New decree-law clarifies and updates VAT rules
The UAE authorities issued a decree-law in November 2022 that amends several provisions of the 2017 decree-law on VAT, with the changes effective as from 1 January 2023. Additionally, there have been some important updates to the Executive Regulations of the 2017 decree-law.
The amendments do not make fundamental changes to the way VAT operates in the UAE and will not affect the way most businesses administer their VAT affairs on a day-to-day basis. However, the changes are important as they are thorough and accompanied by a refresh and clarification in a number of important areas.
Overview of changes
The changes to the VAT decree-law include the following:
- Definitions: New definitions have been added for certain terms, including relevant charitable activity, pure hydrocarbons, tax evasion, tax audit, tax assessment and voluntary disclosure to assist taxpayers and clarify the interpretation of other clauses in the decree-law.
- Supplies outside the scope of VAT: A new clause has been added to provide that the Executive Regulations may specify supplies that fall outside the scope of VAT, in addition to the sale or issuance of vouchers and the transfer of a business, which are already listed as not constituting a supply. This will allow the Federal Tax Authority to add to the list of supplies that are outside the scope of VAT, when necessary, which should be helpful for taxpayers.
- Date of supply: The date of supply in special cases (e.g., contracts with periodic payments or consecutive invoices) has been amended to add a date that occurs one year after the date on which the goods or services are provided. In practice, although many taxpayers likely already apply the date of supply in this way, the update confirms the position.
- Pure hydrocarbons: The domestic reverse charge will apply to pure hydrocarbons.
- Tax credit notes: Article 61(1) of the decree-law sets out the circumstances in which a tax credit note can be issued. Sub-clause (e) has been amended to add the words in bold: “If the Tax was charged in error or if the tax treatment is applied incorrectly.” The revised wording clarifies that if all other details in the invoice are correct, but the tax treatment is incorrect (e.g., the standard VAT rate rather than the zero rate is applied), a tax credit note can be used to correct the error. While many taxpayers likely would assume that incorrect tax treatment is an “error” and would issue a tax credit note, the change confirms that this is the correct approach going forward.
- Statute of limitations: A new article has been added to set out how the VAT statute of limitations will be applied in certain circumstances and confirms the following:
- The normal five-year statute of limitations will not apply if the FTA has notified the taxable person of the commencement of an audit and the audit is completed within four years from the notification;
- The statute of limitations will be extended by one year if the taxable person submits a voluntary disclosure in the fifth year; and
- A taxable person cannot file a voluntary disclosure more than five years after the end of the relevant tax period.
All taxpayers should be aware of these changes to the statute of limitations, particularly the time limits on making voluntary disclosures. Taxpayers should consider reviewing past declarations as soon as possible to establish whether any corrections are needed because once the deadline has passed, voluntary declarations will not be possible and potential refunds of overpaid tax will be forfeited.
Changes to Executive Regulation
The update of the Executive Regulation includes a change regarding directors’ fees and the Federal Tax Authority has published a public clarification explaining the change. As from 1 January 2023, if the functions of a board director are carried out by an individual, there will be no supply for VAT purposes. This is an important change because previously the director would have been considered to be making a supply and if the value of the supply (or the value of the supply, plus all of the director’s other taxable supplies) exceeded the VAT registration threshold, the director would be required to register for and charge VAT. VAT-registered directors will now need to consider their VAT position and whether they need to remain registered.