In a nutshell: UAE VAT Public Clarifications

So far, 19 public clarifications have been issued since the inception of the UAE VAT law  by the Federal Tax Authority.This article is an initiative by GCC FinTax to summarize those clarifications for our readers to keep you up to date with all the recent developments.

Clarification 1:

Would VAT be applicable on payment in the form of compensations between business entities for losses, omission or other wrong doings?

The clarification lays down a few considerations one can take while determining the taxability under law undermining that the examples are inclusive and not exhaustive:

• the substance of transactions and contracts needs to be studied over its legal form on case by case basis.
• review whether the payment is made in relation to previous or new supply of goods/ services or right to use or refrain from their use.
• A fine or penalty imposed by the party to contract or a government entity is not a supply under VAT
• compensation for loss (liquidated damages) are not a supply. However, charges on cancellation of bookings paid to hotels are a supply of service and liable to VAT.
• Payment to settle dispute enforcing previous terms of contract or payment for damaged goods obligating their title would be considered as a supply of good.

Clarification 2:

Are goods purchased before application of VAT law, eligible for the Profit Margin Scheme?

As per the clarification, only goods which have been previously subject to tax are eligible subject to fulfillment of other conditions regarding eligibility under the Profit Margin scheme. If goods are purchased before 1-1-2018, they are not eligible under the scheme. As for goods purchased previously but invoiced after 1-1-2018 or purchased on or after the same date, they must be backed by evidence regarding the VAT payment on original purchase along with information regarding the date on which the goods were first manufactured/ sold/ bought in to use to be eligible.

Clarification 3:

Classification of labour accommodation into residential and serviced property and its treatment under VAT.

As per VAT laws, residential accommodation to a labour is an exempt supply (zero rated if first supply).  Serviced property is subject to standard rates. Additional services when clubbed with the main service of accommodation need to be classified into mixed or composite supply based on whether or not it is ancillary to the main supply. As per Real Estate Guide, an accommodation can be considered residential when it is the principal place of residence for the labour, it is an immovable property lawfully constructed and no other service other than charged ancillary services are combined with it.

Clarification 4:

What are the exchange rates to be considered for computation of VAT?

Rates published by UAE Central Bank are to be used for any transaction which occur in a currency other than the UAE Dirham. However, since the exchange rates were first published from 17-05-18, for all the transactions which occurred prior to the said date, they need to be converted using rates published by any other reliable source. As for the transactions which occurred prior to this date but invoiced on or after the said date must be converted using the historical rates given by the Central Bank.

Clarification 5:

What is the treatment for Entertainment serviceexpenses incurred by entities?

Entertainment service expense to non- employees incurred by Designated Government entities is eligible to tax credit. Any service classified as entertainment given by other than designated government entity to any non-employee is not acceptable for tax credit. Credit on any service categorized as entertainment by a business entity including government entity to any employee is allowed only if it meets any of the following criteria:

• Its a part of contractual/ legal obligation or a documented policy,
• It is a normal business expense
• provision of goods / service is covered under deemed supply.

Clarification 6:

Requirements to issue a Tax invoice

Unlike the full tax invoices, lines items need not be shown at net value on the tax invoice for a simplified tax invoice. When the transaction value does not exceed AED 10,000 or where the recipient is not registered, a simplified tax invoice is issued. Tax amount payable must be expressed in AED in all tax invoices issued in foreign currency. Rounding of as a general rule must be done till 2 decimal points on a line by line basis in any invoice.

Clarification 7:

The VAT implications on supply of bus/ train for public transportation.

Supply of bus/ train with a capacity of 10 or more passengers intended for public transport is a zero rated supply. For it to be called a public transportation, following norms must be followed as per the clarification:

• used only for Mass Transportation and not restricted to any specific category of customers. (eg. supply of school bus is a taxable supply)
• there must exist a feature to pay for services along with a space for third party advertisements
• it must be branded as available to all indicating also the regulation which it abides by
• provisions of its regulations must be fulfilled by it.

Clarification 8:

VAT status on sale/ lease of Farm land and Farm houses.

Farm houses which meet criteria mentioned in Real estate guide for Residential building will be exempt from VAT (zero rated if first supply within 3 years from construction). Other buildings constructed on farm land eg. weekend houses, barns and sheds, etc will be subject to VAT at standard rates. Only bare farm land i.e. farmland free from building or civil structure even if in the form of built in irrigation system, roads and utility connections would be exempt from VAT. When farm is supplied as a whole, it is important to identify the predominant use of the farm based on which it can be a composite or a mixed supply.

Clarification 9:

Date of Supply for independent directors

When fees for independent director is not known before the conclusion of AGM and no invoice is issued/ payment is received, as per Article 25, Date of supply would be date on which fees become known. If fees are known at the onset and periodic/ multiple payments are made to the director, date of supply would be earlier of :

• Date of Invoice
• Date of payment on tax invoice
• Date of receipt of payment

The date of supply will be calculated in a similar way where periodic / multiple payments are not made with date of payment on tax invoice being replaced by Date when provision of service was completed. If none of the above dates are met within 12 months from date of service then consider the date on expiry of 12 months to be the date of supply.

Clarification 10:

VAT implications of Bank interests and Dividends

Article 42 of the Executive regulations state that interest and dividend are financial services which are exempt from VAT. However, interests on bank deposits and dividends from holding shares ina company are passively earned incomes not falling in the definition of service and therefore not covered under VAT laws. Management fees are still chargeable to VAT.

Clarification 11:

Taxability of Donations, Grants and Sponsorships

For Donations or Grants to be outside the scope of VAT, they must be unconditional and unrestricted. there must be no benefit directly to the donor or his related person. Sponsorships are generally subject to VAT provided each case is studied individually and holistically.

Clarification 12:

Importation of goods by agents on behalf of VAT registered persons.                                 

The clarification addresses the situation where an agent (importing agent) imports goods from outside UAE on behalf of the owner of goods both being registered under VAT.  The importing agent needs to record his import in Box 6 of the VAT return. The same amount is nullified in Box 7 of his return. This amount is added to Box 7 of the owners account making him the final beneficiary to recover the VAT paid. A prior declaration stating compliance to the above process must be signed by both the parties. Alternatively, the importing agent could submit a declaration with the owner which would then act as a tax invoice for the purpose of claiming credit.

Clarification 13:

Treatment of Disbursements and Reimbursements

Generally,a reimbursement is receivedin capacity of being the principle whereas, disbursements are received on behalf of another individual (as an agent). Addressing which payments are disbursements and segregating it from reimbursements, this clarifications lays down certain factors to classify payments as a disbursement and not to be subjected to VAT unlike reimbursements  :

• other party should be recipient of goods and services and be responsible for making payment based on the invoice in his own name without any markup.
• proper authorization by the owner to the tax agent must be given to receive goods on their behalf

Clarification 14:

VAT treatment of options and option premiums

Article 42(3) specifies that the “issue, allotment, or transfer of ownership of an equity security or a debt security” is exempt for VAT purposes. Options on equity and debt securities received against payment of premiums are covered in the definitions of securities and hence the same are exempt from VAT. If before the date of clarification i.e. 31-07-19, the supplier has incorrectly charged VAT @ of 5% on these exempt options, he must issue a credit note to the recipient correcting the same treatment.

Clarification 15:

Sale/ Transfer of business as a Going concern

Transfer of business as a going concern (TOGC) is not subject to VAT. The conditions mentioned below are to be met for considering a transfer as TOGC:

• Transfer must be of a whole/ an independent part of a business which must be operational before and at the time of transfer.
• Transfer must be made to a taxable person who is either registered or has applied for registered at time of transfer.
• The recipient intends to continue the business after transfer. However, a short period of temporary closure immediately after transfer is permissible to prepare it for new ownership.

This treatment applies to a transfer of the business irrespective of the VAT treatment which would apply to any of the underlying assets that are being transferred.

Clarification 16:

Whether the business to business supplies of healthcare services are eligible for zero rating?

The healthcare services as defined under Article 41, must be made for the treatment of the recipient of supply. Where the patient and recipient are different persons, it is a taxable supply @ 5%. To determine the recipient, a careful study of the contractual position between the parties must be made as a reflective of the economic and commercial reality of the supply. E.g.:

Clarification 17:

Input tax must be recovered in the first tax period in which the following two conditions are satisfied cumulatively:

a. the tax invoice is received; and

 b. an intention to make the payment of consideration of the supply before the expiration of six months after the agreed date of payment is formed.

 If the input tax is not recovered within two tax periods following such date, a Voluntary disclosure form is required to be submitted amending the VAT return for input tax. If no payment is made within 6 months from date of intention to pay, ITC must be reversed to that extent which will be available once the payment is made.

Clarification 18:

VAT treatment on sale/ lease of a building and its subsequent use thereof by the purchaser

The treatment of sale of building depends on use by the supplier. Its subsequent use by the purchaser or lessee does not alter the VAT treatment. E.g.:

The use by supplier is to be examined on the date of supply/ lease. Flat or a unit in the building is also considered to be building for this purpose.

Clarification 19:

For an export of services to qualify for zero rating, the following two conditions must be simultaneously met by the Recipient of service:
1. The recipient must not have a Place of Residence in an Implementing State. For this purpose, an Implementing State means a GCC State that is implementing a tax law and which allows UAE to be termed as an implementing state in its legislation. A Place of Residence would mean a Place of Establishment where the entity is legally established and where significant management decisions are made or a Fixed Establishment where the entity conducts its business regularly.

2. At the time of service performance, the recipient must be outside the UAE. As per the law, a recipient can have physical presence in the UAE in an exceptional case, when the presence is not connected effectively with the supply and it is for a duration less than a month.

To elaborate on the different scenarios related to having a place of residence, the clarification states that where there is more than one place of establishment of the entity- consider the one which is more closely related to the supply. In determining the same, one must consider which establishment is the contractual recipient or which is actually benefitting from the supply or the one providing instructions to the supplier and invoicing the supply. If there is no permanent establishment of the entity, place of Residence of the individual recipient is to be observed.

For more detailed clarifications, please visit our law and public clarifications section: https://www.gccfintax.com/clarifications/default.asp?cat_id=1&l_id=5