UAE amends VAT Executive Regulations
With the easing of COVID-19 restrictions in the UAE, while businesses are slowly getting to the new normal, there has been an important amendment in the VAT Executive Regulation. The amendment has far-reaching impact.
In this issue, we summarize the recent developments, which include legislative changes, guidance provided related to the digital economy, and VAT judgments won by the taxpayers in the Federal Courts, all of which signal that though VAT has only applied since 2018, the system has evolved and is still developing.
UAE narrows the scope of zero-rating on exported services
The UAE Cabinet has issued a decision that narrows the scope of zero-rating for services supplied to non-UAE customers. The changes were made by amending Article 31(2) of the Executive Regulations.
One of the conditions for zero-rating exported services requires that the services be supplied to a non-resident who is outside the UAE when the services are performed. Before the amendment, the recipient of services was considered outside the UAE if they had a short-term presence in the UAE of less than one month or if their presence was not effectively connected with the supply. The amendment resulted in the replacement of the word ‘“or” with “and”. As a result, now both conditions must be met for a recipient to be considered outside the UAE.
The Federal Tax Authority (FTA) issued a clarification that indicates that in certain circumstances, however, zero-rating is possible if the recipient of the service is present in the UAE for longer than one month, provided their presence is not considered to be the establishment that is most closely related to the supply. This clarification suggests that with regard to businesses with a longer-term presence in the UAE (as well as outside the UAE) the FTA would treat them basically the same as if “or” applied to the conditions, rather than “and”.
Clarity regarding what is considered “presence” has yet to be provided, however. We can assume the test for presence is different from the concept of a “Place of Residence”, as both terms are used separately in Article 31(1). Presence may therefore refer to individuals who are temporarily or permanently in the country.
The amendment will mainly impact UAE businesses with customers visiting the UAE for short periods in connection with a supply. But, there are also potential implications for businesses that have clients with personnel based permanently, or long-term, in the UAE. For example, legal services provided by a UAE-based law firm to a non-resident where physical presence in the UAE of a foreign representative of the non-resident is needed could be subject to VAT, regardless of the fact that the representative’s presence in the UAE is for less than one month.
VAT Guidance on e-commerce
In August 2020 the FTA issued detailed guidance on e-commerce transactions. The guidance addresses two parts of e-commerce: the supply of goods on an electronic platform and the supply of electronic services.
Supply of goods
The taxability of goods supplied via an e-commerce platform will be assessed like any other supply made though traditional commerce.
An important point of clarification was that non-residents supplying goods in the UAE would be required to register if the goods are supplied to a non-taxable person or if they are unable to confirm that the VAT on the transaction would be accounted for by their customer via the reverse charge mechanism.
It should be noted that the above points are independent of VAT due on the importation of goods into the UAE.
Supply of services
The regulations provide a list of services considered to be electronic services and the requirement for the service to be automatically delivered over the internet, an electronic network, or an electronic marketplace. The guidance provides some clarity on the degree of human intervention that may be disregarded when considering whether a supply qualifies as an electronic service.
Further clarity was provided on what may be considered the actual use and enjoyment of electronic services. Some principles were provided as high-level guidance to be considered regarding use and enjoyment:
- If electronic services are delivered to a physical place, the place of use and enjoyment is that physical place.
- If services are provided on a portable device, the use and enjoyment may be determined based on the recipient’s location at the time the services are supplied, which is based on indicative factors specified in the guide.
If a non-resident supplier is unable to confirm that the VAT on the transaction would be accounted by its customer via the reverse charge mechanism, the non-resident would be required to register and account for VAT on services supplied in the UAE.
The Federal Court and Tax Dispute Resolution Committee (TDRC) have issued favourable judgements in two cases concerning late payment penalties levied on taxpayers.
It was judged that where the taxpayer can clearly prove that they have acted in good faith and made voluntary disclosure within the timeframe, only voluntary disclosure penalties will be applicable. Retroactive late payment penalties that could amount to an additional penalty of 300% of the unpaid tax should not be applicable.
From our experience, however, this favourable treatment has not yet been seen in the FTAs imposition of penalties on taxpayers.