In January 1, 2018, value-added taxes have been introduced where a VAT rate of 5% shall be levied on all standard-rated supplies. In a normal scenario, businesses purchase their supplies from their supplier for a specific consideration. The business then recovers the input tax, and finally supplies the same goods to the end consumer for another consideration, where as per the VAT law, the end consumer is the person who shall bear the VAT on goods and services
Note: A Consideration is an amount inclusive of 5% VAT.
First, what is the meaning of supply under UAE VAT?
The term “supply” refers to providing all form of goods or services by satisfying all of the following circumstances:
• Goods or services supplied by a taxable registered person;
• Goods or services are supplied in the state of UAE;
• Goods or services will later be supplied in exchange of a reconsideration; and
• Goods or services are supplied for a business purpose.
In most cases, all the factors of the term “supply” mentioned in the above definition do take place when a supplier is providing a company with goods or services, and therefore, 5% VAT shall be charged. Subsequently VAT is recovered by the company under the normal tax returns submissions.
Sometime later, the company takes an action with the goods, that may break the rules of “supply” listed above. For example, a company may buy goods for business purposes, and recover its VAT, then choose to keep the goods for personal purposes. In another case, the company may buy goods to re-sell them to an end consumer for a specific reconsideration, but then end up giving the goods for free, or as a sample. If a company do actually break the “supply” chain after already recovering its VAT, then it either means that the company itself is the end consumer, or it has given the goods to another end consumer for free. In both cases, the end consumer is benefiting from the goods, without paying 5% VAT on the goods. This
is what we call “deemed supply”.
In such cases, the company is required to pay back the 5% VAT it has recovered, only that are pertaining to the goods that have turned from business to personal use, or that have been given away for free, e.g. gifts or samples.
Circumstances of Deemed Supply
1. Giving away company’s assets for no consideration
In most cases, a company will purchase a product which is for business for an amount inclusive of VAT. Subsequently, the company will recover the VAT amount paid on the product. The company will then decide that the product will not be sold, and will be used or incurred by others for free. For example, ABC Company has purchased 20 laptops for AED 50,000/- and paid AED 2,500/- as VAT. ABC Company have then submitted their tax return and recovered AED 2,500/- as input tax. ABC Company later decided to give the laptops to their employees for free because the laptops were old. Because the laptops were given away for no consideration in return, then they shall be considered as deemed supply. Therefore, ABC Company are liable to pay back the VAT it has recovered on those laptops which is worth AED 2,500/-.
2. Transferring business assets from UAE to a GCC implementing state
In many daily cases, companies in the UAE may transfer its assets to another implementing state e.g. KSA. When the company in the UAE have purchased this asset, whether a local purchase, or an import, it was subjected to pay 5% VAT on the purchase price of the asset, and then recover the VAT paid through the normal tax return submission by the end of the corresponding period. If the same company in the UAE have permanently transferred the assets to another GCC implementing state after recovering the VAT, then the assets shall be considered as deemed supply, and thus, the company is liable to pay the 5% VAT it has recovered back to the FTA.
For example, ABC Company in Dubai have purchased 20 laptops for AED 50,000/- and paid AED 2,500/- as VAT. ABC Company have then submitted their tax return and recovered AED 2,500/- as input tax. ABC Company later decided to transfer the 20 laptops to its other branch KSA. Once the laptops were transferred, the laptops are to be considered as deemed supply, and ABC Company is liable to pay back the AED 2,500/- that it has recovered as input tax back to the FTA.
However, such goods may not be considered as deemed supply only in the following circumstances:
• If the transfer of the goods is only temporary in accordance with customs legislation; or
• If the transfer is made as a supply of goods.
3. Usage of goods related to business purposes for personal use
Input tax recovery is permitted for all registered businesses, only if the goods purchased are pertaining to business purposes. In many cases, companies purchase goods that are actually purchased for business purposes, but later after the purchase, the usage of the goods is changed from business purposes to personal use, that is when those goods will be considered as deemed supply.
For example, ABC Company has purchased 20 laptops for AED 50,000/- and paid AED 2,500/- as VAT. ABC Company have then submitted their tax return and recovered AED 2,500/- as input tax. The owner of ABC Company has then decided to move 5 of the 20 laptops to his house for his family to use them for their own preferences. Those 5 laptops are now considered as deemed supply, and thus, ABC Company is liable to pay back the VAT it has recovered on those 5 laptops
which is AED *625/-.
4. Goods owned at the time of tax de-registration
When a company applies for a de-registration, the goods owned and available for sale shall be considered as deemed supply and thus, pay back the VAT amount recovered from the FTA, provided that the company initially recovered the corresponding VAT it has paid when they purchased or made the goods.
For example, ABC Company, a tax registered company, has purchased 20 laptops from their supplier for AED 50,000/- and paid AED 2,500/- as VAT. ABC Company have then submitted their tax return and recovered AED 2,500/- as input tax. Later, ABC Company has sold 15 laptops, then decided to de-register its tax registration to be compliant. The other 5 unsold laptops are to be considered as deemed supply, and thus, ABC Company is liable to pay back the VAT it has recovered on those 5 laptops which is AED *625/-.
*AED 2,500 ÷ 20 × 5 = AED 625/-.
The FTA has applied this rule to make sure that all goods and services traded in the UAE are being charged by 5% VAT. In the example above, let’s assume that ABC Company did not pay back the VAT on the 5 unsold laptops, and then sells the laptops later for a customer without VAT, as it is now de-registered from tax. In that case VAT on those particular laptops have not been paid by anyone, as the supplier recovered the full VAT paid on those laptops then de-registered without accounting deemed supply, and the end-consumer did not pay VAT, because the supplier not registered in tax anymore.
The circumstances listed above are the only times where goods are to be considered as deemed supply. However, there are exceptions for deemed supply, in which if any of the cases above is taking place, then the taxable person shall not be liable to pay back the 5% VAT to the FTA.
Exceptions of Deemed Supply
1. Input tax is initially not recovered from FTA
When a company purchases goods or services that are pertaining to business purposes, and does not claim back the VAT it has paid on the price of the goods or services, it will not be liable to pay any VAT again if it uses the goods or services for personal use anytime later.
For example, ABC Company has purchased 20 laptops for business purposes, for AED 50,000/- and aid AED 2,500/- as VAT. ABC Company have then submitted their tax return and only recovered AED 1,875/- as input tax (which is VAT for 15 laptops only). The owner of ABC Company has then decided to move 5 of the 20 laptops to his house for his family to use them for their own preferences. Generally, those 5 laptops are now considered as deemed supply but, because the company has not recovered the VAT it has paid on those 5 laptops, then they shall be exempted from being deemed supply, and there is no any liability to pay any VAT back to the FTA.
2. Goods and services supplied are defined as exempt supply
If the goods or services being traded and subjected to being accounted as deemed supply, are specified as exempt supply as per the VAT law, then none of the any 4 circumstances of deemed supply explained above shall apply. In other words, all exempt supplies shall always be exempt from VAT, and shall never be accounted as deemed supply.
3. Input tax recovered is already adjusted for being supplied under Capital Asset Scheme
In some cases, companies purchase assets under the capital asset scheme, where the recovered VAT is being adjusted under the scheme itself. In cases where the recovered VAT is already reversed under the scheme, then the corresponding goods shall not be accounted as deemed supply.
4. Samples or commercial gifts given for no consideration
Goods or services given for no consideration shall be treated as deemed supply. However, there is an exception for this rule, where the goods or services provided to each customer is worth not more than AED 500/- within a 12-month period and that the goods are given as samples or
For example, ABC Perfumery has given goods as samples or commercial gifts worth AED 480 for a specific customer within a 12-month period.
ABC Perfumery shall not consider those goods given to that customer as deemed supply because all of the following are satisfied:
• Goods are worth less than AED 500;
• Goods were given in a period of less than 12 months; and
• Goods are given as samples or commercial gifts.
If any of the above points was not satisfied, then the goods would have been considered as deemed supply.
5. Output VAT threshold exemption
This gives an exception to all the deemed supplies that have a total output tax payable for each person in a 12-months period is less than AED 2,000/-. Such supplies will be exempted from being considered as deemed supply.
For example, ABC Toy Shop has conducted a lucky draw in which 1 kid shall win a gift voucher worth AED 1,500/-. The toys that will be given for free for the winner kid shall not be considered as deemed supply, as their worth is less than AED 2,000/- and given within a period of less than 12 months.
It is important for all companies to properly analyze whether specific goods shall or shall not be treated as deemed supply. There are specific circumstances where goods shall be treated as deemed supply, and there are specific exemptions to those circumstances. Therefore, it is very important for companies to analyze the nature of the supply of the goods that might be deemed supply and also to make sure if there are any exemptions to such supply.
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