The introduction of VAT in UAE has brought with it a need to completely change the business practices that businesses in UAE have been used to for approximately past 5-6 decades. One of the major requirements that the introduction of VAT in UAE brings with it is a requirement for all businesses to maintain proper Books of Accounts, Records and Documents, for all their business and financial transactions, which they historically for all these years were not required to maintain. This requires a complete business transformation especially for Small and Medium Scale Enterprises (SME’), who historically have never been used to maintain any kinds of Books of Accounts, Records and Documents. There is no requirement for getting the Books of Accounts audited in UAE and the VAT Returns can be filed and due VAT payment made by all VAT Registered businesses and individuals on a self- assessment basis to the Federal Tax Authority (FTA) of UAE. However, FTA can at its discretion carry out ‘Tax Audit’ on any VAT Registered person in UAE.
The basic provisions of the UAE VAT Decree Law (Federal Decree Law No.8 of 2017 on Value Added Tax) and its Executive Regulations (Cabinet Decision No.52 of 2017) are similar to the basic fundamentals and framework of the VAT or GST Laws of other countries of the world. All businesses in UAE (whether they are incorporated or unincorporated) and individuals who have annual turnover for taxable supplies of goods or services of AED 375,000 and above, have got a mandatory requirement to register for VAT. The Taxable Supplies of Goods and Services include Standard Rated Supplies as well as Zero Rated Supplies. The businesses with annual turnover or annual expenses of AED 187,500 and above, have an option to do a voluntary VAT Registration, if they wish to claim input tax credit of all the input VAT they pay to their Suppliers on procurement of various Goods and Services that they make, in course of the business. UAE VAT Decree Law also require overseas companies and non-residents of UAE, who are making any taxable supply of goods and services in UAE, to register themselves for VAT (in cases where they do not have a UAE incorporated company or hold a UAE Residency), where no other person in UAE is obligated to account for and pay the due VAT on such taxable supply of goods and services in UAE i.e. provisions of Article 48 of the VAT Decree Law are not attracted. In such cases, overseas companies and non-resident suppliers making any taxable supply of goods and services in UAE, have to register themselves for VAT in UAE prior to making their first taxable supply of such goods and services in UAE and charge and collect VAT on such supplies from their first supply itself taking place on or after 1st January 2018.
The VAT Law of UAE prescribes three different categories of Tax Rates :
- 5%- Standard Rated Supplies
- 0%- Zero Rated Supplies
- Exempt Supplies
UAE VAT Decree Law, in order to avoid any classification issues of which category will a supply of certain goods or services fall in have done a very wise thing by providing only the exhaustive list of goods and services which are ‘Zero Rated Supplies’ and ‘Exempt Supplies’. Any supply of goods or services, which is not covered in the list of ‘Zero Rated Supplies’ and ‘Exempt Supplies’, will by default be Standard Rated Supplies, subject to 5% VAT.
VAT in UAE is applicable only if the place of supply of any goods or services is UAE. If the Place of Supply of Goods is outside UAE and only the invoicing is being done ‘from’ or ‘to’ a UAE incorporated Company, then such transaction will be outside the Scope of UAE VAT. Most International Companies are using their UAE incorporated subsidiary companies or UAE incorporated stand-alone companies, only for the purposes of invoicing and receiving and making payments, on account of there being no corporate tax applicable in UAE, for most industry sectors (except branches of Foreign Banks and Foreign Oil & Gas companies). For example, if a UAE incorporated Company receives an order for supply of any goods from its customer in UK and it places the order for this supply to its supplier in India and the shipment is dispatched directly by the UAE incorporated Company’s supplier in India to its customer in UK, without the goods ever coming to UAE (but only the invoicing for this shipment being raised by the Indian Supplier in name of the UAE incorporated Company and in turn invoicing being raised by the UAE incorporated Company in name of its UK Customer), then such transactions are ‘outside the scope of UAE VAT’ and there is no applicability of UAE VAT on such transactions, which are in essence ‘High Sea Sales transactions’. Similarly, in case of services, if a singer who is a resident of UAE and registered for VAT in UAE, goes and performs at ‘Live Concerts’ in some other country, then such performance is ‘outside the scope of UAE VAT’ and there is no UAE VAT to be charged by such singer for his/her revenue from such performance.
A large proportion of international companies operating business in UAE have set up their businesses in one of the 50+ Free Zones spread across UAE, due to the fact that they can enjoy 100% business ownership and capital repatriation in these free zones (and do not require to have any UAE National holding 51% shareholding on paper, as their UAE local sponsor, which is a requirement in case of a mainland/non free zone company) as well as enjoy a 50 years of tax holiday for corporate and personal income tax. Therefore, the impact of UAE VAT on the free zone companies in UAE requires a more in-depth analysis. To start with, all Free Zone Companies whose annual taxable supplies (Standard Rated Supplies and Zero Rated Supplies or Imports) exceeds the mandatory threshold of AED 375,000/- are required to register for VAT mandatorily.
Free Zones in UAE, for the purposes of VAT Decree Law of UAE, can further be divided into two categories i.e. ‘Designated Zones’ and ‘Non Designated Zones’. There are only a 20 Free Zones out of the 50+ total Free Zones, which were notified as ‘Designated Zones’ in UAE for the purposes of UAE VAT Decree Law, by Cabinet Decision No. 59 of 2017. All other free zones in UAE which have not been notified as ‘Designated Zones’ are therefore ‘Non Designated Zones’, to whom all the provisions of VAT Decree Law and the Executive Regulations of UAE will be applicable in exactly the same way as to the Mainland Companies in UAE.
This Cabinet Decision No. 59 of 2017, which notifies the list of Designated Zones in UAE is dated 28th December 2017 and is effective from 1st January 2018 i.e. from date of implementation of the VAT Decree Law itself. However, it was made available in Public Domain only on 9th January 2018.As per this Cabinet Decision, there are a total of Twenty (20) notified Designated Zones spread across all Seven (7) Emirates of UAE, which meet the conditions stipulated in the Executive Regulations of the Federal Decree Law No. 8 of 2017 on Value Added Tax. This includes Seven (7) Designated Zones in Dubai, Three (3) Designated Zones in Abu Dhabi, Three (3) Designated Zones in Ras Al Khaimah, Two (2) Designated Zones in Sharjah, Two (2) Designated Zones in Fujairah , Two (2) Designated Zones in Umm Al Quwain and One (1) Designated Zone in Ajman.
Most of the notified Designated Zones are the ones which were largely expected to be notified as Designated Zones such as Jebel Ali Free Zone, Dubai Airport Free Zone, Dubai Aviation City, Dubai Textile City and Dubai Cars And Automotive Zone in Dubai; Abu Dhabi Airport Free Zone, Khalifa Industrial Zone and Free Trade Zone of Khalifa Port in Abu Dhabi; Hamriyah Free Zone and Sharjah Airport International Free Zone in Sharjah; Ajman Free Zone in Ajman; Umm Al Quwain Free Trade Zone in Umm Al Quwain; RAK Free Trade Zone, RAK Maritime City Free Zone and RAK Airport Free Zone in Ras Al Khaimah; and Fujairah Free Zone and Fujairah Oil Industry Zone in Fujairah. However, there are a few surprises in this list of notified Designated Zones such as Free Zone Area in Al Quoz and Free Zone Area in Al Qusais in Dubai. It has not been clearly defined in the Cabinet Decision, as to which exact areas in these two locations in Dubai are Free Zone Areas. Furthermore, it has been stated in the Cabinet Decision that the Cabinet has the authority to amend the list of notified Designated Zones. Therefore, in future, we may expect addition, deletion or amendment to this list of notified Designated Zones. According to Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree Law No. 8 of 2017 on Value Added Tax, a notified Designated Zone shall be treated as being outside the state, for certain matters in relation to the application of provisions of Federal Decree Law No.8 of 2017 on Value Added Tax. Accordingly, any import of goods made by a Designated Zone Company in UAE is ‘outside the scope of UAE VAT’ and they are not required to account for VAT on such imports under ‘Reverse Charge Mechanism’. Similarly, supply of goods within the same Designated Zone or from one Designated Zone to another Designated Zone(subject to necessary controls and procedures being followed and conditions of providing financial guarantee etc, if required being met) shall be ‘outside the scope of UAE VAT’ and no VAT be applicable on such transactions. However, if the Goods supplied within a Designated Zone are not for the purposes of resale by the Recipient or are not incorporated into, attached to or otherwise form part of or are used in the production of another Good located in a Designated Zone which itself is not consumed, then supply of such Goods will become subject to VAT. Given that Real Estate is classified as Goods under the UAE VAT Decree Law, so the sale and lease of both commercial and residential properties in Designated Zones will be ‘outside the scope of UAE VAT’.
Any supply of goods made from ‘Designated Zone’ to ‘Mainland/Non Designated Zone’ will be considered as import of goods into the ‘Mainland/Non Designated Zone’ in UAE, and VAT on such goods will be accounted for by a VAT Registered company in ‘Mainland/Non Designated Zone’ under ‘Reverse Charge Mechanism’. In case, the supply of goods is made by a ‘VAT Registered Designated Zone Company’ to a customer in the ‘Mainland/Non Designated Zone’, who is not registered for VAT, then such Designated Zone Company will be required to charge and collect VAT on such sales. Similarly, if any supply of goods is made by a ‘VAT Registered Mainland/Non Designated Zone Company’ to a ‘Designated Zone Company’, then such Mainland/Non Designated Zone Company will be required to charge and collect VAT on such sales. The ‘Designated Zone Company’ receiving such goods, if registered for VAT can claim input tax credit of VAT charged on such sales in their VAT Returns, if eligible. As regards Supply of any Services, Water or any form of Energy, the VAT applicability is exactly the same for all companies across UAE and there is no differential VAT treatment being prescribed for Designated Zone Companies, in relation to these. Accordingly, any supply of Services, Water or any form of Energy in ‘Designated Zones’ or from ‘Designated Zones’, will be subject to VAT, in exactly the same way as it is in case of ‘Mainland/Non Designated Zones’.
Another matter which all companies operating in UAE need to beware of is that once they register themselves for VAT in UAE, whether under the mandatory category or voluntary category, then any supply of goods or services that they make, whether or not, such supply is their core business activity, it will be subject to VAT. For example, if a UAE incorporated manufacturing company, whose core business activity, is manufacturing and supply of fabricated steel, also sells its old used machinery, scarp and motor vehicles as well occasionally, then it will be required to charge and collect VAT on sale of such machinery, scrap and motor vehicles as well.
Compiled by GSTstreet for #GSTManthan