How it works

Let’s assume that the VAT rate to be applied is 5%.

VAT on Goods:

IMPORTS:

Step 1: Company A imports a container full of clothes from France at a value of AED 1,000.000/-. The French seller does not charge VAT on exports; hence, the declared value at the arrival port remains for 1 million. Upon clearance, the customs will charge Company A, a VAT amount of AED 50,000/-. Usually the cost of shipping, insurance etc. are included in the cost of goods and taxable accordingly, but we excluded the same to minimize the example.

Step 2: Company A sells the container to Company B with a markup of 30%. The total invoice will be for AED 1,300,000/- on which there would be an added tax of (1.3m x 5%) i.e. 65,000/-.

Step 3: Company A declares to the tax Authority that it owes them 65,000/- “output tax” for the amount charged on company B and at the same time claims the amount of 50,000/- “input tax” that was paid to the customs earlier.

Step 4: Company B sells the products in the container to various end users for a cumulated amount of AED 3,000,000/-. Corresponding VAT is AED 150,000/-. Furthermore, Company B booked an advertising campaign costing AED 100,000 + 5% VAT = tot. 105,000 to advertise for the said products.

Step 5: Upon tax declaration, company B calculates its tax returns as follows:
Input tax: 65,000/- levied by Company A + 5,000 being the VAT from the advertising campaign.
Output tax: 150,000 charged on customers.

The operation net-off will be 150,000 – 70,000 = 80,000/- to be refunded to the authorities.

Step 6: End users who purchased the products from company B and paid the total VAT of AED 150,000 are not entitled to reclaim it back as “input tax”.

As a recap, the tax authorities should have collected 50,000 from the customs (charged on Company A upon goods clearance), 65,000 from Company A (that it levied on Company B) and 150,000 from Company B (that was charged on the end users): Total collected 265,000 AED

At the same time, the authorities should refund the “input tax” of 50,000 to company A and 65,000 to Company B, with a total refund of 115,000 AED.

In conclusion, the tax authorities have collected 265,000 AED and paid back 115,000 AED; hence the final net VAT amount charged on the container is AED 150,000/-, which tallies to the amount of tax Company B levied from end users.

EXPORTS (outside the GCC):

In order to align with the above example, I will replace Step 4, 5 & 6 with new ones.

Step 4: Company B resells the clothes container to Company C located in Iran for an amount of 3,000,000/- Since non-GCC exports are Zero rated under the destination VAT, the input tax levied by Company A should be reclaimed by the company upon submission of its VAT returns.

Step 5: Company B files for the tax returns from the proper authorities and provides proofs that the taxable items have been shipped overseas, therefore there should be no VAT payments (output tax) to be paid to the authorities, whilst claiming the input tax levied by Company A.

By exporting the imported product, the total amount collected by the tax authorities ”output tax” will be (50000 from the customs +65000 from company A) = 115,000 and the amount refunded “input tax” is (50000 to company A + 65000 to company B) = 115000. Net amount collected by the tax authorities is NIL

Since the VAT is a destination tax and Company C premises are outside the local & GCC jurisdiction, no tax can be registered at the local level.

Exports (within the GCC):

The VAT legislations that are published till date do not explain the procedure to deal with GCC cross border invoicing except that VAT will apply on such transactions. Most probably, the same procedure applicable on local transactions will apply in this case, but in order to be effective, there should be a centralization of the VAT registration numbers for companies within the GCC in order to streamline the operation.

Step 6: End users who purchased the products from company B and paid the total VAT of AED 150,000 are not entitled to reclaim it back as “input tax”.

As a recap, the tax authorities should have collected 50,000 from the customs (charged on Company A upon goods clearance), 65,000 from Company A (that it levied on Company B) and 150,000 from Company B (that was charged on the end users): Total collected 265,000 AED

At the same time, the authorities should refund the “input tax” of 50,000 to company A and 65,000 to Company B, with a total refund of 115,000 AED.

In conclusion, the tax authorities have collected 265,000 AED and paid back 115,000 AED; hence the final net VAT amount charged on the container is AED 150,000/-, which tallies to the amount of tax Company B levied from end users.

VAT on Local Services:

Step 1: Mohammed is a professional photographer based in Abu Dhabi, Company A is having its annual meeting at a 5-star hotel in the city and requires his services to take some photos during the event. Company A agreed to pay Mohammed AED 10,000 for his services and AED 40,000 for the hotel to book their meeting room and the related catering services.

Step 2: Mohammed has just launched his business and since his income is less than the threshold of AED 375,000, decided not to register for the VAT; while the hotel is already a registered entity.

Step 3: Mohammed issues a bill for company A amounting to AED 10,000 with no VAT since he is not allowed to collect it. While the hotel issues a bill for 40,000 + 2,000 as VAT total 42k.

Step 4: Mohammed went to Canon and bought a special camera needed for the event costing him AED 5,000 + 250 VAT, for a total cost AED 5250.

Consequence for Mohammed: since he is not registered with the VAT authority, Mohammed is not allowed to reclaim the 250 AED as input tax paid on top of the camera cost and accordingly has to include the VAT in his cost of purchase. On the other hand, he is not entitled to raise any tax on his invoice to Company A, accordingly his margins are narrowing.

If Mohammed opted to register with the VAT authorities, he would have claimed the 250 back as an input tax along with any other VAT incurred directly linked to the running of his operations.

Consequence for the Hotel: Since the hotel is registered with the VAT authorities, they would be filing to pay the output tax collected of AED 2,000 mentioned in Step 3. While it is not obvious what is to be claimed back as input tax for the simplicity of this example; usually in such businesses, the claim should be for the VAT incurred on the consumables bought and lease paid.

VAT on Imported Services (within the GCC):

Imports from the GCC countries:

Step 1: Company A located in Dubai posts an advertisement with a Saudi Local newspaper for the price of Saudi Riyals 30,000/-. For reference, KSA is part of the GCC countries to implement the VAT by 01-01-2018, but since the services rendered by the newspaper is on the Saudi soil and supplied to a UAE based company, it is not exempt from tax, hence the company levies a 5% VAT, so total invoice is 31,500/- SAR.

Step 2: : The GCC Tax treaty discuss the mechanism to be applied when goods and services are exchanged within the GCC. Assuming that the Saudi supplier invoice bears VAT, Company A will have to reclaim the VAT “input tax” back from the UAE authorities when it files the tax returns.

Step 3: This inter-country operation will have a currency exchange effect since it involves Saudi Riyals as a supply currency and UAE Dirhams as a local one. We believe that the authorities will disclose at some stage a currency exchange chart to streamline the conversions.

Assuming that 1 SAR equals to 0.98 AED, Company A will have to convert the VAT levied by the supplier from SAR to AED i.e. SAR 30,000 x 0.98 = 29,400 AED accordingly the VAT levied is 1,500 SAR x 0.98 = 1,470/- AED. Accordingly, Company A must claim 1,470 AED from the UAE authorities as an input tax.

Imports from non GCC countries:

Step 1: Company A located in Dubai posts an advertisement on Facebook for the price of US Dollars 30,000/-. Assuming that Facebooks has no representative in the UAE or the GCC to issue the invoices, the invoices will be sent from the US and bear no VAT.

Step 2: while submitting the tax returns, the mechanism to be used by Company A in such a case is the “reverse charge mechanism”.

Reverse charge rule: Since it is difficult to enforce the law against the import of services or other intangibles, as it does not pass through the country’s customs. Input VAT on imported services is self-assessed by the recipient who can claim it in reverse (a reverse charge). The reverse charge mechanism moves the responsibility for the reporting of a VAT transaction from the seller to the buyer of a good or service.

Assuming that 1 US Dollar equals to 3.675 UAE Dirhams, the Facebook invoice of 30,000 US$ equals to 110,250/- AED. Upon submission of its tax returns, Company A will disclose the purchase operation for the full amount at records the corresponding VAT (110,250 x 5%) as payable to the authorities and at the same time files the amount as an input tax to be claimed.

Company A which is the recipient of the service must report both its purchase (input VAT) and Facebook’s sale (output VAT) in its tax returns. The 2 declarations offset each other from a cash point of view, but the authorities will have full visibility of the transactions.

VAT on E-Commerce:

E-commerce or Electronic commerce being an online marketplace for goods and services in exchange for payments that can be done by transferring the amount to the supplier or via a direct card payment.

VAT on this type of business varies immensely from other economical activities due to the digital reality involved. To simplify the process, let us take the example of Souq.com which is an online platform selling a huge variety of items and acting as an agent for a big number of sellers. It is a known fact that the majority of the items displayed on the website does not belong to Souq.com, but to smaller retailers.

Although the end user pays directly through the website’s payment procedure, it is the seller himself who is the ultimate beneficiary.

Tracking the VAT through this complex channel will be a big challenge to the authorities since the European countries are still struggling to audit the digital marketplace. Check www.vatfraud.org a site made by online sellers to describe how they are victimized by other fellow sellers that bent the law to avoid the VAT.

It is worth mentioning that the digital platform is not the place of supply of the goods, as the goods will be moving from an actual warehouse and delivered to the client, we need to consider the below scenarios:

Step 1: Company A located in Dubai posts an advertisement on Facebook for the price of US Dollars 30,000/-. Assuming that Facebooks has no representative in the UAE or the GCC to issue the invoices, the invoices will be sent from the US and bear no VAT.

vStep 2: while submitting the tax returns, the mechanism to be used by Company A in such a case is the “reverse charge mechanism”.

Reverse charge rule: Since it is difficult to enforce the law against import of services or other intangibles, as it does not pass through the country’s customs. Input VAT on imported services is self-assessed by the recipient who can claim it in reverse (a reverse charge). The reverse charge mechanism moves the responsibility for the reporting of a VAT transaction from the seller to the buyer of a good or service.

Assuming that 1 US Dollar equals to 3.675 UAE Dirhams, the Facebook invoice of 30,000 US$ equals to 110,250/- AED. Upon submission of its tax returns, Company A will disclose the purchase operation for the full amount at records the corresponding VAT (110,250 x 5%) as payable to the authorities and at the same time files the amount as an input tax to be claimed.

Company A which is the recipient of the service must report both its purchase (input VAT) and Facebook’s sale (output VAT) in its tax returns. The 2 declarations offset each other from a cash point of view, but the authorities will have full visibility of the transactions.

• Product is shipped within the same country:
  • The supplier should be registered for VAT; unless he is under the required threshold.
  • The site should mention on the offered item the amount of VAT to be charged
  • The site should issue the invoice with its related VAT (including the shipping cost)
• Product is shipped from a non-GCC country to UAE:
  • The supplier is “basically” not registered for VAT; hence cannot claim it from the ordering client.
  • The shipped item must have the detailed invoice to facilitate the Customs task while determining the amount of VAT to be charged on the importing party.
• Product is shipped from a GCC country to the UAE
  • The supplier is a registered taxable entity within its place of establishment
  • The Import/Export operation will be as follows:
    • Export Company should charge VAT on its selling operation.
    • Products will pass customs without having to pay VAT since the same was levied by another GCC member state.

The VAT on the online services will have pretty much the same process except in the case of import from a non-GCC member state. Reverse charge mechanism will have to be applied unless the importing party is not registered for VAT.