5. Place of supply goods, imports and exports
- PLACE OF SUPPLY OF GOODS
Supply of goods without transportation
The place of a supply of goods that occurs without transportation or dispatch thereof is the place where the goods are located on the date they are placed at the customer’s disposal.
Article 10 of the Agreement determines that when goods are supplied but they are not transported, then the jurisdiction where the goods are located is the jurisdiction which is competent to claim VAT on the supply. Although the article does not mention it, traditionally the transport condition needs to be read as transport out of the Member State. In other words, the goods can be transported inside the same Member State, and this provision will still apply, as shown by the example below.
If goods are sold by a Saudi business in Khobar to another Saudi business in Jeddah and they are transported to Jeddah from Khobar, then the goods are located for VAT purposes in Saudi.
If goods are sold by a Saudi business in Khobar to a business in the Emirates and the goods remain in the warehouse in Khobar, then the goods are located for VAT purposes in Saudi, even if the customer is located in the Emirates.
Supply of good with transportation
The place of a supply of goods that occurs with transportation or dispatch thereof by the supplier or to the account of customer is the place where the goods are located when the transportation or dispatch commences.
This rule determines the general rule for the situation when goods are supplied with transport. It determines that when goods are supplied with transport, the jurisdiction that can claim VAT on this supply is the jurisdiction from where the goods are leaving.
In other words, if goods are sold from Oman and sent to customers in Ethiopia, the jurisdiction that can claim VAT on the supply is Oman.
This does not necessarily mean that the supply is actually subject to VAT, as it could potentially be zero rated where the supplies are made outside the GCC.
In the EU, this provision would be applicable to intra-community supplies and exports, which could be VAT exempt with right to deduct input VAT (or alternatively called ‘zero rated’) if certain conditions are met (in the jurisdiction of arrival, the goods are then taxed as an intra-community acquisition). In the GCC this provision does not apply to intra-community supplies since that concept is not known under the VAT Agreement.
Special Case of Internal Supplies with transportation
In article twelve of the Agreement, rules related to internal supplies with transportation have been set as below:
1. As an exception to the provisions of Article 11 of the Agreement, the place of supply for an Internal Supply of Goods with transportation or dispatch thereof from one Member State to another shall be in the State in which the transportation or dispatch of the goods terminates in the following cases:
If the customer is taxable.
Without prejudice to subsection 2 of the Article, if the Customer is not taxable and the supplier is registered in the country where the Customer resides or is obligated to be registered.
2. The place of an internal supply of goods with transportation or dispatch thereof but without installation or assembly by a supplier who is registered for tax purposes in a Member State in favour of a customer who is not registered for tax purposes in another Member State is the place where the goods are located on the date the transportation or dispatch begins, provided that the total value of the supplies of that supplier during any 12 months period does not exceed an amount of SAR 375,000 or its equivalent in GCC currencies, in the State to which the supply is provided. In the event that the total value of the supplies exceeds this amount, this shall result in the supplier registering in that State.
3. If transportation of goods from one Member State to another cannot be established through compliance with the obligations provided for in Article 6 of this Agreement and the Local Laws, the place of supply shall be where the goods are located on the date the transportation or dispatch begins.
4. In the event of a supply of goods that occurs without transportation or dispatch, and it is later established that transportation or dispatch of such goods to a Member State took place in the circumstances provided for in subsection 1 of this Article, the State in which the transport or dispatch ends has the right to recover the tax from the Member State where the transportation or dispatch started in accordance with the Automated Direct Transfer Mechanism in force with Customs or any other mechanism approved by the Ministerial Committee.
In summary, it provides for an exception to the rule that supplies of goods with transport are located in the Member State of dispatch. They are labelled here as ‘internal supplies’. Internal needs to be read here as internal to the GCC Member States.
The first type of supply is the supply of goods transported from one Member State to another and whereby the customer is taxable. In that case the supply is not located in the Member State of departure but in the Member State of arrival.
In other words, if an Emirati business is supplying goods to a Saudi business and transporting them to Saudi, then the supply will be located in Saudi. It constitutes one single supply. This is different from the rules in the EU where such an ‘internal supply’ would qualify as a (possibly exempt) intracommunity supply and a taxed intra-community acquisition.
No simplifications for triangulation are provided under the VAT Agreement.
If that same supply is not made to a taxable customer, but to a non-taxable customer (e.g. a private individual), then again, the place of supply is changed to the country of arrival of the goods when the supplier is registered in that country (or should be registered). The supplier could be registered in that country for other reasons, e.g. he holds a stock there from which he sells, he imports into that country, etc.
But even if the supplier is supplying to a non-taxable customer and is not registered, the next provision may require him to register. This is the case when the supplier is making supplies to a certain Member State the annual value of which exceeds 375.000 SAR. This provision is similar to what in Europe is called a ‘distance sales’ provision.
The consequence according to the Agreement is that the supplier should register in the country of arrival. The wording of this provision is however inefficient. It should actually say that the sale made by the supplier is located in the country of arrival. The supplier is then liable for the payment of VAT on this supply to the tax authorities (no reverse charge applies). Therefore, the supplier needs to register for VAT purposes. Because of regulatory reasons though, this will often not be possible.
The reasoning here is somewhat circular as the place of supply changes to the country of destination triggers the need for the supplier to register when he makes supplies to the country of destination.
In the same paragraph, it is suggested that supplies with installation or assembly would be qualified differently for VAT purposes. However, there is no other provision with respect to the place of supply of supplies with installation or assembly. It is unclear whether this was intended. The UAE has gone ahead and drafted an internal place of supply rule anyways with respect to supplies with installation or assembly.
The third paragraph is a fall back rule stating that when transport from one Member State to another cannot be proven, by default the Member State of departure can claim VAT on the supply. This provision is merely for clarification purposes, as it is clear from the structure of the Agreement that supplies with dispatch are the exception to the general rule of supplies without dispatch. There, any reason for deviation needs to be proven.
The last paragraph is well intentioned. It allows the Member States that establish that goods were sent to them to recover VAT from the Member State of departure through the Customs Duties Automated Transfer Mechanism. Such a provision does not exist in the EU. This is due to the fact that the customs duties constitute revenue of the European Union itself, not of the individual Member State. It is to be foreseen that there may be some practical issues with applying this provision, such as issues around delivering proof that the goods have arrived and Member States of departure not wanting to hand over the revenue (e.g. in cases where they themselves did not receive any revenue for the supply).
Under the current customs framework, the relevance of the above mentioned provisions could be questioned. Goods do not freely move from one GCC country to another. All of the above provisions have been copied from the European Union where goods can move freely. In other words, the provisions around the potential obligation to collect VAT in another GCC Member State are obsolete since from a regulatory point of view, these situations cannot present themselves.
The Regulations of the KSA Law require a taxable person to retain evidence that those goods have been transported from the Kingdom to the state of destination (another Member State). The evidence of the transport to the State of destination must include each of the following:
Commercial documentation identifying the Customer and the place of delivery of the goods
- Transportation documentation evidencing the delivery or receipt of goods in the State of destination
- A customs declaration, if applicable
If a taxable person does not have evidence that the goods have been transported within sixty ( 60 ) days of the supply taking place then he must treat the supply as being made without transportation or dispatch from the Kingdom until such evidence is later obtained.
Internal supplies to non-registered persons
The Agreement allows each Member State to claim from another Member State the tax paid if the value of the Supply exceeds the amount of SAR 10,000 or its equivalent in other currencies of the GCC to individuals and non-registered persons, and the settlement of tax is according to the Customs Duties Automated Direct Transfer Mechanism applicable under the framework of the Customs Union of the GCC. The Ministerial Committee may propose any other mechanisms. The Member State may also impose tax on these supplies at its points of entry to such State if no evidence is presented that the Tax was paid in the other Member State.
This article is quite unique. The rationale behind it is that some GCC Member States wish to preserve their fiscal revenues. Regional shopping destinations such as Dubai or Bahrain account for much spending in the GCC and thus also in the future for VAT. The article allows that one Member State can claim from the other the VAT which was paid on a supply in the other Member State. A concrete example could be the purchase by a Saudi private individual of an expensive designer purse in Dubai during a shopping trip.
The provision allows that the KSA can claim from the UAE the VAT which was paid by the Saudi private individual in Dubai. In other words, the UAE will have to transfer this VAT to the KSA. Since there is already a Customs Duties Automated Direct Transfer Mechanism in place for customs duties, this mechanism will also be used to transfer VAT. The process does not involve the supplier of the customer in this case. The important challenge of this article will be its policing by the tax authorities.
It looks like on top of this, if a private individual cannot substantiate it paid tax in another Member State (e.g. through the invoice or receipt), the Member State in which the private individual resides can claim VAT on the purchase. This presents a high burden on the individual that has to keep its proof, but also a challenge for the tax authorities which is potentially policing the borders. If there is no proof of payment, how will it determine the value on which to levy VAT? There is definitely a cost and benefit analysis to be made of the application of this provision.
Since there is no refund mechanism foreseen for this case, the private individual will end up paying VAT twice, once in the Member State of purchase and once in his country of residence.
Supply of Gas, Oil, Water and Electricity
As an exception to the provisions of Articles (10) and (11) of the Agreement:
The place of supply for gas, oil and water through the pipeline distribution system and Supply of electricity by a taxable person who is established in a Member State to a taxable trader established in another Member State shall be the place where the Taxable Trader is established.
The place of supply for gas, oil and water through the pipeline distribution system and supply of electricity to a person who is not a taxable trader will be the place of actual consumption.
The supply of gas, oil, water and electricity generally follows the main principles described above. The remarkable thing though is that electricity is assimilated with a supply of goods (as this is the case also in other jurisdictions, like the EU).
The special exception in this provision is that where these goods are supplied to a trader, i.e. someone who has the intention of reselling the goods, an exception applies to the general principles. In order not to burden the trader with potential registration and other obligations in the other Member States where he purchases and sells electricity, the place of supply of this kind of supplies is different when they are supplied to a trader. In that case, the place of supply of these goods is the country where the taxable trader is established. This solves the issue with the purchase. However, if the onwards supply of these goods is not subject to a reverse charge, the taxable trader will still be required to register in that state.
Where there is a supply of gas, oil and water through a pipeline to a person who is not a taxable trader, i.e. both a taxable person or a private consumer, then the place of supply will take place where the actual consumption is done. The same holds for the supply of electricity to these same persons.
Place of Import
The Regulations of the KSA VAT Law refer to the rules related to the place of import in the Agreement. As per the agreement, the place of import for Goods is the State of the First Point of Entry.
When goods are placed under customs duty suspension under the Unified Customs Law immediately upon entry into the GCC Territory, then the place of import will be in the Member State where these goods were released from the duty suspension status.
This article sets out an important place of supply rule for imports. Wherever goods are brought into the territory of the GCC, the import shall take place in the country where the goods entered first. If goods are imported into Oman and subsequently shipped to Saudi Arabia, the first point of entry is Oman. Therefore, Oman can decide whether to levy VAT on the import.
If the goods are however placed under customs duty suspension, then the place of supply of the import will be in the country where the goods are released from the duty suspension status.
This article makes an important bridge to the Customs legislation which is applicable in the GCC. Although there are common rules, exceptions exist in terms of the rates applied (e.g. Saudi applies higher customs duties rates) and important formalities still exist for movements between the Member States. To some extent the customs union in the GCC is less integrated than the customs union the EU has with Turkey, which is not even a member of the EU. The GCC VAT framework took the EU laws as a guideline however, but appeared not to have taken into account that the GCC does not operate in an integrated customs union. This explains also to some extent why the UAE law and the KSA laws are so different. It also shows why article 71 of the Treaty could be obsolete for goods movements.
The cases in which the payment of customs duties is suspended are described in the Common Customs Law (article 69 and following). They concern the transit transport of goods, the storage of goods in a customs warehouse, the import of goods into free zones or duty-free shops, the temporary admission of goods and the re-exportation of goods. The cases in which the supply of goods is zero rated concern mainly the scenarios involving a customs warehouse and free zones.
This entails that when goods come into a certain Member State and are put under one of the above regimes, not only the payment of customs duty is suspended, but also the payment of VAT. Goods can also be released from one suspension regime and put under another. The goods also do not necessarily have to actually be released in the GCC, but can be re-exported.