UAE VAT implications for retailers and suppliers when offering discounts and promotions

Simran KSimran K    10 August 2020
UAE VAT implications for retailers and suppliers when offering discounts and promotions

The retailer has a strategic advantage shop which runs different advertising schemes for their clients. Awards can be rendered in the form of discounts, free gifts, samples, gift vouchers, promotions bundled, etc.

VAT implication for the retailer when offering promotions are as follows:

Free samples: Retailers can supply product samples to foster business profits. Such free samples could be taken within the scope of 'deemed supply' subject to certain conditions such as the following:

1. The retailer recovers VAT on the concerned goods & services procured by them.

2. The value of each supply considered the beneficiary shall be greater than or cumulative AED 500 the worth of all these supplies the duration of twelve months is over 40,000 AED.

In the light of the above-mentioned conditions, the free samples distributed to the customer could be liable to VAT.

Percentage based or fixed amount discount: Retail stores may provide the clients with a discount percentage or lump sum discount as a fixed amount on the total selling price of the product.

In the event of a discount, the customer benefits from a reduced price and pays only the balance amount. Thus, in such cases, VAT on goods/services would apply to the value of the consideration received by the customer after discount subject to compliance with the conditions laid down in the VAT legislation, i.e. such discounts would have to be financed by retailers and customers would have to benefit from the price reduction.

In such instances, it would be appropriate for retailers to ensure that discount costs are not passed on or financed by any third party. In the case that the discount or any part thereof is financed either by the manufacturer or by any other person, such funding may be subject to VAT.

Discount coupons: Retail stores provide customers with a discount coupon that can be redeemed against future purchases from stores. Discount vouchers may fall within the scope of 'vouchers' and, therefore, the issuance of discount coupons may be outside the scope of VAT unless it is issued for consideration in excess of the stated face value of such coupon. Depending on the conditions placed on such discount vouchers for their redemption, the same may be considered a discount when the customer redeems the voucher against subsequent purchases of goods.

Raffles/Lottery: Customers will take part in the raffle draw/spin the wheel and get a chance to win a prize. Customers are often required to spend a minimum value in order to participate in the draw. However, sometimes draws are made randomly and they may not be required to buy anything, such as draws kept for all walk-in customers when a new store is opened. In this case, the gifts/prices distributed to participants could fall within the scope of the deemed supply.

Trade-in/Exchange: Customers are offered to exchange their old products for the brand-new product. Customers may be required to pay only the variable consideration resulting in a discount on the price of the new product. Even so, the old product returned by the customers could be considered as non-monetary consideration and the retailer may be liable for payment of VAT on the consideration received plus the market value of the non-monetary part, i.e. the total selling price of the new product.

Cashback/Retrospective discount by the retailer: Stores offer a percentage discount or a fixed amount discount on the purchase threshold over a certain period of time. In such situations, as a discount is offered to customers against purchases made in the past period, retailers may issue a tax credit note to the customer.

Scope of the discount amount; however, it would be cumbersome to identify and tag the original tax invoice against which the discount is offered and, therefore, the tax credit note may not comply with the procedural requirements. Alternatively, retailers may consider passing on this discount to customers on their next purchase value and pay VAT on the value net discount at the time of purchase of that kind.

Cashback by third party/banks: Third-party/banks join hands with retailers to provide customers with cashback after purchase. Retailers shall supply the customer for full consideration and, subsequently, the third-party/banks shall provide the customer with cash back upon receipt of confirmation of supply from the retailers.

Under these instances, the cashback provided by third-parties/banks would be recognized as a separate transaction. Since there is no underlying supply of goods or services between banks and customers involved in the reimbursement of such consideration or between retailers and banks / third parties, the transaction should be treated as outside the scope of VAT.

In addition, third-party/banks can have a back-to-back contract with retailers to carry part of the cashback amount. For these situations, the cashback received from suppliers would also be outside the scope of VAT, because it may be viewed as a solely financial transaction between the bank/third-parties and the retail store. It will be appropriate to analyse the contractual relationship with the retailer with the third-party/banks as to whether the transaction amounts to business promotion/marketing.

Accessories/Parts without consideration: Retail stores shall supply additional goods/accessories/parts with the main product as a bundled supply. Such products are usually marketed as accessories/parts along with the main product on the market.

For these situations, products should be treated as a combined supply and the consideration received for the main component should be regarded as a package and VAT is also liable to be paid on the overall consideration received.

'VAT paid/borne by the retailer' promotion: The retail store charges the customer only for goods or services and does not charge the customer any amount of VAT on these supplies. Within those situations, retailers usually offer customers discounts equal to the VAT portion and reduce the consideration to that degree. Balance sum is deemed to be inclusive of VAT as provided for in the law and the VAT on the same sum is refunded. Calculated for the purposes of transparency on tax invoices. From the customer's point of view, the cash flow is reduced to the extent of the discount received.

VAT implication for suppliers when offering promotions are as follows:

Rebates/Cashback: Suppliers provide an incentive to retailers in the form of cashbacks/rebates/refunds/volume discounts for incentives purchasing. The rebates/kickbacks granted to retailers are regarded to be deductions in the purchase price and are regarded as discounts from the supplier to retailers on the basis of the arrangements in the underlying agreement.

In these instances, the supplier should issue a tax credit note to the retailer on the basis of which input VAT recovered earlier could be reversed. Even so, in certain cases, such kickbacks/incentives are not carried on as discounts but are provided as incentives for the performance of certain items.

Conditions as set out in the agreement. In this case, such incentives would be treated as consideration for the promotional support services provided by retailers and should be recognized as revenues of retailers; Henceforth being subjected to VAT.

Sales at a reduced price: The retail store is allowed to consider the sale in two separate taxable supplies. The first transaction is with the consumer where the goods are sold at a reduced price and the second transaction is with the supplier for the recovery of the balance.

Advertisement/POS display material: Showcase materials are given free of charge along with the main product to retailers for promotional activities; they cannot be viewed as separate items and should be used as promotional content along with the primary brand.

Discounting on early payments: Suppliers shall give a discount to the retailer on the consideration received on the taxable supply of goods or services, the same must be regarded as a discount on previous supplies and the suppliers will issue a Tax Credit note for the same item.

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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