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SKP GCC VAT Alert
The UAE Ministry of Finance has released additional FAQs

The UAE Ministry of Finance has recently released a set of certain supplementary Frequently Asked Questions (FAQs), which have been summarised below:

Registration
  1. Who can or will be able to register for VAT?
    Mandatory VAT registration, if taxable supplies and imports exceed the threshold of AED 375,000.

    Voluntary VAT registration, if supplies and imports less than AED 375,000 but more than AED 187,500. Also, voluntary VAT registration facility will be available if the expense of any business exceeds AED 187,500. This opportunity is designed to enable start-up businesses with no turnover to register for VAT.
     
  2. Will there be VAT grouping?
    Businesses that satisfy certain requirements covered under the Legislation (such as being resident in the UAE and being related/associated parties) will be able to register as a VAT group.

    For some businesses, VAT grouping will be a useful tool that would simplify accounting for VAT.
     
  3. Will non-residents be required to register for VAT?
    Non-residents who make taxable supplies in the UAE will be required to register for VAT unless there is any other UAE resident person who is responsible for accounting for VAT on these supplies. For e.g. the exclusion will be applicable where a reverse charge mechanism is applicable to the UAE business for purchases made from a non-resident.
Place of supply
  1. How should a business determine the Place of Supply (POS)?
    POS will determine whether a supply is made in the UAE (in which case the UAE VAT law will apply), or outside the UAE for VAT purposes.
Type of transaction POS
Supply of goods Location of goods when supply takes place (special rules for certain categories of supplies such as water, energy, cross-border supplies, etc. will be prescribed)
Supply of services Location where supplier is established (special rules for certain categories of supplies such as cross-border supplies will be prescribed)

Exempt and zero-rated supply
  1. What sectors will be zero rated?
    VAT will be charged at 0% in respect of the following main categories of supplies:
    • Exports of goods and services to outside the GCC;
    • International transportation and related supplies;
    • Supplies of certain sea, air and land transportation (such as aircrafts and ships);
    • Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
    • Newly constructed residential properties, that are supplied for the first time within three years of their construction;
    • Supply of certain education services, and supply of relevant goods and services;
    • Supply of certain healthcare services, and supply of relevant goods and services.
       
  2. Which categories will be exempt?
    The following categories of supplies will be exempt from VAT:
    • The supply of a few financial services (clarified in VAT legislation);
    • Residential properties;
    • Bare land; and
    • Local passenger transport.
Sector specific VAT treatment
  1. How will real estate be treated?
    The VAT treatment of real estate will depend on whether it is a commercial or residential property.
    • Supplies (including sales or leases) of commercial properties - Taxable at 5% (standard VAT rate); and
    • Supplies of residential properties - Generally are exempt from VAT. Furthermore, to ensure that real estate developers can recover VAT paid on construction of residential properties, the first supply of residential properties within three years from their completion will be zero-rated.
    This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties.
     
  2. How will insurance be treated?
    Generally, insurance (vehicle, medical, etc.) will be taxable. Life insurance, however, will be treated as an exempt financial service.
     
  3. How will financial services be treated?
    It is expected that fee-based financial services will be taxed, but margin based products are likely to be exempt.
     
  4. How will Islamic finance be treated?
    The treatment of Islamic finance products will be aligned with the treatment of similar standard financial services.
     
  5. How will government entities be treated for VAT purposes?
    Supplies made by government entities will typically be subject to VAT.

    However, certain supplies made by government entities will be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies.

    If the supply is subject to the standard tax rate, the treatment would remain the same even if it is provided to a government entity.

    It is likely that certain government entities will be entitled to VAT refunds. This is designed to avoid budgeting issues and provide a level playing field between outsourced and insourced activities.
Input Tax Credit
  1. How will partial exemption work?
Particulars Treatment
Input tax paid on expenses related to taxable supply Fully recoverable by the registered VAT person
Input tax paid on expenses related to non-taxable/exempt supply May not be recoverable by the registered VAT person
Input tax paid on expenses related to both taxable and non-taxable/ exempt supply Recoverable on a proportionate basis by the registered VAT person.

Registered person need to apportion input tax between the taxable and non-taxable (exempt) supplies.

Businesses will be expected to use input tax (ratio of recoverable to total) as a basis for apportionment in the first instance. Although, there will be the facility to use other methods where they are fair and agreed with the Federal Tax Authority (FTA).
  1. Will there be any VAT that businesses are not allowed to claim?
    VAT credit will not be allowed in respect of input tax paid on expenses incurred for making non-taxable supplies.

    Additionally, input tax credit will not be allowed in respect of tax paid on specific expenses such as entertainment expenses e.g. employee entertainment.

     
  2. Under which conditions will businesses be allowed to claim VAT incurred on expenses?
    VAT on expenses that were incurred by a business can be claimed as credit in the following circumstances:
    • The business must be a taxable person (the end consumer cannot claim any input tax refund).
    • VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
    • The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
    • The goods or services acquired are used or intended to be used for making taxable supplies.
    • VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.
       
  3. Can UAE nationals claim VAT?
    A scheme will be introduced to allow a UAE national who is not registered for VAT to reclaim VAT paid on goods and services relating to constructing a new residence which will be privately used by the person and his family. This will allow the recovery of VAT on such expenses as contractor’s services and building materials.
     
  4. How quickly will refunds be released?
    Refunds will be made after the receipt of the application and subject to verification checks, with a particular focus on avoiding fraud.
VAT on imports
  1. Will VAT be paid on imports?
    VAT is due on the goods and services purchased from abroad.

    In case the recipient in the state is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.

    In case the recipient in the state is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC. Such VAT will typically be required to be paid before the goods are released to the person.

     
  2. Can businesses offset customs duty against VAT payments?
    VAT shall be payable in addition to the customs duties paid by the importer of the goods and cannot be deducted. VAT shall be computed on the value that includes the customs duties.
     
  3. Will the goods exempt from customs duties also be exempt from VAT?
    Not necessarily. Some goods that are imported may be exempt from customs duties but subject to VAT.
Invoicing and reporting
  1. Will it be possible to issue cash receipts instead of VAT invoices?
    A supplier registered or required to be registered for VAT must issue a valid VAT invoice for the supply.

    To be considered as a valid VAT invoice, the document must follow a specific format as mentioned in the legislation. In certain situations, the supplier may be able to issue a simplified VAT invoice. The conditions for the VAT invoice and the simplified VAT invoice will be mentioned in the legislation.

     
  2. How long must a taxable person retain VAT invoices for?
    Any taxable person must retain VAT invoices issued and received for a minimum of five years.
     
  3. Will Businesses have to report on their business in each of the Emirates?
    It is expected that businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate. Guidance will be provided to businesses with regards to this.

    It is expected that the rules will be relatively straightforward for most businesses and will be based, for example, for B2C transactions, on the location of the transaction (e.g. in a retail environment, the location of the shop).
Special scheme and relief
  1. Will there be any special schemes for SMEs?
    No special rules are planned for small or medium sized enterprises. However, the FTA will provide materials and resources available for these entities to assist them with their enquiries.
     
  2. Will there be a margin scheme?
    To avoid double taxation where second-hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second-hand goods with reference to the difference between the purchase price of the goods and the selling price of the goods (that is, the profit margin). The VAT which must be accounted for by the registered person will be included in the profit margin. The legislation will include the details of the conditions to be met in order to apply this mechanism.
     
  3. Will there be bad debt relief?
    VAT registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to the bad debt which has been written off by the VAT-registered businesses. The legislation will include the conditions and limitations concerning the use of this relief.
Transitional provisions and penalties
  1. Will there be transitional rules?
    Special rules will be provided to deal with various situations that may arise in respect of supplies that span the introduction of VAT. For example:
    • Where a payment is received in respect of a supply of goods before the introduction of VAT but the goods are actually delivered after the introduction of VAT, VAT will have to be charged on such supplies.
    • Likewise, special rules will apply with regards to supplies of services spanning the introduction of VAT.
    • Where a contract is concluded prior to the introduction of VAT in respect of a supply which is wholly or partly made after the introduction of VAT, and the contract does not contain clauses relating to the VAT treatment of the supply, then consideration for the supply will be treated as inclusive of VAT.
    • There will, however, be special provisions to allow suppliers to charge VAT in situations where their recipient is able to recover their VAT but where there is no VAT clause.
       
  2. What are the cases that would lead to the imposition of penalties?
    Penalties will be imposed for non-compliance. Examples of actions and omissions that may give rise to penalties include:
    • A person failing to register when required to do so;
    • A person failing to submit a tax return or make a payment within the required period;
    • A person failing to keep the records required under the issued tax legislation;
    • Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.
FTA and VAT
  1. Will FTA issue rulings or provide tax advice?
    In the course of its interaction with taxpayers, the FTA may provide its views on various matters in the law. Taxpayers may choose to challenge these views. It should be noted that penalties may be imposed on taxpayers who are found to violate any tax laws and regulations.
     
  2. How can one object to the decisions of the authority?
    Any person will be able to object a decision of the FTA.
Step Particulars Authority Timeline
1 Application for request to re-consider the decision of FTA FTA 20 business days from the date the person was notified of the original decision of FTA
1A Disposal of application by FTA and provide a revised decision FTA 20 business days from receipt of application
2 Not satisfied with revised decision of FTA, the person can further put up his objection to the committee
(However, the person will be required to pay all taxes and penalties subject to objection before objecting to committee)
Disputes Resolution Committee (DRC) 20 business days from the date the person was notified of the revised decision of FTA
2A Disposal of object by the committee and provide a decision. DRC 20 business day from receipt of objection
3 Not satisfied with decision of DRC, the person can file an appeal before competent court Competent Court 20 business days from the date of the Appellant being notified of the committee’s decision
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SKP's comments
  • The release of the abovementioned additional FAQs evidences the effort of the UAE government to speed up the process of the release of the draft law and regulations and to encourage the industry to undertake efforts to understand the VAT implementation.
  • It is suggested to seek professional advice to understand the impact analysis.
  • Further policy announcements by the Ministry of Finance must be tracked.
SKP
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This update contains general information which is provided on an "as is" basis without warranties of any kind, express or implied and is not intended to address any particular situation. The information contained herein may not be comprehensive and should not be construed as specific advice or opinion. This update should not be substituted for any professional advice or service, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. It is also expressly clarified that this update is not intended to be a form of solicitation or invitation or advertisement to create any adviser-client relationship.

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