In January 2018, the UAE Federal Tax Authority has introduced “Value-added Tax”, in which tax (0% or 5%) is charged on all goods and services supplied within the mainland of the UAE, except for those specifically specified as exempted supplies. This is a general definition of VAT, but if we go deeper into the UAE VAT Laws, we can understand the different tax treatments that may apply on different supplies within the UAE as per the VAT Laws and Executive Regulations. Further in this article, the four different tax treatments shall be explained, Standard-Rated, Zero-Rated, Exempted and Out of Scope Supplies.
Standard-rated supplies are supplies where 5% tax is charged at the time of supply. This applies on all supplies traded within the UAE Mainland, in which the supplier and the customer are inside the UAE Mainland, except for supplies that are specifically mentioned as not being standard-rated supplies (either zero-rated or exempted supplies). The UAE Mainland is any place in the UAE that is not considered to be a Designated Zone. There are today 25 designated zones all around the 7 Emirates of the UAE, which can be found in the legislation section in the FTA’s website.
The following scenarios are few of the many different scenarios which are treated as a “standard-rated supply”:
• A sale from a supplier anywhere inside the UAE mainland to a customer that is anywhere insider the UAE mainland, provided that the goods or services are incurred inside the UAE mainland;
• A sale in which the goods are moving from the mainland to a designated zone in the UAE;
• All services provided within the UAE as whole, and not only the mainland (e.g. the supply of a service from a designated zone to the same designated zone shall be treated as a standard-rated supply).
There are specific supplies that are being traded inside the UAE Mainland, where 5% tax shall not be charged, in which it is specifically identified in the law that such supplies shall be treated as taxable at a rate of 0% or exempted from VAT, which shall be explained later in this article.
Zero-rated supplies are supplies that are considered to be taxable, but at a rate of 0%, and not 5%. Such supplies shall be declared properly in the general tax returns submitted every tax period. As mentioned earlier in this article, there are exceptions for goods supplied within the UAE Mainland, where such supplies shall be treated as either zero-rated or exempted from VAT (VAT exempted supplies shall be discussed later in this article). The following supplies traded within the UAE are to be considered as zero-rated supplies:
• Supply of precious metals such as, gold, silver and platinum. Shall be 99% pure and in tradeable form;
• Supply of certain educational services along with relevant goods and services;
• Supply of certain healthcare services along with relevant goods and services;
• First supply of a newly constructed residential properties;
• First supply of a charitable building;
• International transportation of goods and services (inbound and outbound);
• Export of goods and services; and
• Supply of certain means of transportation, where it is designed to be used for commercial transportation purposes.
It is important for companies to know that even if their supplies are completely zero-rated, if the company’s turnover for the past 12 consecutive months is over the mandatory registration threshold, then tax registration shall still be done.
Title Six of the Cabinet Decision No. (46) on the Executive Regulations of the Federal Decree-Law No. (8) of 2017 on VAT explains the supplies that are subjected to the zero-rate. Title six is from Article (30) until Article (41).
Exempt supplies are supplies traded within the UAE, but without any VAT charge, neither 0% nor 5%. Just like the standard-rated and zero-rated supplies, the exempt supplies shall as well be properly declared in the general tax returns submitted every tax period. As mentioned earlier in this article, there are specific supplies, that the law has specified, that shall be considered as VAT exempted supplies, and therefore, shall be traded in the country without charging VAT at all, neither 0% nor 5%. The following are the supplies that shall be considered as exempt supplies:
• Financial services;
• The subsequent supply of a residential property, in which the first supply is zero-rated as mentioned above;
• Supply of a bare land; and
• Supply of local passenger transport in a qualifying mean of transportation.
Unlike the standard-rated and zero-rated supplies, there is no need for companies that are completely making VAT exempt supplies to register in tax, even if their turnover for the past 12 consecutive months have exceeded the mandatory registration threshold.
Title Seven of the Cabinet Decision No. (46) on the Executive Regulations of the Federal Decree-Law No. (8) of 2017 on VAT explains the supplies that are VAT Exempted. Title seven is from Article (42) until Article (45).
As explained earlier in this article, VAT shall be charged when trading supplies inside the UAE Mainland. In some cases, a payment might be made without receiving any supply in return, for example, a penalty. In such cases, since there is no actual supply made here, then the payment shall be outside the scope of VAT. We have also seen many companies licensed inside the UAE, but trading supplies that are completely outside the UAE Mainland. For example, a company purchased goods from its supplier in China, and sold the same goods to its customer in Germany. It is important to analyze whether the goods have physically entered the UAE or not. In most cases, such companies would deliver the goods from their supplier’s premises directly to the customer’s country. In that case, this supply would be considered as being outside the scope of VAT, as the goods have not physically entered the UAE Mainland, and thus, have not been declared by the UAE customs, and therefore, shall be considered as outside the scope of VAT. In some other cases, companies would import the goods purchased from outside the UAE, and then export the same goods again to customers outside the UAE. This supply will have a different VAT treatment which shall be analyzed on a case-by-case basis.
Unlike the standard-rated, zero-rated and VAT exempted supplies, out of scope supplies shall not be declared in the general tax returns that are submitted in each tax period.
Just like the companies that are completely making VAT exempt supplies, there is no obligation for companies that are completely making out of scope supplies to register in tax, even if their turnover for the past 12 consecutive months have exceeded the mandatory registration threshold. Without any obligation to do so, the only way for companies that are completely making out of scope supplies to register in tax is if their taxable expenses incurred in 12 consecutive months is more that the voluntary threshold. Subsequently, the company will be able to recover and claim back input VAT, in which only registered companies can recover back VAT incurred for business purposes.
However, it is always important for companies in the UAE to properly analyze the characteristics of the supply taking place, and to always take into considerations all the details of the supply in order to build a precise opinion on the proper tax treatment of the supply.
Such proper analysis will enable companies in the UAE to know whether they are obliged to register in tax or not. In case a company was obliged to register in tax, submit tax returns, and pay taxes to the FTA, does not perform the necessary compliant actions, it shall be subjected to financial administrative penalties by the FTA.
The same analysis will also allow taxable persons to construct a proper tax return, in which the correct amounts shall be disclosed in the correct fields of the tax returns.
However, it Is always important for companies in the UAE to properly analyze the tax treatment of their supplies for two reasons mainly, the first is to know whether the company is obliged to register in VAT if there turnover exceeded the mandatory registration threshold, and the second is to know where in the tax return shall the VAT Output be disclosed, as there are special boxes for different type of supply.