VAT on E-commerce in UAE - Summarised

Deeplaxmi NadgoudaDeeplaxmi Nadgouda    27 October 2020
VAT on E-commerce in UAE - Summarised

Introduction:

In traditional commerce, goods and services are usually supplied from a physical location, such as a shop or office, with the supplier and the recipient usually present in the same location. However, the Novel Corona Virus 2019 pandemic has brought about a change in this traditional approach and hence there is a rising preference seen for buying things online. This write up will discuss the impact of VAT on the E commerce business in UAE and GCC countries.

E-commerce (also known as “electronic commerce” or sometimes loosely referred to as the “digital economy”) generally refers to supplies of goods and services over the Internet or a similar electronic network, with goods and services being sourced or supplied by electronic means, such as through a computer, phone website or electronic applications.

Broadly speaking, they are goods or services or both bought or sold through E-commerce.

General Background:

Before we could proceed deep into each of these categories, let us look into the general taxability criterias since the general VAT rules also apply to e- commerce transactions. As far as legislative background is concerned, UAE VAT is governed by the Decree-Law and the Executive Regulation. It should be noted that VAT legislation contemplates special rules for cross-border supplies of goods and services between the UAE and “Implementing States”, which are the GCC States that are implementing a VAT system. At the current time, none of the GCC states are considered to be Implementing States for the purposes of the UAE VAT.

1. What is a Taxable Supply?

For a supply to be a taxable supply, the following conditions must be met:

• there needs to be a supply of goods or services;

• the supply has to be for consideration;

• the supply has to be made by a person who is conducting business in the UAE; and

• the supply should not be an exempt supply.

2. What are the tax Rates?

Taxable supplies may either be subject to the standard rate of 5% or zero rate (i.e. 0%) for both goods and services.

3. When would be a person considered resident?

A person would be resident in the UAE for the purposes of VAT registration if the person has a place of establishment or fixed establishment in the UAE.

4. When should a resident person get himself registered?

A person resident in the UAE is mandatorily required to register for VAT if any of the following apply:

• the total value of their taxable supplies made within the UAE and imports into the UAE exceeded AED 375,000 over the previous 12-month period; or

• the person anticipates that the total value of their taxable supplies made within the UAE and imports into the UAE will exceed AED 375,000 in the next 30 days.

However a person may also seek voluntary registration. The conditions for seeking voluntary registration are similar to above except that the limit on taxable supplies and imports is set as AED 187500.

The value of any supplies which are either exempt from VAT or are outside the scope of UAE VAT are not to be considered in calculation.

In contrast, if the person is a non-resident, such person is required to register for VAT if it makes any taxable supplies in the UAE, unless there is another person in the UAE who is responsible for accounting for VAT on such activities. As such, for non-resident suppliers, the registration threshold is, in effect, nil.

5. What is a Place of supply in UAE?

For a supply to be within the scope of the UAE VAT regime, the supply needs to take place in the UAE. If a supply takes place outside the UAE, the supply is treated as outside the scope of UAE VAT and therefore UAE VAT will not apply. The basic place of supply rule for goods is that, if the goods are located in the UAE when supplied, then they are treated as supplied in the UAE. Similarly, if the goods are located outside the UAE when they are supplied, the place of supply is outside the UAE. Where the supply involves the export of goods from the UAE to a place outside the GCC Implementing States (which is currently, any other state outside the UAE), the place of supply is in the UAE. For the purpose of services, Supplies of electronic services (as well as of telecommunications services) are subject to a special place of supply rule. Thus, the place of supply of electronic services is in the UAE, to the extent of the use and enjoyment of the supply in the UAE and outside the UAE, to the extent of the use and enjoyment of the supply outside the UAE. The actual use and enjoyment of electronic services should be determined on the basis of where the electronic services are consumed by the recipient, regardless of the place of contract or payment.

Since the legislation does not provide any express rule regarding the indicators, following principles may be used as high-level guidance in determining the place of use and enjoyment in various scenarios:

• In the case of an electronic service which is delivered to a physical place, the place of use and enjoyment of that service is that physical place. For example, where electronic services content can be only accessed from a particular physical location, that location will be the place of use and enjoyment.

• In the case of electronic services provided on a portable device, the use and enjoyment may be determined on the basis of the recipient’s location at the time the services are supplied. For example, where music is electronically delivered to a recipient located in the UAE, the place of use and enjoyment will be the UAE.

For the purpose of determining the location of the recipient, some of the factors which may be indicative of the recipient’s location are the internet protocol (“IP”) address of recipient, the country code stored on the SIM, the place of residence of the recipient; the billing address of the recipient; and / or the bank details used by the recipient for the payment.

6. Who is responsible for accounting of VAT?

The supplier is generally responsible for accounting of VAT except the RCM transactions where recipient is responsible.

E-commerce: Supplies of Goods

Depending on the location of the supplier, the recipient, and the goods, the supply may take any of the following basic forms:

• A supply by a resident supplier to a recipient in the UAE, with goods being delivered from either inside or outside the UAE;

• A supply by a resident supplier to a recipient outside the UAE, with goods being delivered from either inside or outside the UAE;

• A supply by a non-resident supplier to a recipient in the UAE, with goods being delivered from either inside or outside the UAE; and

• A supply by a non-resident supplier to a recipient outside the UAE, with goods being delivered from either inside or outside the UAE.

A. Supplier is a UAE resident and a taxable person:-

This situation is quite clear as the supplier being resident taxable person, the onus to collect VAT, pay it, account for it and report it to FCC in form of returns is on him wherever applicable. Also, wherever the supplier is not registered for VAT, no VAT applies on the supply (it could apply on the import), unless the supplier has an obligation to register for VAT in accordance with the registration rules.

Goods delivered from

Goods delivered to

VAT on supply

VAT on supply accounted by

VAT on import

Reason

UAE

UAE

5%

Supplier

No

Domestic supply

UAE

Outside UAE

0% if export conditions are met; otherwise 5%

Supplier

No

This is export supply (0 rated) if conditions are met, otherwise

supplier to be

         

responsible.

Outside UAE

UAE

No

N/A

Yes

POS is outside

UAE

Outside UAE

Outside UAE

No

N/A

No

Outside the

scope of UAE.

B. Supplier is not a resident of UAE

Residency status of

recipient

Registration status of

recipient

Goods delivered

from

Goods delivered

to

VAT on supply

VAT on supply

accounted by

VAT on import

Reason

UAE

Registered

UAE

UAE

5%

Recipient

No

Reverse Charge

attracted.

Any

Not registered

UAE

UAE

5%

Supplier

No

If this is a taxable supply and No other person in UAE to remit the tax, supplier must take registration. No threshold limit for  seeking registration.

Outside

UAE

Any

UAE

UAE

5%

Supplier

No

Same as above

UAE

Registered

UAE

Outside UAE

0% if export conditi ons are met; otherwi se 5%

Recipient

No

In this case supplier being unregistered and recipient being registered, if the export criteria is not satisfied, onus is on recipient on RCM  basis.

Any

Not registered

UAE

Outside UAE

5% or  0% if export conditions are met

Supplier

No

Same as point 2

Outside UAE

Any

UAE

Outside UAE

0% if export conditi ons are met; otherwise 5%

Supplier

No

Same as point 2

Any

Any

Outside

UAE

UAE

No

N/A

Yes

VAT not applicable.

Any

Any

Outside

UAE

Outside

UAE

No

N/A

No

VAT not applicable

Note:-

1. Where the non-resident supplier has obtained registration in UAE, the taxability will happen directly on par with any regular registered supplier.

2. Where the VAT on the supply is the obligation of the non-resident supplier who is not yet registered for VAT, the supplier must apply to register for VAT. The supplier may be subject to penalties for non-compliance.

E-commerce: Supplies of services

For the purposes of VAT, “electronic services” mean services which are automatically delivered over the internet, an electronic network, or an electronic marketplace, including:

• supply of domain names, web-hosting and remote maintenance of programs and equipment;

• supply and updating of software;

• supply of images, text, and information provided electronically, such as photos, screensavers, electronic books and other digitised documents and files;

• supply of music, films and games on demand;

• supply of online magazines;

• supply of advertising space on a website and any rights associated with such advertising;

• supply of political, cultural, artistic, sporting, scientific, educational or entertainment broadcasts, including broadcasts of events;

• live streaming via the internet;

• supply of distance learning; and

• services of an equivalent type which have a similar purpose and function.

For a supply to fall under the special VAT rules for electronic services, the supply must, therefore, meet two conditions:

1. The service in question must be one of the services mentioned in the above list of services; and

2. The service must be automatically delivered over the internet, an electronic network, or an electronic marketplace

Explanation:- Going by this requirements a supply of legal advice, for instance, will not constitute an electronic service simply because the parties use the internet to communicate with each other or to facilitate bookings. Also, the term “automatically delivered over

internet” should be considered with a fair intention that provision of service involves significant automatic delivery over internet although a negligible amount of manual intervention is understood. For instance, a software delivered via a downloadable link on mail is considered delivered electronically although the mail has been sent manually.

The supply of electronic services may be made through an electronic marketplace (E.g:- A website, Internet portal etc) which allow suppliers to make supplies of electronic services to recipients; and the supplies made by the marketplace must be made by electronic means rather than directly by the supplier to the recipient.

Residency status of supplier

Place of use and enjoyment (Place of supply)

Registration status of recipient

VAT on supply

VAT accounted by

UAE

UAE

Any

5% or 0% if specifically zero-rated

Supplier

UAE

Outside UAE

Any

No

N/A

Outside UAE

UAE

Not registered

5% or 0% if

specifically zero-rated

Supplier

Outside UAE

UAE

Registered

5% or 0%

specifically zero-rated

Recipient

Outside UAE

Outside UAE

Any

No

N/A

Note:

The UAE-resident supplier will only be responsible for accounting for VAT on the supply where it is a taxable person in the UAE.

Supplies made through agents

Electronic marketplaces like websites, portals, gateways etc may sell goods or services themselves, as well as act as intermediaries between the supplier and the recipient of goods or services.

The VAT treatment of supplies using intermediaries will depend on the arrangement between the supplier, the intermediary and the recipient of the supply. They are generally categorised as Disclosed agents and Undisclosed agents. While a disclosed agent, act on behalf and in the name of a principal while an undisclosed agent is an agent acting in its own name.

In transactions involving services of a disclosed agent, the supply is purely between the supplier and the recipient beneficiary. Hence here the supplier is cast on responsibility to account for VAT.

Where an agent is charging an agency fee or commission for its agency services, these agency services should be treated as a separate supply of services from the supply of the underlying goods or services. Where the place of supply of such agency services is in the UAE, the services are considered a taxable supply. It should be noted that the place of supply for agency services provided by agents must be determined independently from the place of supply of the underlying goods and services, and therefore can differ from the place of supply of such goods or services. For zero rating the conditions like agency services provided to non resident and such recipient should be outside UAE, the underlying asset should not be a real asset and the performance of the agency services is not received by another person in the UAE who is unable to recover any input tax in full, need to be fulfilled.

In case of undisclosed agent, such an agent is treated as both the buyer and the seller of the goods or services. Here both the principal supplier and the undisclosed agent must separately charge VAT applicable on the supply of the underlying goods or services, and must account for this VAT to the FTA in their own VAT returns. Where it is eligible under the general input tax recovery rules, the undisclosed agent may also recover the VAT which was charged to it by the principal supplier. Where an undisclosed agent and the principal agree that the agent can charge a separate agency fee or commission for the agency services to the principal, the agent must consider the VAT treatment of this services separately from the VAT treatment of the underlying supply of goods or services. On the other hand, where the agent is able to embed the fee as a mark-up to the sale price of the goods or services, then the VAT treatment of the agency services should follow the VAT treatment of the underlying goods or services.

Issue of Invoice

As a default rule, a VAT-registered supplier of a taxable supply of goods or services is required to issue an original tax invoice and deliver it to the recipient of the supply. This condition applies irrespective of whether the goods are sold directly or through an electronic marketplace.

There is an exception to this default rule, where a VAT-registered agent makes a supply of goods or services on behalf of a principal, the agent may issue a tax invoice in relation to that supply as if that agent had made the supply. A tax invoice issued by the agent must not only contain all the usual particulars required under Article 59 of the Executive Regulation, but may include the agent’s, rather than the supplier’s, details – in which case, the invoice should, however, contain a reference to the principal supplier (including the supplier’s name and TRN) somewhere on the invoice. The undisclosed agent has the responsibility to issue a tax invoice in its own name.

Conclusion:

This article discussed comprehensively the aspects involved in E-commerce transactions of goods and services.

Source:- E-Commerce VAT Guide | VATGEC1|August 2020

 

 

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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