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:
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:
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.
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