VAT IN UNITED ARAB EMIRATES: PROFIT MARGIN SCHEME

The Federal Tax Authority (‘’FTA’’) issued a public clarification on Article 29 (VATP002) of the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax, few months ago. This has been further clarified by the FTA at an awareness session recently organised at the Abu Dhabi Chamber of Commerce and Industry in order to raise awareness among the taxable persons.

Profit Margin Scheme is a scheme that may allow the Registrant, in any Tax Period, to calculate and charge tax based on the profit margin earned on the taxable supplies and not based on the value of these supplies.

The profit margin is the difference between the purchase price of the Goods and the selling price of the Goods, and the profit margin shall be deemed to be inclusive of Tax.

What kind of goods are eligible to be supplied under Profit Margin Scheme?

  • Second hand goods, meaning tangible moveable property that is suitable for further use as it is after repair;
  • Antiques i.e. goods that are over 50 years old;
  • Collectors’ items i.e. stamp, coins, currency and other pieces of scientific, historical or archaeological interest.

What are the key conditions to apply the Profit Margin Scheme?

  • Only those goods which have previously been subject to VAT before the supply in question may be subject to the profit margin scheme. As a result, used goods acquired prior to the implementation of VAT or goods which have not previously been subject to VAT for other reasons are not eligible to be sold under the Profit Margin Scheme. There needs to be sufficient evidence or information to justify that the good was subject to previously.
  • The goods must have been purchased from either:
    • A person who is not registered for VAT.
    • A registered business which has already applied Profit Margin Scheme on the same goods.
  • The taxable person made a supply of the goods where input tax was not recovered in accordance with Article 53 of Cabinet Decision No. 52 of 2017.

Under what cases the Profit Margin Scheme will not apply?

  • Used goods acquired prior to the implementation of VAT or goods which have not previously been subject to VAT for other reasons are not eligible to be sold under the Profit Margin Scheme.
  • Where a tax invoice or any other document mentioning an amount of VAT chargeable in respect of the supply has been issued.
  • Sufficient evidence or information is not available to justify that the goods have been subject to VAT previously.

How can we help?

Further, we can help you assess the eligibility of Profit Margin Scheme on the goods under question and advise on the implications and provide guidance in relation to the documentary requirements which need to be maintained to ensure compliance.

VAT IN UNITED ARAB EMIRATES: WHAT IS IT AND WHAT ARE THE IMPACTS?

Why is VAT being introduced?

The Ministry of Finance and the wider GCC have agreed to implement Value added tax (VAT) at a rate of 5% from 1 January 2018. This landmark Agreement marks the start of a fiscal reform across the region.

The increased need to diversify the economy, changing operating models and promoting smart initiatives led by technology and employment continue to be key trends. In order to promote such change and create an economy which is safeguarded for the future, governments across the region have introduced various initiatives to reduce the dependency on oil-generated incomes and further stabilize the economy, one of which being the introduction of VAT in Dubai, Abu Dhabi and all of the Emirates.

How will VAT impact your business?

VAT in the UAE is likely to impact various segments of your business, therefore it is advisable to conduct a VAT mapping programme of your current procedures and processes in order to identify the VAT transformation required.

Depending on the size and complexity of your business and operations, VAT readiness can take from three months to a year, with an impact being felt across multiple touch points of your business, which include some, if not all, of the functions such as:

  • Finance, Purchasing and Sourcing and Imports
  • Sales and Marketing; Logistics and Customs
  • Legal and Human Resources; IT Department for Systems and ERP

 

Standard Rate:       5% to be applied to most goods/services supplied by ‘Chargeable Persons’

Zero Rate:               Zero VAT (0%) applied to limited goods and services.

Exempt Supplies:   Supplies outside the scope of VAT. Input VAT will not be recoverable.

Who needs to register?

Mandatory registration will be required for ‘Chargeable Persons’ (individuals, companies, groups, etc) making ‘Taxable Supplies’ of AED 375,000 (generally calculated over a 12-month period). The voluntary registration threshold will be AED 187,500.

 

POINTS TO CONSIDER

VAT Returns: Most Chargeable Persons will need to file quarterly returns. The deadlines for VAT returns will be a month from the end of the quarter. Some entities may need to file monthly returns.

Transitional Rules: Transitional rules will apply on stock / WIP as at 31 December 2017. Contracts that cross over the date of implementation of VAT will be affected.

Tax Audits: FTA has been given rights to undertake a Tax Audit on any person to ascertain the extent of compliance with the provisions of the LAW.

What if you decide not to change anything?

If nothing is done, there is a serious risk that your current business methodology will not be compliant with the new legislation. Furthermore, you might not be able to submit a complete and accurate VAT return in a timely manner. Non-compliance could lead to penalties or prosecution, whichever applies.

BAHRAIN VAT: IN COMPARISON

The government of Bahrain has announced the implementation of VAT from 1st January 2019. An Arabic version of the VAT law has been published. Implementing regulations will be released at a later date which will explain the VAT matters in further detail.

Some of the important points and differences to UAE and KSA VAT legislation are as follows:

1. Mandatory Registration – Threshold

The Bahraini legislation refers to the GCC agreement for the mandatory registration threshold which stipulates Saudi Riyal 375,000 as the basis of calculation. The Bahraini legislation has not clarified which rate of exchange rate will be used to determine the final value of threshold. Threshold value is likely to be 37,500 if we look at the example of UAE threshold which is not exactly equivalent to the exchange rate pertaining to, for example, 01 January, 2018. UAE used a rounded off exchange rate of 1AED/SAR to calculate its threshold. Bahrain is likely to use a round off figure of 10 BHD/SAR, hence, BHD 37,500 as the threshold.

2. Mandatory Registration – Period

Another important distinction when compared to KSA and UAE legislation would be the period of revenue considered for mandatory registration. KSA and UAE consider last 12 months and next 30 days of revenue for the purpose mandatory registration. In contract Bahrain considers last 12 months OR “anticipated revenue” in the next 12 months. Companies may have to provide signed contracts to establish future revenue.

3. Voluntary Registration – Threshold and Period

Similar to UAE and KSA the voluntary threshold will be half of the mandatory threshold and both revenues and expenses can be considered for this purpose. But similar to the distinction in the period, previous OR next 12 months of revenue and expenses can be considered for the registration.

4. Tax Return Submission Date

It will be the last day of the month subsequent to the tax period. For example, for Quarter Ended 31st March, 2019 the last date of submission would be 30th April, 2019. This is similar to KSA.

5. Tax Debit Notes

The document titled “Tax Debit Note” is officially recognized when compared to KSA and UAE where only additional invoices can be issued for any increase in the value of a Tax Sales Invoice. For instance, in UAE and KSA, if by error or omission a Tax Invoice was undervalued, you need to issue an additional Tax Invoice describing the change. Bahraini Legislation recognizes a Tax Debit Note which can be officially issued to rectify such an error, instead of an additional tax Invoice.

6. Pre-registration Expenses

In Bahrain, with regards to sale of taxable goods, only those Input VAT credits can be claimed where the respective taxable goods would be sold after the registration date. In terms of taxable services, no Input credits can be claimed prior to 6 months of registration date. This is similar to KSA.

The distinction in UAE is with respect to the input credits on services only. Input Credits can be claimed as long back as 5 years prior to registration, provided that these services were used to make taxable services.

7. Education Services and related goods/services

In Bahrain these are Zero rated supplies. The legislation has not restricted this provision to government institutes only, whether higher education or not. The implementing regulation is likely to further elaborate on this topic specially “related goods/services”, and whether transportation, uniform, educational aids etc. would come under the zero rate or not.

In UAE, Higher education is chargeable at 5% VAT where it is a private institute. Otherwise public and private education and related goods and services are zero rated with the exception of uniforms, school trips, food items, electronic devices etc.

In contrast in KSA, all education services and related goods/services are subject to VAT at 5%. Though, the VAT payable by KSA citizens on educations services and related goods/services will be borne by the KSA government.

8. Enforcement

In Bahrain, the enforcement of VAT legislation will be done through an existing pool of judicial officers and public enforcement officials. So we may expect more inspections and enquiries when compared to KSA and UAE, where new departments are formed for enforcement which would need sufficient time to hire, train and start their inspections.

9. Failure to submit VAT return in time

The time stipulated in Bahrain before a penalty is levied is 60 days, when a minimum of 5% to a maximum of 25% penalty, on the amount of tax, can be levied. In contrast UAE, and KSA apply penalty immediately after the due date is over which is 28 days and last day, of the subsequent month, respectively.

10. Prosecution

In Bahraini legislation there is much more emphasis on criminal charges to be levied upon the violations of the law, when compared to UAE and KSA where financial fines are largely emphasized and higher in value.

UAE VAT AND THE EXCHANGE RATE, HOW DOES TAX AFFECT CURRENCY EXCHANGES AND YOUR BUSINESS?

The Federal Tax Authority (“FTA”) published Article 69 in April 2018, of Federal Decree-Law no. (8) of 2017 for the clarification of Currency Exchange rate for VAT purposes with effect from 17 May 2018.

When a supply is made in any currency other than AED all taxable persons must use the Central Bank’s published exchange rates for the purposes of converting invoices issued in foreign currencies into the local currency (UAE Dirham) and calculate the VAT liability accordingly.

  1. For tax invoices prior to 17-May-18, exchange rates from reliable sources can be used.
  2. The exact exchange rate must be used, i.e. the same number of decimal places, as published.
  3. These rates are updated Monday to Friday and are based on rates prevailing at 6pm UAE time each day
  4. In instances where specific markets are closed due to local holiday, then the relevant rate to be used for VAT purposes will be the prevailing rate of the previous day at 6pm.
  5. Rates can be reliably sourced from Thomson Reuters and UAE Central Bank.
  6. The customs department shall convert the value to AED for the purpose of Import declaration, and automatically populate it in Box 6 of the VAT return.
  7. When the exchange rate used by the customs department is different from those published by the Central Bank, the former can be used, for declaring the VAT due on imports.

Your next step:

Businesses should consider the implications of this update on their transactions involving foreign currency to ensure that the correct amount of input VAT is being recovered, and furthermore understand the impact on their business operations and continuously ensure that the correct VAT treatment is being applied to its transactions.

Our role:

Affiniax Partners can assist you to assess the impact of this update and advise you on the recoverability of input VAT and VAT treatment of transactions involving foreign currency.

UAE VAT: WHAT ARE DESIGNATED ZONES AND WHAT DOES IT MEAN TO MY BUSINESS?

Under the VAT guide on Designated Zones (“DZs”) the Federal Tax Authority (“FTA”) has confirmed the VAT treatment applicable to businesses operating in DZs as provided for in the VAT Law and Executive regulations, and clarified the treatment of supplies in specific cases where previously there was some ambiguity.

The key noteworthy clarifications are:

  1. If the supply of services from the designated zones is provided within UAE, VAT charged is at the standard rate of 5%. If the supply is of export of services, the VAT is zero rated.
  2. If the supply of goods is within the designated zones, it is not subject to UAE VAT law.
  3. The Onus is on the supplier to ensure that it treats the supply correctly for VAT purpose. Therefore, the supplier should be satisfied that there is no reason to believe that the goods may be used by the purchaser for non-qualifying purposes. A written statement from the recipient of the goods that it will not be consumed in a non-qualifying manner is sufficient.
  4. Transfer from mainland UAE to DZs of goods and services is not considered to be an export and is therefore treated as local supply, and VAT charged is standard rated.
  5. Transfer of goods between DZs is outside the scope of UAE VAT law provided:
  6. goods (in part or in whole), are not released into circulation, nor used or altered in any way during the transfer, and
  7. transfer of the goods is undertaken in accordance with the rules for Customs suspension per the GCC Common Customs Law.
  8. The FTA may require the owner of the goods to provide a financial guarantee for the payment of VAT, which that person may be liable, if the conditions in point 5 are not met.
  9. Upon importing goods from DZs into the mainland, the Import VAT is payable by the importer.

Your next step:

Businesses should consider the implications of this VAT guide on their transactions to ensure that the right class of transactions are being taken into consideration and the correct amount of input VAT is being recovered, and further more understand the impact on their business operations and continuously ensure that the correct VAT treatment is being applied to its transactions.

Our role:

Affiniax Partners can assist you to assess the impact of this clarification and advise you on the recoverability of input VAT and VAT treatment of transactions involving such instances.

Appendix:

The Cabinet Decision No. 59 confirms that the following Free Zones in the UAE are to be treated as Designated Zones. These Designated Zones will be subject to special rules for supplies of goods within those Designated Zones:

  • Free Trade Zone of Khalifa Port
  • Abu Dhabi Airport Free Zone
  • Khalifa Industrial Zone
  • Jebel Ali Free Zone (North-South)
  • Dubai Cars and Automotive Zone (DUCAMZ)
  • Dubai Textile City
  • Free Zone Area in Al Quoz
  • Free Zone Area in Al Qusais
  • Dubai Aviation City
  • Dubai Airport Free Zone
  • Hamriyah Free Zone
  • Sharjah Airport International Free Zone
  • Ajman Free Zone
  • Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
  • Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
  • RAK Free Trade Zone
  • RAK Maritime City Free Zone
  • RAK Airport Free Zone
  • Fujairah Free Zone
  • FOIZ (Fujairah Oil Industry Zone)

UNDERSTANDING VAT ON ENTERTAINMENT EXPENSES

The Federal Tax Authority (“FTA”) issued a Public Clarification Article 52 of Cabinet Decision no. (52) of 2017 on the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on VAT.

Entertainment has been defined as hospitality of any kind, including the provision of accommodation, food and drinks not provided in the normal course of a business meeting, and access to events or trips.

When the hospitality provided becomes an end in itself, such costs are considered to be entertainment, and are not recoverable.

It is worth noting that:

  1. VAT incurred on any costs which are used for genuine business purpose or is incidental to business purpose shall be recoverable. For example, food and drink provided during meetings, food and drinks purchased by an employee for own consumption during a business trip, and sundry office expenses such as tea and coffee supplies or flowers for display in offices.
  2. Input VAT is non-recoverable on entertainment expenses incurred for non-employees. For example, customers and potential customers, shareholders and officials (except for certain exceptions).
  3. Where a business is uncertain whether hospitality is provided in the normal course of the business then it should not recover input VAT.
  4. For conferences and business events, when a fee is charged, and output VAT is accounted for, Input VAT is recoverable. If no fee is charged, Input VAT is non-recoverable.
  5. Expenses incurred purely for the entertainment of employees such as Staff dinner, and Ramadan Iftar, etc. and free of cost goods and services as rewards are not recoverable unless the employee is charged for the same.
  6. If there is a legal obligation to provide those goods or services under the applicable UAE labour law to employees or a contractual obligation to provide the same to the employees in order for them to perform their role then VAT may be recoverable.

Your next step:

Businesses should consider the implications of this clarification on their transactions involving such expenses to ensure that the right class of transactions are being taken into consideration and the correct amount of input VAT is being recovered, and furthermore understand the impact on their business operations and continuously ensure that the correct VAT treatment is being applied to its transactions.

Our role:

Affiniax Partners can assist you to assess the impact of this clarification and advise you on the recoverability of input VAT and VAT treatment of transactions involving expenses of this nature.