Executive Regulations on the Value Added Tax Law
Yesterday, the Ministry of Finance published the long awaited Executive Regulations on the Value Added Tax Law (Cabinet Decision No. 52 of 2017; “ER”) which shed some light on the provisions of the Value Added Tax Law (“VAT Law”). The ER will come into effect on January 1, 2018 – at the same time as the VAT Law.
The ER are structured into 18 chapters and provide more detailed regulations on certain topics from the VAT Law. The chapters are as follows:
Chapter 1: Definitions
Chapter 10: Calculation on Due Tax
Chapter 2: Supply
Chapter 11: Apportionment of Input Tax
Chapter 3: Registration
Chapter 12: Capital Asset Scheme
Chapter 4: Rules Relating to Supplies
Chapter 13: Tax Invoices and Tax Credit Notes
Chapter 5: Profit Margin Schemes
Chapter 14: Tax Returns and Tax Periods
Chapter 6: Supplies Subject to Zero Rate
Chapter 15: Recovery of Excess Tax
Chapter 7: Exempt Supply
Chapter 16: Other Provisions Relating to Recovery
Chapter 8: Accounting for Tax on Certain Supplies
Chapter 17: Transitional Rules and Record Keeping
Chapter 9: Designated Zones
Chapter 18: Closing Provisions
An overview of the content of all chapters can be found on the website of the Ministry of Finance. In the following we will take a closer look at registration requirements, zero-rated export of goods and services, import of goods, designated zones and VAT-compliant invoices.
Although the thresholds for the mandatory and voluntary registration of businesses with the Federal Tax Authority (“FTA”) were announced by the FTA early on, neither the Tax Procedure Law nor the VAT Law regulated any amounts in their respective provisions. Article 7 of the ER confirms the threshold of AED 375,000 for the mandatory registration and Article 8 confirms the threshold of AED 187,500 for the voluntary registration.
Furthermore, Article 7 stipulates that the FTA will register taxable persons who exceed the mandatory registration threshold but who have not registered. The same applies to non-resident taxable persons (i.e. foreign suppliers). It remains to be seen how exactly the FTA intends on controlling and collecting information on non-registered taxable persons. It should also be noted that non-registered taxable person will nevertheless be liable to pay taxes for supplies made before the registration.
Zero Rated Export of Goods and Services
Export of goods and services to a third country (excluding KSA) will be subject to tax rate of 0% if certain conditions are fulfilled.
In case of export of goods, the goods have to be physically exported to a third country, which is to be evidenced e.g. by airway bill, bill of lading, certificate of shipment or consignment note, Article 30 ER.
It is important to note that any movement or supply of goods into a Designated Zone shall not be considered as an export, Article 30 para. 3 ER.
In case of export of services, the services have to be rendered to a recipient with a place of residence outside the UAE (or KSA) and who is located outside the UAE (or KSA) at the time the services are rendered in order for the services to be zero-rated, Article 31 ER.
Exporters should be aware of the increased record keeping requirements and have to put in place certain documentation procedures in order to take advantage of the zero-rated export of goods and services.
Import of Goods
In general, any taxable person importing goods into the UAE is liable for tax reporting and tax payment (Reverse Charge Mechanism, whereby the importer can “claim” the paid VAT back as input VAT). Only if the receiving party is not a taxable person in the UAE (e.g. individual), the responsibility for tax reporting and payment falls back to the foreign exporter.
The ER specify in Article 47 which supplies are not considered as imports and for which the Reverse Charge Mechanism will therefore not be applicable:
· Where the goods are subject to customs duty suspension agreement in accordance with the GCC
Common Customs Law (cases where a financial guarantee has to be provided)
· Import into a Designated Zone
· Personal belongings imported by travelers
· Returned goods (warranty cases).
It should be noted that goods will not be released by customs authorities as long as the due tax has not been paid, Article 50 para. 2 ER. In most cases non-registered persons will be using an agent for the import of goods (logistics company, customs broker, etc.) which mean that this agent will be liable to pay the VAT on behalf of the non-registered person as if the agent had imported the goods himself.
Designated Zones are defined in Article 51 ER as fenced geographical areas with security measures and customs control which can monitor the entry and exit of individuals and goods from and to the area. If an area meets these criteria, it will be considered as outside the UAE. However, it is important to understand that there is no automatic mechanism whereby any UAE free zone will be considered as a Designated Zone. Only free zones that fulfill the above-mentioned conditions can be listed as a Designated Zone. Furthermore, in order for a free zone to become a Designated Zone it has to be included into the list of Designated Zones issued by a decision of the UAE Cabinet which is yet to be published.
It can be speculated that free zones such as the Jebel Ali Free Zone, Dubai Airport Free Zone, Dubai South, Hamriyah Free Zone and Ras Al Khaimah Economic Zone might be qualified as Designated Zones.
In the context of Designated Zones, we would like to highlight Art. 51 para. 5 and 6. Companies having their place of business in a Designated Zone will be considered as having their place of residence in the UAE. This means that any supply of goods and/or services by a company registered in a Designated Zone to a person within a Designated Zone will be considered as a supply made in the UAE and therefore will be subject to VAT. The only exemption from VAT in such cases will be where goods are transferred from one Designated Zone to another in case a deposit is paid. It appears that the Ministry of Finance and FTA follow the procedures and principles of the customs authorities and introduced a similar reporting and payment system.
In accordance with Article 59 ER all VAT Invoices shall include the following:
· “Tax Invoice”
· Name, address and tax registration number of both parties (supplier and recipient)
· Sequential invoice number
· Date of supply
· Description of services and goods
· Unit price, quantity, tax rate, amount payable in AED
· discount (if any)
· gross amount payable
· tax amount payable.
If the recipient is a non-registered person or the supply of goods and services does not exceed AED 10,000, a simplified tax invoice with the following content can be issued:
· “Tax Invoice”
· Name, address and tax registration number of supplier
· Description of goods and services
· Total consideration and tax amount
An important clarification is that free zones and their companies are fully accountable and liable for VAT in case of local supplies. Many free zone companies have waited with the registration for VAT since it was not clear whether or not they will be excluded from VAT. The ER now clarify this point and result in the requirement for free zone companies to register for VAT.
In this regard, it should be noted that on November 30, 2017 the next registration deadline for companies with a turnover exceeding AED 10 million will expire and all other companies (i.e. companies with a turnover over AED 375,000 and lower than AED 10 million) should be registered by December 4, 2017. Therefore, all free zones companies fulfilling the registration requirements should register with the FTA as soon as possible in order to avoid fines.
Furthermore, the ER provide more detailed instructions on documentation and record keeping for companies, particularly with regard to exports and imports.
Lastly, it is recommended inquiring the tax registration number from your customers in order to comply with the requirements for Tax Invoices and hence to avoid any administrative penalties.
VAT Business Breakfast
In light of the publication of the Executive Regulations on the Value Added Tax Law, SCHLÜTER GRAF will host a business breakfast on December 13, 2017 at 9am. The event will be held together with Wortelmann Accountancy and is intended to give practical guidance and advice to companies which are required to pay VAT.
If you would like to participate in the event, kindly register via email on dubai(at)schlueter-graf.com until 7 December 2018.