VAT on local transportation that forms or does not form part of the international transportation leg

In a typical international logistics transaction, a consignor (person who wishes to get the goods transported) enters into a contract with a transporter for moving the goods from one country to another and delivering them at the consignee’s place in the country of destination.

Such services are typically broken into three legs – First, is the movement of goods within the country of the consignor that includes picking goods from consignor’s place (either warehouse or factory), transport them to the local port, loading them to the ship and undertaking all customs formalities at the port. Second, is the actual transportation of the goods in the vehicle (i.e., ship or a vessel) until the destination port. Third, is the movement of goods from the destination port to the consignee’s place and that includes unloading of goods, storage at the port, customs formalities and finally transporting them to the consignee’s place of business.

Under the UAE VAT law, international transportation of goods which either starts or ends in UAE including any transport related service (defined separately) is subject to VAT at 0%. This is on the basis that services typically relate to international movement of goods and therefore, should not be subject to a tax.

The challenge that some of the transportation companies are currently facing is in relation to the third leg of the transaction where goods are transported from the port to the consignee’s place of business (both in UAE). Or alternatively, where the consignor is in UAE, transportation services to move goods from his place of business and delivered to the port (both in UAE). The challenge is arising for those transporters who are hired only to execute the local leg of the entire transaction chain and are not providing the complete end-to-end services to the consignor. Which means that these transporters are only contracted for local transportation of goods in UAE and are not concerned at all with the other two legs of the transaction.   

The general trend in the industry and the position taken by them seems to indicate that such services were being considered as a part of the ‘international transportation services for goods’ and consequently subject to zero rate VAT. This is on the basis that this leg of the transaction involving local transportation was considered to be covered under Article 33 of the UAE VAT Executive Regulations and was treated as ‘supplied as part, or for the purpose of the supply of services of transporting goods either from a place in the State to a place outside the State or from a place outside the State to a place in the State’.

The FTA, in some of the private rulings, seem to suggest otherwise and it appears that such independent transactions of transporting goods in UAE (though forming part of the international transportation of goods services) would get covered under Article 33 only when such services are provided by a single entity. The FTA seems to be taking a view that unless the transactions are inextricably linked (by way of being provided by the same entity), they should be subject to VAT at 5%.

A significant no. of transporters could immensely get impacted by this clarification and it is important that either they themselves get it clarified from FTA for their respective businesses, or else the industry as a whole represent to the FTA on why this leg of the transaction should be covered under Article 33 and thereby zero rated for VAT.

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