VAT Administrative Exception for Exporters Struggling with Documentation
It is a fundamental principle of VAT around the world that exports do not bear VAT and the associated input tax is refunded to the exporting business to encourage international trade. Similarly, in UAE, KSA and Bahrain, the VAT Laws treat export of goods as zero-rated (VAT at 0%) with the right to recover input VAT and claim refund.
To ensure export benefit and the related refund is granted to genuine exporters, the VAT authorities generally lay procedural conditions to verify the claim. Under UAE VAT as well as in KSA and Bahrain, retention of ‘official evidence’ and ‘commercial evidence’ is mandatory to claim the benefit of zero-rating. The authorities generally require these evidences during an audit to verify physical movement of goods outside the country.
Failure to maintain these evidences could render transaction subject to VAT at 5% in addition to the administrative penalties. Furthermore, the 5% VAT would become cost as possibility to recover VAT from the overseas customer could be a challenge after an export sale.
Typically, commercial evidence would include airway bill (for export by air), bill of lading (for export by sea) or consignment note (for export by road). These documents are generally available from the exporters as part of the export documentation for Letter of Credit and banking requirements. However, for official evidence, there is little clarity in the UAE VAT Law as it referred to documents issued by the local Emirate Customs authorities.
For official evidence, the Dubai Customs authorities, during VAT implementation, issued Notification No. 7/2017 stating the procedure to prove exportation outside the country for VAT purposes and advised Businesses to obtain:
Due to lack of awareness about the customs notification, many Businesses in the UAE in last 2 years did not maintain official evidence while others struggled to obtain a customs exit certificate due to differences in customs procedures at each Emirate checkpoints.
To address this issue, the FTA recently updated the Administrative Exception Guide to include a relaxation in the export documentation mentioned above and to allow alternate use of documents to prove exports. The Guide was originally issued in June 2019 to allow taxpayers to apply for an administrative exception for certain procedural requirements such as relaxation in tax invoice and tax credit note particulars or the length of tax period.
The administrative exception is not automatic therefore, Businesses need to make an application before the FTA along with actual reasons / circumstances to allow use of alternate form of export evidence.
Before making an application, it would be important to evaluate various export scenarios (in terms of export by road, air or sea) and examine whether sufficient documentation in terms of official and commercial evidences are available under each scenario. In cases where there are deficiencies, it would be relevant to look at the alternate documents which can substantiate exports such as copy of customer courier receipt or bill of entry at port of destination to prove that goods were delivered to the overseas customer.
The use of alternate form of export evidence is at the discretion of the FTA therefore, it is necessary for Businesses to carefully draft the exception application with detailed justification and supporting documents to obtain the desired outcome.
To conclude, Businesses which are struggling to obtain official evidence or those which levied 5% VAT on exports on conservative basis, should use this opportunity to obtain administrative exception from the FTA and apply zero-rating on exports to remain competitive in international trade.
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