PRACTICAL VAT APPLICATION FOR UAE - 3

Few days back I offered to provide VAT advice on matters which need interpretation of VAT legislation. I received following queries:

1. What will be treatment of shared cost allocation from foreign head office of a corporate entity in UAE.

2. How would we treat corporate gifts for VAT purposes?

3. Is employee entertainment VAT admissible? In what case it can be admissible.

4. How will we treat free zone entities? Can they be clubbed in a VAT group with non Free zone entities? Are they considered outside or inside UAE.

5. If an item is imported with an intent to use but later exported within GCC. What will be tax treatment?

I have already answered the first three queries in my previous two articles of the series. In this article I shall address the last two queries i.e. VAT group with free zone company and export to GCC. I have taken assumptions which I believe are relevant to the person who requested for this, however there may be many variants and hence the conclusions may be different. Further this article does not purports to be a legal advice. The reader should use his judgement before relying upon the below conclusion. Please also note that I have relied at this stage on draft executive regulations as publicly available on the internet (https://www.slideshare.net/bharatpurca/uae-vat-law-draft-executive-regulation). Final regulations may significantly differ from draft regulations.

Tax Group

In the instant scenario we have a non-free zone company and a free zone company located in a designated zone. If free zone company is not located in a designated zone (free zones specified as designated zones), for purpose of VAT it’s a normal company resident in UAE.

We will not go into details of whether it will be beneficial to form a tax group of aforementioned companies as it’s a separate discussion on tax planning. Here we will just concentrate on legal aspects of forming tax group.

We are assuming that the companies are related as described in Article 9 of Draft Executive Regulations. We also assume that there is common ownership as required by Article 14 of Decree Law. The only remaining criteria to form a tax group would then be resident status of the company in designated zone.

Article 51(1) of draft Executive Regulations describes that designated zones themselves will be considered out of UAE and implementing states. However any person established in designated zones will be considered to have a place of residence in UAE (Article 9 of draft executive regulations). Further the definition of person includes a legal person (Article 1 of Executive Regulations). Therefore the company in designated free zone being a legal person is deemed to be resident in UAE which settles the only remaining criteria for VAT group formation.

Conclusion. The VAT group can be formed between an entity out of designated zone and another in the designated.

Export to GCC

Please note that legislation uses term of implementing states. So the GCC states which have implemented VAT will be covered in implementing states definition while other will be considered any normal country in the world (for VAT purposes only- as customs common custom union of GCC is different)

In the instant case the question is if goods have been imported in UAE for business supply and later they are exported to another implementing state (to a taxable supplier) how would these be treated.

The Goods imported will be usually concerned goods and fall into reverse charge mechanism as described in Article 48(1) of Decree law. However if latter the intended use has changed and input tax has been recovered under reverse charge, the legal situation here would be classified as “Goods on which input tax has been recovered but the input tax became not so attributable” in simple terms “change in use”. For exports to GCC countries input tax is not under reverse charge but has to be paid at port of first entry (Article 48 (2) of Decree Law) and can only be recovered in the destination implementing state (Article 54 (2) of Decree Law. Further Article 48(2) of Decree law states that tax has to be actually paid for goods destined for another implementing Regulations.

Conclusion Considering above in totality, the input tax recovered through reverse charge will become payable to government (Article 54(1) of Draft Executive Regulations) in actual while the input tax will now be recoverable in destination state.

Please note UAE legislation are not very clear o how the input will be recovered in implementing state. However KSA VAT implementing Regulations in Article 28(5) describe the mechanism as establishment of electronic Service System within GCC, wherein all supplies within implementing states will be entered along with any tax suffered therein. It is expected that the system will then generate approval for supplier to recover input tax after it has matched the supply with data provided by taxable person in other implementing state.