How we can go wrong in determining VAT Treatment

Muhamed AshiqueMuhamed Ashique    24 June 2022
How we can go wrong in determining VAT Treatment

Overview

Determination of accurate VAT treatment is crucial in every business transaction hence, an indispensable care is significant to determine the VAT treatment even if the organization is operating in small or medium scale.

During my professional career, I came across various scenarios where business owners neglect to take professional advice related to VAT treatment and depend on what similar industry business is following which end up in an FTA Audit, obviously concludes with a massive penalty.

Here, I would share a VAT Treatment which is followed by business entities in the industry.

Introduction

On concurrent reading of Section 2 of Article 45 of the Decree-Law

“International transport of passengers and Goods which starts or ends in the State or passes through its territory, including Transport-related Services. “

and Section 1 of Article 33 of the Executive Regulation

“The supply of international transportation Services for Passengers and Goods and Transport-related Services shall be subject to the zero rate in the following cases:

 

a. Transporting passengers or Goods from a place in the State to a place outside the State.

b. Transporting passengers or Goods from a place outside the State to a place in the State.

c. Transporting passengers from a place in the State to another place in the State by sea or air or land as part of a supply of an international transport of those passengers if either or both the first place of departure, or the final place of destination, is outside the State.

d. Transporting Goods from a place in the State to another place in the State if the Services are 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. “

 

This decree implies that, Transportation of goods or passengers from/to the state to/from a place outside the state, for such services of transportation, VAT is applicable at 0%. As well law considered “Transport related services” that will fall under the 0% VAT.

Referring to Sub Section (d) Section 1 of Article 33 of Executive Regulation “The supply of transportation service from/to Port in U.A.E to/from U.A.E mainland is treated as Standard-Rated Supply (5%)."

The falsification followed is by interpreting Sub Section (d) Section 33 is that the transportation from port to mainland or vice versa is a part of international transport since the goods arriving from the port or departing from the port is in International transit. Hence, subject to Zero Rate.

However, The above mentioned supply of transportation service is Standard Rated 5% with interpretation as follows:

When a company contracts to undertake a transportation from a place inside to/from outside UAE to a place outside/inside U.A.E and as a part of this international transportation company agrees to provide transportation inside U.A.E will be zero rated only if the additional local transportation (between Posrt/Warehouse/Factory etc.) is provided by the same supplier and in connection with transportation from/to UAE to/from Outside the U.A.E (International Transport).

Eg. ABC LLC undertake a contract with Finhouse LLC to deliver a container from Warehouse to a place in Oman after loading goods from the factory in Dubai for which ABC LLC provided a description of Service Fee as AED 2,500.00 for transportation from Warehouse to Factory and AED 10,000.00 as transportation charge from Factory to Oman.

In this scenario the Total Service Charge of AED 12,500.00 can be treated as Zero Rated with reference to Sub Section (d) Section 1 of the Executive Regulation.

If Finhouse contract with KGF LLC to transport goods from Warehouse to Factory and Contracts ABC LLC to transport from Factory to Oman, in this scenario supply of ABC LLC is subject to 0% but the supply by KGF LLC is liable for VAT at 5% since KGF LLC is only involved in Local Transportation or only provided a domestic leg of international Transportation.

However, in the first scenario if ABC LLC appoint KGF LLC to transport the container form Warehouse to Factory and ABC LLC transport the same to Oman is Zero Rated but, the Service provided by KGF LLC to ABC LLC will be subject to 5% on the ground that KGF LLC have made a local supply to ABC LLC. On the other hand, ABC LLC have made an international transport including the local transport which will be zero rated as contract between ABC LLC and Finhouse is concerned.

 

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax

 

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