VAT considerations for disclosed agents

James HillJames Hill    16 November 2020
VAT considerations for disclosed agents

Determining whether one is acting as a disclosed or undisclosed agent is an important consideration that many UAE taxpayers continue to grapple with.  This topic is a global issue, routinely covered in detail in many VAT or GST jurisdictions because the tax consequences for the party acting in each role can be very different. 

Article 9 of the UAE VAT Law covers the VAT implications for supplies made via an Agent.  However, many people could read Article 9 and still be unsure as to (i) which category of agent they fall into; and (ii) what the VAT consequences are for them.

How to identify whether you are acting as a disclosed agent

It is important to note that the FTA has not released specific guidance on how to determine whether a business is acting a disclosed or undisclosed agent.  However, section 5 of the VAT Guide for e-commerce does contain some useful information, which is worth considering.

The most common mistake made by businesses appears to be believing that because they have primary interaction with, and collect money from, the ultimate customer then they must be acting as “principal” and therefore an undisclosed agent for VAT purposes. 

However, these factors are actually less relevant when determining the role of the agent.  There is not a specific comprehensive test, but typically a business is likely to be acting as a disclosed agent if the following conditions are met:

  • The agent claims to hold no legal liability if there is a fault with the goods or services
  • The client knows or can identify the supplier of the goods or services at the time of purchase
  • The agent cannot legally bind the supplier to contracts without approval
  • The supplier determines / approves the price of the goods or services being supplied

Much of this information will be outlined in the agent’s T&Cs and potentially any formal agreement between the principal and the agent.  However, it may not be clear cut and some detailed analysis may be required in order to determine the role of the agent.

In fact, we have seen businesses acting as an undisclosed agent for purchases on behalf of a supplier and then as a disclosed agent for the sale of those products – for example, in the contract catering industry where it may make financial sense for the contract caterer to make bulk purchases in their name in order to obtain more favourable prices and rebates.

VAT implications for disclosed agents

Where a business is acting as a disclosed agent, then it is making a supply of agency services to the supplier or customer or both.  Importantly, it is not considered to be making a supply of the underlying goods or services as principal for VAT purposes (which is the contrasting position for undisclosed agents).  Therefore, the disclosed agent should only account for VAT (where applicable) on its agency services.

Common mistakes by businesses not realising they are acting as a disclosed agent include:

  • Receiving invoices from the supplier and deducting the VAT charged as input tax.
  • Not issuing or delivering a valid tax invoice stating the agency fee, even if the correct output tax is accounted for in the VAT return.
  • Applying an incorrect VAT rate to the agency services, based on the VAT treatment of the underlying goods or services.
  • The contractual agreements in place do not accurately reflect the roles of the parties of the specifics of the transaction.

Arguably, acting as an undisclosed agent is simpler for VAT purposes, which could be a reason why so many businesses are quick to jump to that conclusion without conducting a thorough analysis.  There is also no obligation to disclose your “mark-up” or fee to your customer, which can cause issues from a commercial perspective.

However, with the strict penalty regime in the UAE and the current approach of the FTA, it is important for businesses acting as agents in the UAE to quickly identify whether they are acting as a disclosed or undisclosed agent for VAT purposes so that they can meet the necessary VAT obligations. While we understand that it may be difficult to change past approaches and the parties may not want to agree on the correct approach, both parties could be subject to penalties if the supplies are treated incorrectly.  If the resulting VAT obligations are too onerous, it could be a potential driver for the businesses to change their operating model for commercial purposes, particularly if new contracts are in the process of being agreed.

 

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

Other articles by James Hill


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