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.

2. 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).

3. 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.

4. 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.

5. 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.