the Gulf states argue that the excise taxes are designed to protect health and the environment, not to shield local industries, they don’t fulfill that aim, Sateri said.‘‘The tax is based on carbonization, whereas there are many non-carbonated drinks with high sugar content not taxed,’’ said Sateri. However, flavored carbonated drinks continue to be taxed despite having almost no sugar content. ‘‘If health is used as a reason then the range of products would need to be modified. Similarly the energy drinks are taxed at 100 percent but there are many caffeinated drinks on the market with higher caffeinated levels which do not fall under the tax,’’ Sateri said.

Sluggish Resolution 

The dispute could take some time to resolve, leaving other Gulf states unable to advance their own tax plans, said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai. ‘‘The claims could pose a serious challenge to the GCC Excise Tax and may prevent the other GCC states from implementing it in its current form,’’ Vanhee said in a July 19 email. He noted that under the WTO dispute settlement system, the issue is currently in the consultation phase. If no mutually agreed solution in line with the WTO agreement is found, the case will be referred in a first stage to a WTO panel. ‘‘A potential ruling is binding on the WTO members. The majority of WTO disputes get resolved in the consultation phase,’’ Vanhee said. Coca-Cola Co. declined to comment. Austrian-based energy drink manufacturer Red Bull didn’t respond to a request for comment.


Reproduced with permission. Published July 20, 2018. Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>

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UAE VAT

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers
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UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

The United Arab Emirates has clarified the application of value-added tax to accommodation provided by employers. VAT Public Clarification VATP003, published by the Federal Tax Authority, distinguishes between residential accommodation, which is zero-rated on first supply and afterward exempt, and standard-rated service accommodation. “The clarification is important for the numerous companies in the UAE which have an extensive labor force and provide housing to their employees. This is customary for laborers in the construction sector,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai.

Where employers supply “incidental” services such as cleaning communal areas, garbage collection, access to a pool or gym within the building, and basic building maintenance, the accommodation will be zero rated. The supply of additional services including telephone or internet, laundry, catering, pest control, room cleaning and fresh bed linen will be considered “serviced accommodation” and subject to value-added tax. There will be implications for recovering tax on expenses, Vanhee said by email July 5. “No input VAT is deductible with respect to the business offering exempt residential rent, contrary to a business offering taxed serviced property,” he said. 

The clarification also addresses whether the accommodation is “a single composite supply” of either type, or “a mixed supply with separate component parts.” “Where a single composite supply is made, the entire consideration for the supply shall be subject to the VAT treatment of the principal component,” the circular says. “Where a mixed supply is made, each component part must be valued and the correct VAT treatment applied to each component part.” “This is an area that often causes problems for business as, in the case of a single composite supply, the entire consideration is subject to the VAT treatment of the principal component, whereas in a mixed supply, each component must be valued and a VAT treatment applied to it,” A big 4 said in a circular emailed to clients July 3. “One criteria that the FTA will consider to be crucial is that a single composite supply must have all components supplied by a single supplier. If the components come from multiple suppliers, it will not be treated as a single composite supply, and the tax treatment of each component must be individually evaluated.” 

‘Scores of Clarifications’

The treatment of mixed supplies “has been an area of some complexity in the U.K., and it deserves a Public Clarification of its own,” said a tax and public policy partner at a law firm in London, by email July 5. He expects “scores of Public Clarifications to emerge” as the UAE fine-tunes its VAT regulations, he said. More details may be required on this subject, Vanhee said. “The clarification does not discuss any cases in which the building is located in a Designated Zone,” which is not subject to VAT, he said. Suppliers could face “considerable fines” if they don’t treat the accommodation supplies correctly, said a partner at a law firm in Dubai. “Each provider will still need to make an individual assessment of the correct approach to take, but they will now be better informed as to the way in which the FTA will review the treatment that has been selected,” he said by email July 5. However, what isn’t clear is the impact the new clarification will have on providers that have previously taken an alternative interpretation to that provided by the FTA with this new clarification. “The providers will need to assess whether or not this will mean that any previously filed VAT returns will need to be re-submitted and VAT claimed from customers where it was not previously the case,” he said.

Reproduced with permission. Published July 6, 2018.  Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.

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