VAT and Commercial Services

24 Nov, 2023
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Elleonor Grace E. Apostol

General Accountant, Elnaggar & Partners

Overview

The UAE's introduction of a 5% VAT in 2018 marked a pivotal moment in its economic history. It signaled a shift away from oil-dependent revenue and promoted economic diversification. This move aligned the UAE with international tax norms, requiring businesses to adapt to new regulations. VAT has provided consistent government revenue, fostering structured financial practices and transparency. It contributes to a stable and sustainable economic environment.

This VAT system is part of broader GCC efforts to achieve economic consistency and harmonization. Over time, the UAE has tailored provisions and special schemes for various sectors and business categories. This enhances the UAE's appeal for global trade and investment, offering a standardized and well-regulated tax framework. Understanding and complying with UAE's VAT regulations have become vital components of businesses' financial strategies and operations.

This Practice Note will specifically focus on the application of VAT to the provision of services. It will outline the primary considerations that businesses should be aware of concerning the provision of services for VAT purposes.

Definitions

  • Deemed supply: Deemed supply may include:
    • assets which were part of their business are supplied for no consideration.
    • transfer of businesses assets from UAE to another GCC implementing state or GCC implementing state to the UAE.
    • goods used for the non-business purpose on which input VAT deduction is claimed;
    • goods and services that a taxable person owns at the date of tax deregistration.
  • Federal Tax Authority (FTA): Authority responsible for the administration, collection and enforcement of VAT.
  • Federal Decree-Law No. 8/2017 on Value Added Tax ( also known as the VAT Law)
  • Gulf Cooperation Council (GCC): Of which the UAE and Qatar are member states along with Saudi Arabia, Kuwait, Bahrain, and Oman.
  • Implementing states: Each member state of the GCC will integrate the VAT regulations into their local law and implement VAT from 1 January 2018.
  • Reverse charge mechanism: Where the recipient of goods or services is required to pay VAT instead of a supplier, where the supplier is not a taxable person in the UAE - where the supply has been made.
  • Taxable person: A person who pays tax and is required to be registered for VAT purposes.

 

 

 

Practical Guidance

Understanding VAT

Federal Decree-Law No. 8/2017 defines VAT as a tax on Goods and Services. Value Added Tax is a tax on consumption levied at each stage of the supply chain and ultimately borne by the end consumer. VAT applies at a standard rate of 5% in the UAE, unless the goods and services are exempt or zero-rated. Businesses must register for VAT if their annual turnover exceeds AED 375,000, and voluntary registration is possible for turnovers AED 187,500 and above. Businesses dealing with zero-rated or exempt supplies are exempt from VAT registration subject to approval from FTA.   Moreover, Article 15 of the VAT Law that  has been amended provide greater clarity, and the FTA has broadened its administrative authority to allow anyone, regardless of registration status, to seek exemption from registration if their supplies are only subject to the zero rate, provided they meet certain criteria. Note that upon successful registration, the FTA assigns a tax registration number (TRN).

What is the definition of "supply"?

To classify an activity as a supply, it must meet specific criteria outlined in Federal Decree-Law No. 8/2017. The term "supply" encompasses all instances where a registered taxable person in the UAE provides goods or services in exchange for a consideration as part of their business operations.

Zero-rated supplies

Services can be zero-rated under article 44 and 45 of Federal Decree-Law No. 8/2017 if the following conditions are satisfied:

  • The services are provided to a recipient without a residence in a GCC state who is located outside the UAE when the services are rendered.
  • The services are not directly linked to real estate or movable property in the UAE at the time-of-service provision.

Zero-rating can also apply when:

- Services are performed outside the GCC or involve arranging services conducted outside the GCC.

- The supply includes facilitating outbound tour packages.

For this regulation, "outside the UAE" includes short-term presence in the UAE (less than one month) or presence unrelated to the supply, as defined in Federal Decree-Law No. 8/2017.

Consequently, the following supplies qualify for zero rating:

- Exports of goods and services outside the GCC.

- International transportation and related services.

- Supplies of specific air, sea, and land transportation means (e.g., aircraft and ships).

- Certain investment-grade precious metals.

- Newly constructed residential properties.

- Education and healthcare services.

Exempt supplies

Certain categories of supplies are exempt from VAT, as follows:

- Some financial services.

- Residential properties.

- Bare land.

- Local passenger transport (article 46 of Federal Decree-Law No. 8/2017)

Goods vs services

Determining whether one is supplying goods or services is crucial for a taxpayer, as distinct regulations govern each category. As outlined in this article, our primary emphasis is on the VAT implications related to the provision of services. Therefore, we will now explore the rules that pertain to such service supplies.

What are services?

Services are defined in article 6 of Federal Decree-Law No. 8/2017 as “Anything that can be supplied other than Goods”. In other words, anything that does not constitute a supply of goods will be considered as a supply of services. Cabinet Decision No. 52/2017 further clarifies some forms of supplies as a supply for services, such as, consultancy services, market research services, advertising services, advertising agency services, making available a facility or advantage, the transfer or licensing of intangible rights, e.g. rights of authors, inventor, artists, and rights in trademarks.

It is therefore very crucial to determine what you supply as a taxpayer - goods or services, as per the above definition, services are defined to include non-physical property along with anything else that can be supplied other than goods. Hence, the definition of services can encompass all transactions that escape the definition of goods into services.

Place of supply

The place of supply is crucial as it determines whether a supply is made within or outside the UAE for VAT purposes, because different rules apply.

If you, as a taxpayer, are supplying the services outside the UAE, you will not be subject to VAT. Whereas, if the services are supplied by you within the UAE, VAT at the rate of 5% will be chargeable. Note also details on the supplies made from a designated zone to onshore or vice versa.

Place of supply for services

The basic rule for supply of services pursuant to article 29 of the Federal Decree-Law No. 8/2017 is where the supplier has the place of residence. Meaning thereby that a supply of services is subject to VAT where the service is received. Specific rules are applicable under article 30 of the Federal Decree-Law No.8/2017 to real estate, transport, tele-communications, cultural, artistic, sporting or similar activities (which are out of the scope of this Note).

The below rules of Federal Decree-Law No. 8/2017 and Cabinet Decision No. 52/2017 would be helpful to determine where the place of supply is, namely:

  • where the recipient of your services has a place of residence in another implementing state and is registered for tax in that implementing state – the place of supply will be the place of residence of the recipient of services, i.e., the implementing state.
  • where the recipient of your services is a business, which is based in the UAE and the supplier is not resident of the UAE, the place of supply of services will be UAE;
  • for supply of services related to goods, such as installation of goods supplied, the place of supply will be where the services are performed;
  • place of supply of restaurant, hotel and catering services is where they are performed;
  • place of supply of real estate services is the location of the real estate;
  • place of supply of a means of transport to a person not registered for VAT in the GCC is where the goods are put at the disposal of the recipient;
  • place of supply of transport services is where the transport begins;
  • place of supply of telecommunications and electronic services is where the services are actually used and enjoyed by the recipient; and
  • place of supply of cultural, artistic, sporting, educational or similar services is where they are performed.

Date of supply

Date of supply is important as this is the date on which the obligation to pay tax arises. As per article 25 of Federal Decree-Law No. 8/2017, the date of supply for services will be:

  • the date on which the service was completed;
  • the date of receipt of payment; or
  • the date on which the tax invoice was issued.

The date of supply would be different if:

  • the payment is made via the vending machines, then the date of supply will be the date of collecting fund from the machine;
  • for deemed supply of services, the date of supply will be the date of their supply, disposal, change of usage, etc. as the case may be; or
  • the payment is made through voucher, then the date of supply would be date of issuance or supply thereafter.

In the case of contracts, which include periodic payments or consecutive invoices, the date of supply will be different from the date of supply provided under article 25 of Federal Decree-Law No. 8/2017 as above. Namely the date will be the earliest of any of the following dates:

  • the date of the issuance of the tax invoice;
  • the date the payment is due under the tax invoice; or
  • the date of receipt of payment (ibid).

So, to avoid any fines under Federal Decree-Law No. 8/2017, it is better to follow the date of supply and pay as per the above rules of Federal Decree-Law No. 8/2017.

Further to the above, with the Amendment of the Article 67 of the VAT Law it clarifies the period within which tax invoices must be issued. A registrant must issue a tax invoice within 14 calendar days from the date of supply. This date of supply is any of the dates as outlined in Articles 25 or 26 of the Decree-Law as the case may be.

Designated zones

Designated zones are important for VAT purposes, as specific rules apply for the provision of services from and within the designated zones under Cabinet Decision No. 59/2017.

What is a designated zone?

In the UAE, there is a specific area designated as outside the scope of VAT for tax purposes. Article 51 of Cabinet Decision 52/2017 provides the definition of a "designated zone," which encompasses three key criteria:

  1. The Designated Zone is a specific fenced geographic area and has security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area.
  2. The Designated Zone shall have internal procedures regarding the method of keeping, storing and processing of Goods therein.
  3. The operator of the Designated Zone complies with the procedures set by the Authority.

Out of the original twenty (20) designated zones in the UAE, Cabinet Decision (59) has expanded the list to include four (4) additional Designated Freezones, bringing the total to 24 designated freezones. These specific zones enjoy exemption from UAE VAT, requiring a unique methodology for calculating VAT on goods originating within these regions. Nevertheless, when it comes to VAT calculations for services, a designated zone is regarded as an integral part of the UAE.

It's crucial to emphasize that the application of VAT to services rendered from a designated zone in the UAE has some nuances in comparison to the taxation of goods. This distinction arises from the treatment of the place of supply for these services, which is considered to be within the UAE, regardless of their origin in a designated zone.

When a Designated Zone undergoes a change in its operational methods or no longer adheres to the conditions that led to its designation, it will be treated as if it were located within the boundaries of the UAE.

VAT applicability on designated zones

The transfer of goods between Designated Zones will not be subject to taxation if two conditions are met. First, the goods, or a portion thereof, must remain unreleased, unutilized, and unaltered during the transfer between the Designated Zones. Second, the transfer should adhere to the customs suspension rules outlined in the GCC Common Customs Law.

In cases where goods are moved between Designated Zones, the Authority may request the goods' owner to provide a financial guarantee to cover potential tax liabilities if the conditions for goods movement are not met.

The UAE Cabinet issued a Cabinet Decision No. 88 of 2021 to amend Clause (5) to (10) of Article 51 of the Cabinet Decision No. 52 of 2017 - The Executive Regulations of the Federal Decree-Law No. 8 of 2017 on Value Added Tax. The amendments are effective from 30th October 2021.

For supply of goods in UAE Mainland, the amendment highlights that place of supply of goods shall not be considered in the UAE for supplies from Designated Zone to Mainland if the supplier retains official evidence establishing that VAT had been applied on the import of the goods to the mainland.

For supply of goods outside UAE, the recent amendment also highlights that in the case of out-of-scope supplies i.e. Supplies from Designated Zones to outside the UAE, now companies are required to maintain documents in order to prove the place of supply as outside the state. The supplier has to retain official or commercial evidence proving the same.

Goods situated in a Designated Zone for which no tax has been paid will be treated as if they have been imported into the UAE by the owner under specific circumstances. This includes when the goods are consumed by the owner, unless they are integrated into, attached to, or used in the production of another item within a Designated Zone that is not meant for consumption. Additionally, if goods are unaccounted for, they are also subject to this treatment.

Any individual or entity established, registered, or with a place of residence in a Designated Zone will be considered to have a place of residence within the UAE for the purposes of the Decree-Law.

Apportionment of Input Tax

In situations where a business uses goods and services for a combination of taxable supplies, exempt supplies, and non-business purposes, without the ability to separately identify their allocation, the recoverable portion of input VAT can be determined by calculating the percentage of taxable supplies in relation to the total supplies (including recoverable and non-recoverable supplies). This percentage is then applied to the total amount of input VAT that couldn't be individually identified, allowing businesses to recover the VAT related to taxable supplies while leaving the portions related to exempt supplies and non-business use as non-recoverable. This method helps ensure a fair and accurate allocation of input VAT in complex scenarios.

Vouchers

Under UAE VAT law, a voucher is defined as conferring the right to receive goods, services, or a discount on the price.

Vouchers have become integral across various industries in the United Arab Emirates, with their significance amplified by the implementation of VAT laws, compelling businesses to scrutinize their voucher practices. Voucher formats have evolved from traditional paper-based systems to digital alternatives, catering to the changing demands of modern consumers. In the retail sector, vouchers serve as a valuable tool for attracting customers and fostering brand loyalty. Additionally, credit card rewards programs in the UAE offer vouchers for gift cards or a wide range of goods and services, enhancing customer incentives. In the gaming industry, vouchers take the form of in-game currencies, adding value to the gaming experience. Moreover, the hospitality sector leverages vouchers within loyalty programs to reward and retain guests. Understanding the intricacies of VAT regulations concerning vouchers is of utmost importance for businesses, and the UAE's VAT legislation provides explicit guidance on the appropriate handling of vouchers. Businesses must also stay updated on official interpretations from tax authorities to ensure continued compliance.

Notably, the monetary value of a voucher must be readily identifiable upon issuance. Companies face the challenge of determining the VAT treatment of certain vouchers, but it's essential to note that the sale or issuance of a voucher is exempt from VAT, as long as it is not sold at a value exceeding its face value, ensuring regulatory adherence.

Deregistration

Article 21 of the VAT Law states that the Tax Registrant shall apply to FTA for Tax Registration upon meeting the following:

  • If he stops making Taxable Supplies
  • If the total value of his taxable supplies made over the period of the 12 consecutive months is less than 187,500 AED

Further, with the new amendment, Deregistration can also made by the FTA if it finds that keeping Tax Registration threat the interests of the Authority.

VAT compliance

To ensure your adherence to VAT regulations, follow these steps:

  • Levy VAT on the taxable services you provide.
  • Maintain business records that allow the FTA to verify your compliance.
  • Timely submission of VAT returns is essential.
  • Evaluate the impact of VAT on your business and make necessary adjustments to ensure compliance. Conduct a comprehensive legal review of service supply contracts to determine whether payments include or exclude VAT. Introduce new contractual terms to prevent VAT-related losses for your business.
  • Issue accurate tax invoices that clearly indicate VAT and comply with the requirements.
  • Ensure full compliance with VAT Law and it’s Executive Regulations to avoid penalties.

 

Related Content

  • Federal Decree-Law No. 8/2017 on Value Added Tax
  • Cabinet Decision No. 52/2017 on the Implementing Regulation of Federal Decree-Law No 8/2017 on the Value Added Tax
  • Federal Law No. 7/2017 on Tax Procedures
  • Cabinet Decision No. 36/2017 on the Issuance of the Implementing Regulation of Federal Law No 7/2017 on Tax Procedures
  • Cabinet Decision No. 59/2017 on Designated Zones for UAE Federal Decree-Law No 8/2017
  • Executive Regulations of the Federal Decree-Law No. 8 of 2017 on Value Added Tax

 

 

Daisy Cureg

Financial Controller and Tax Advisor

Elnaggar & Partners

 

             

Elleonor Grace E. Apostol

General Accountant

Elnaggar & Partners

 

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