VAT Awareness Session: Aviation industry

VAT Awareness Session: Aviation industry

Introduction

Update on current progress

  • Successful roll out of general VAT awareness sessions took place in March - May 2017
  • Phase 2 of the awareness sessions, targeted at specific industries is currently underway
  • Federal Law No. 7 of 2017 on Tax Procedures
  • Federal Decree-Law No. 8 of 2017 on VAT
  • Cabinet Decision No (36) of 2017 on Executive Regulation of Federal Law No (7) of 2017 on Tax Procedures.
  • Cabinet Decision No (39) of 2017 on FTA fees & Cabinet Decision N0. (40) of 2017 on Administrative Penalties
  • VAT Executive Regulations will follow
  • VAT registration portal is open

The FTA – who are we?

Federal Tax Authority

  • Formed by the Government to administer VAT and Excise Taxes, plus any future taxes, introduced in the UAE.
  • Responsible for collecting taxes and reviewing Taxable Person compliance.
  • Available to provide guidance and direction to Taxable Persons in order to support them in meeting their tax compliance obligations.
  • Decision making capacity in areas of tax technical complexity.
  • Responsible for conducting tax audits and administering penalties.

Getting assistance from the FTA

The FTA is committed to helping Taxable Persons learn about VAT in an easy, accessible and straightforward manner. As a result, the following options are available:

  • Publications, Notices, VAT Taxable Person Guide will be freely accessible at any time on the FTA website when launched
  • E-learning modules will provide guidance on the basics of VAT and available on the FTA website
  • VAT helpline can be used for general enquiries about the application of VAT

When will VAT be implemented?

  • Implementation date: GCC vs UAE
  • GCC VAT AGREEMENT is a framework agreement signed by all six GCC countries:
    – Broad framework that mainly states provisions for intra GCC trade
    – Gives countries discretion to choose treatment in certain sectors where it does not affect intra-GCC trade
    – Mutual agreement on some provisions such as the standard rate of VAT and the registration threshold
  • Federal Laws in the UAE:
    TAX PROCEDURES LAW governs the general rules and procedures relating to all taxes within the UAE
    VAT LAW sets out the application of VAT within the UAE
  • VAT registration

The GCC VAT Framework agreement is applicable to all GCC member states …
The UAE’s Federal VAT Law builds on the GCC Framework and applies to the UAE …
And is further detailed in VAT Executive Regulations.


Mechanics of VAT
A Worked Example

  1. A farmer qrows cotton which is plucked and sold to a factory.
    - The farmer collects VAT from the factory on behalf of the government
  2. The factory processes the cotton and manufactures clothes which are sold to a retail chain.
    - The factory collects VAT from the retail chain on behalf of the government. The factory receives a refund on the VAT paid to the farmer.
  3. The clothes are stocked in stores and placed for sale to consumers.
    - The retail chain collects VAT from the consumer on behalf of the government. The retail outlet receives a refund on the VAT paid to the factory.
  4. A consumer buys a new dress.
  Sales 5% VAT charged on Sales VAT recovered on purchases Net VAT payable
Farmer AED 1,000 AED 50 AED 0 AED 50
Factory AED 3,000 AED 150 AED 50 AED 100
Retailer AED 5,000 AED 250 AED 150 AED 100
Total VAT paid by final consumer: AED 250

Net result = VAT is collected through the chain and the end-consumer bears the cost.

Mechanics of VAT
Output – Input VAT

  • VAT-registered businesses will submit a “VAT return” document to the FTA on a periodic basis mentioning all output tax due and input tax recoverable for the period
  • Net VAT payable or credit recoverable will be calculated as the following:

OUTPUT TAX (VAT collected from customers) - INPUT TAX (VAT paid to suppliers) = NET VAT PAYABLE OR CREDIT (to/from the FTA)

  • “Final consumers” (i.e. persons not registered for VAT) do not submit VAT returns and cannot recover the VAT they are charged


What is a supply?

VAT will be due where a taxable supply is being made by a Taxable Person
  • A supply of goods or services
  • In the UAE
  • For consideration
  • By any person
  • In the course of conducting business 


VAT Registration

Registration: Who is required to register for VAT

  • Every taxable person resident of a member state whose value of annual supplies in the member state exceeds or is expected to exceed the mandatory registration threshold
  • The threshold for registration will be:
    – Mandatory registration threshold: AED 375,000
    – Voluntary registration threshold: at least AED 187,500
  • Threshold will be calculated as follows:
    – Total value of supplies made by a taxable person for the previous 12 months; or
    – Total value of supplies of the subsequent 30 days
    – Value of exempted supplies will not be considered for computing the annual supplies

No threshold applies to non established taxable persons – they may be required to register


VAT Registration Turnover Calculation

“Taxable Supplies” include:

  • Standard rated supplies
  • Zero-rated supplies
  • Reverse charged services received (provided the taxable person is responsible for accounting for the tax); and
  • Imported goods (provided the taxable person is responsible for accounting for the tax).

How to register for VAT

  • Where an entity is required to register for VAT, or would like to voluntarily register for VAT, it should complete a VAT registration form
  • The VAT registration form is available via the FTA’s online portal
  • The VAT registration portal is open and available for both single VAT registrations and VAT group registrations
  • During the application process various documents will be requested to validate the information provided. It is advisable to have these to hand prior to starting the application and copies of the documents should be uploaded with the application.
  • Supporting documents will include such items as:
    - Documents identifying the authorized signatory e.g. passport copy, Emirates ID
    - Trade license
    - Other official documents authorizing the entity to conduct activities within the UAE
  • Following approval of the application a Tax Registration Number will be issued


The VAT registration form

  • Simple process – approximately 15 minutes to complete the form
  • The form should be completed by a person who is an authorized signatory of the business e.g. a Director, owner, someone holding Power of Attorney to sign on behalf of the business etc.
  • Prior to completing the form ensure you have considered the following:
    - Are you required to register for VAT or are you registering voluntarily?
    - Are you applying for a single VAT registration or for registration as a VAT Group?
    - Have supporting documentation & information on hand to upload e.g. trade license, certificate of incorporation, Emirates ID, Articles of Association, bank account details etc.
  • The VAT registration form will also ask you to provide details about your business, such as:
    - Description of business activities
    - Last 12 months turnover figures
    - Projected future turnover figures
    - Expected values of imports and exports
    - Whether you expect to deal with GCC suppliers or customers
    - Details of Customs Authority registration, if applicable


The FTA registration portal

The first time you access the portal you will be required to register your details. You will be required to create an account in order to gain access to the portal.

As part of the account creation process, you will be required to verify your e-mail address. An email will be sent to your registered e-mail address with a link which you can click to verify your details and activate your account.

After the first time accessing the portal, you will simply be required to login using your user details.

Once you have logged in, you will need to navigate to the VAT registration form.

You will then be asked to complete the VAT registration form.

If you require assistance during completion of the form, user guides and help sections will be available on the portal. Once you have completed the form and have checked that all of the details are accurate, you should click submit to send the form to the FTA. The FTA will then process the application and will respond to confirm your Tax Registration Number.


VAT Groups - Registration

  • Each Member State may treat the Tax Group as a single Taxable Person
  • Two or more persons carrying on a business are able to apply for a single “Group” VAT registration where:
    - Each person has a place of establishment or a fixed establishment in the UAE
    - The persons are “related parties”, and
    - Either one person controls the others, or two or more persons form a partnership and control the others.

Two or more persons carrying on a business (subject to grouping conditions) => VAT group – for VAT purposes the persons are now treated as a single taxable person. 

Effect: entities within the VAT group are treated as one entity for VAT purposes

Results:

  • supplies made between members of a VAT group are disregarded from VAT (i.e. no VAT is due on the supplies)
  • Supplies made by the VAT group to an entity outside the VAT group are subject to normal VAT rules


VAT obligation - Tax Return filing & Payment

  • Submission online
  • Deadlines for submission and payment:
    − the due date will be 28 days following the end of the return period
    − where the due date falls on a weekend or national holiday, the deadline shall be extended to the first following working day
  • Late submission or payment can result in a penalty levied by the FTA


Record-keeping

The following records are required to be kept to ensure accurate tax compliance:

  1. Books of account and any information necessary to verify entries, including, but not limited to:
    - annual accounts;
    - general ledger;
    - purchase day book;
    - invoices issued or received;
    - credit notes and debit notes.
  2. Additional records required for specific taxes.
    Different taxes may require different records to be kept in order for taxpayers to be compliant, for example, a VAT account.
  3. Any other information as directed by the FTA that may be required in order to confirm, the person’s liability to tax, including any liability to register.

Taxable persons for VAT must in addition retain the following records for at least 5 years:

Invoices, credit/debit notes Records of: VAT account
  • All tax invoices and alternative documents related to receiving the goods or services
  • All received tax credit notes and alternative documents received
  • All tax invoices and alternative documents issued
  • All tax credit notes and alternative documents issued
  • All supplies and imports of goods and services
  • Exported goods and services
  • Goods and services that have been disposed of or used for matters not related to business
  • Goods and services purchased for which the input tax was not deducted
  • VAT due on taxable supplies (incl. those related to the reverse charge mechanism)
  • VAT due after error correction or adjustment
  • VAT deductible after error correction or adjustment
  • VAT deductible for supplies or imports


VAT invoices

VAT Invoice

  • ‘Tax Invoice’ clearly displayed
  • Name, address and TRN of supplier
  • Name, address and TRN of recipient (if recipient is also registered for VAT)
  • Sequential Tax Invoice number, or a unique number which enables identification of the Tax Invoice and the order of the Tax Invoice in any sequence of invoices
  • Date of issuance
  • Date of supply (if different from date of issuance)
  • Description of goods or services supplied
  • The unit price, quantity or volume, rate of tax and amount payable expressed in AED for each good or service
  • The amount of discount offered
  • Gross amount payable in AED
  • Tax amount payable expressed in AED together with rate of exchange applied
  • Where the recipient is required to account for tax, a statement that this is the case and reference to the relevant provision of the law (Article 48).

Simplified VAT Invoice

  • ‘Tax Invoice’ clearly displayed
  • Name, address and TRN of supplier
  • Date of issuance
  • Description of goods or services supplied
  • Total consideration and tax amount charged


Penalties
Administrative Penalties - Examples

  • Administrative penalties are intended to address non-compliance, and encourage compliance.
  • The FTA has the power to waive or reduce penalties at its discretion (e.g. taxable person has a reasonable excuse for the error).
  • Few examples of administrative violation:
    - If the person conducting a business fails to keep the required records and other information;
    - If the person conducting a business fails to submit the data, records and documents related to tax in Arabic language when requested by FTA;
    - If the taxable person fails to submit a registration application within the period required.

* Not less than 500 dirham and not more than 3 times the amount of tax for which the penalty was levied.


Tax Evasion Penalties - Examples

  • The FTA can issue penalties for tax evasion.
  • Tax evasion is where a person uses illegal means to either lower the tax or not pay the tax due, or to obtain a refund to which he is not entitled under law.
  • The imposition of a penalty under tax law does not prevent other penalties being issued under other laws.
  • Few examples of instances of tax evasion:
    - Where a person deliberately provides false information and data and incorrect documents to the FTA;
    - Where a person deliberately conceals or destroys documents or other material that he is required to maintain and provide to the FTA.

* Up to five times the relevant tax at stake and a prison sentence.


Audits

The FTA can visit businesses to inspect records and make sure persons are paying or reclaiming the right amount of tax, and are able to check whether businesses are liable to be registered where they are not.

  1. FTA will apply risk based selection criteria to determine whom to audit
  2. FTA will usually conduct the audit at the person’s place of business or at the FTA offices
  3. If audit at the person’s place, must be informed at least 5 business days prior to the audit
  4. FTA can close the place of business for up to 72 hours (e.g. suspect tax evasion)
  5. FTA officer may request original records, take samples of merchandise, mark assets to indicate they have been inspected
  6. The FTA may also remove records, documents and samples
  7. The audited person should be notified of the results of the tax audit within 10 business days of the end of the audit


Overview of VAT & the Aviation industry

Special attention points for the aviation industry

  1. What is the VAT treatment of exported of goods?
  2. What is the VAT treatment around international passenger transport services?
  3. What is the VAT liability of the supply of a means of transport?
  4. Will businesses in the aviation industry be in repayment position?
  5. What is the impact of excise tax on the aviation industry?

What is a supply?

VAT will be due where a taxable supply is being made by a Taxable Person
  • A supply of goods or services
  • In the UAE
  • For consideration
  • By any person
  • In the course of conducting business 

Taxable supplies: breaking down the detail

Goods vs. Services
  • Goods = the passing of ownership of physical property or the right to use that property as an owner, to another person
  • Services = anything which is not a supply of goods is a supply of services
Consideration
  • Consideration is anything received in return for a supply
  • If the consideration is only money, the value of that supply is the amount of money received
  • Consideration is treated as VAT inclusive, so the amount received in payment includes an element of VAT for taxable supplies
In the UAE
  • Place of supply rules determine where the supply is ‘made’ for VAT purposes
  • Where the supply is made within the UAE, UAE VAT will be due
  • There are different place of supply rules for goods and services
Made by a person
  • Registered for VAT or required to be registered for VAT
  • Businesses become required to be registered when their turnover reaches a certain threshold
  • It is possible for businesses to voluntarily register for VAT before if they reach a lower voluntary threshold
In the course of business

Business includes:

  • Any activity conducted regularly, on an ongoing basis
  • Independently by any person, in any location
  • Including industrial, commercial, agricultural, professional, service or excavation activities or anything related to the use of tangible or intangible properties


Place of supply

If the supply is treated as made outside the UAE: no UAE VAT will be charged

If the supply is treated as made in the UAE: VAT may be charged

Goods Services
  • Basic rule: the place of supply is the location of goods when the supply takes place
  • Special rules, for example:
    - Cross-border supplies of goods – that is supplies which involve parties in different countries
    - Water and energy
    - Real estate
  • Basic rule: the place of supply is where the supplier has the place of residence
  • Special rules, for example:
    - Cross-border supplies of services between businesses
    - Electronically supplies services – where services are used or enjoyed


Place of supply - Goods - Basic rule examples

Domestic Supplies:

  • No movement of goods outside the UAE
  • Subject to the applicable VAT rate in the UAE – standard or zero-rated

Exports to outside the GCC:

  • Export of goods: place of supply is still the UAE

B2B Import into UAE from outside GCC:

  • Import of goods: place of supply is the UAE
  • The recipient accounts for VAT under the reverse charge mechanism EXCEPT where goods will be re-exported to another GCC State


Place of supply - Goods - Special rules for GCC

Arrival of goods followed by movement of goods within GCC:

  1. Where at the time of arrival the intention is that goods will be transferred by the importer into another GCC State, the place of supply of import is still the UAE BUT…
    - The importer must pay import VAT without using the reverse charge (no recovery)
    - This import VAT should be recoverable in the GCC State to which the goods are transferred
  2. Where import VAT is paid and recovered (on the basis of no intended movement), the importer will be required to “repay” the import VAT by treating the transfer as a deemed supply subject to VAT.

B2B Exports to GCC

Export of goods: place of supply is the other GCC State (e.g. KSA) provided:

- the customer is registered for VAT in the GCC State where the goods are delivered; and
- the goods are exported outside the UAE

Below threshold

− Supplier is registered in UAE and sells goods from UAE to KSA
− Customer in KSA is not registered for tax
− Total amount of exports by supplier remains below the mandatory registration threshold in KSA
− Place of supply is UAE and UAE VAT is due

Exceeding threshold

− Supplier is registered in UAE and sells goods from UAE to KSA
− Customer in KSA is not registered for tax
− Total amount of exports by supplier exceeds the mandatory registration threshold in KSA
− Place of supply is KSA and KSA VAT should be charged


Place of supply - Services - Key rules

Basic rule: the place of supply is where the supplier has the place of residence

Special rules, for example:

  • Cross-border supplies of services between businesses
  • Electronically supplied services – where services are used or enjoyed
IMPORTANT: the basic rule always applies unless overridden by a special rule
  1. Place of supply of services supplied to recipients who are VAT registered in another GCC State is that other GCC State unless the place of supply is the UAE for another reason
  2. Place of supply of services supplied by a person that is not resident in the UAE to a VAT registered business resident in the UAE is in the UAE
  3. Place of supply of services relating to the installation of goods is where the service is performed
  4. Place of supply of restaurant, hotel and catering services is where they are performed
  5. Place of supply of real estate services is the location of the real estate
  6. Place of supply of transport services is where the transport begins
  7. Place of supply of a means of transport to a person not registered for VAT in the GCC is where the goods are put at the disposal of the recipient
  8. Place of supply of telecommunications and electronic services is where the services are actually used and enjoyed by the recipient
  9. Place of supply of cultural, artistic, sporting, educational or similar services is where they are performed


Place of Supply - Reverse charge

  • In situations where a VAT registered person imports goods or services into the UAE which would be subject to VAT if purchased in the UAE, the VAT registered purchaser has to account for VAT in respect of those supplies
  • Typically used for cross-border transactions to relieve a non-resident supplier from the requirement to register and account for VAT in the country of the purchaser
  • The purchaser will account for VAT on its normal VAT return and he may be able to claim that VAT back on the same return, subject to the normal VAT recovery rules

Example:

UK firm provides Legal Advice to UAE firm for AED 10,000.
The UK firm is not registered in the UAE and files no return.
The recipient declares AED 500 as input tax AND AED 500 as output tax. This is reverse charging.

This approach puts local and international suppliers on the same footing

 

Date of supply: When to account for output VAT on supplies

Basic tax point for goods:

  • Date of removal of goods (in case of supply of goods with transportation) [Article 23(2a); GCC VAT Agreement]
  • Date on which goods made available to customer (in case of supply not involving transportation) [Article 23(2b); GCC VAT Agreement]
  • Date of assembly/ installation (supply of goods involving assembly or installation) [Article 23(2c); GCC VAT Agreement] 

Basic tax point for services:

  • Date on which performance of service is complete [Article 23(2d); GCC VAT Agreement]

Overriding the basic tax point: Receipt of payment or the date of a VAT invoice if earlier than the basic tax point.

Continuous supplies & stage payments: The earlier of receipt of payment, the due date of payment shown on the VAT invoice or the date of the VAT invoice.

Example 1:

1 March 2018 - Aircraft spare parts delivered to the customer => Time of supply
14 March 2018 - Invoice issued 

Example 2:

1 March 2018 - Payment received from customer => Time of supply
1 April 2018 - Repair Service started
1 May 2018 - Repair Service completed


VAT liability
Zero-rated supplies in the UAE

  • Zero-rated supplies are not subject to VAT – right to an input tax deduction on the corresponding expenses
  • Should be applied strictly as they are an exception to the normal rule that VAT should be charged.
  • Examples of zero-rated supplies include:
    - International transport of passengers and goods, and services related to such transport
    - Certain supplies of means of transport, and related goods and services
    - New residential buildings

Examples of zero-rated supplies include:

  • Newly converted residential buildings
  • Charity related buildings
  • Educational services, in most cases
  • Exported goods and services
  • Investment precious metals
  • Healthcare services, in most cases


International transportation services

The following international transport services will be zero-rated:

  • transporting passengers or Goods from a place in the UAE to a place outside the UAE
  • transporting passengers or Goods from a place outside the UAE to a place in the UAE
  • the transport of passengers from a place in the UAE to another place in the UAE by sea or air or land as part of an international transport of those passengers if either the first place of departure, or the final place of destination, is outside the UAE
  • the transport of Goods from a place in the UAE to another place in the UAE if the Services are supplied as part of the supply of Services of transporting Goods either from a place in the UAE to a place outside the UAE or from a place outside the UAE to a place in the UAE

The following goods or services will also be zero-rated if supplied in respect of international transport services which are also zero-rated:

  • Goods which are supplied for use or sale on an aircraft or a ship
  • Services supplied during the supply of transportation services
  • Insuring, or the arranging of the insurance, or the arranging of the transport of passengers or goods


Airline industry: VAT impact of common activities

 

Service VAT treatment
Lounge access – included within flight ticket 0%
Lounge access – extra charge 5%
Excess baggage 0%
Cancellation fee Outside the scope
Food & beverage on board 0%
Duty free goods sold on board 0%
Duty free goods sold at arrivals 5%
Duty free goods sold at departures 0%
Sale of visas to customers 5% (subject to disbursement rules)
Charges for military or presidential flights Domestic – exempt
International – 0%


Composite supplies

“Single composite supply” means a supply of goods and/or services, where there is more than one component to the supply and taking into account the contract and the wider circumstance of the supply, the supply either:

  1. includes a principal component, and component or components which either:
    - are necessary or essential to the making of the supply, including incidental elements which normally accompany the supply but are not a significant part of it; or
    - do not constitute an aim in itself, but is instead a means of better enjoying the principal supply;
  2. the supply is of two or more elements so closely linked as to form a single supply which it would be impossible or artificial to split.

A composite supply is taxable at the VAT rate applicable to the principal component.


Examples of composite supplies in the Airline industry

In order for a supply to be a single composite supply, taxable at the VAT rate of the principal component, the following characteristics must be present:

  1. The price of the different components of the supply are not separately identified or charged by the supplier
  2. Consideration payable by the recipient is not affected if the recipient were to purchase only one component of the supply
  3. All components of the supply are supplied by a single supplier

- Supply of a flight along with drinks and a meal on board.
- Supply of a flight along with a baggage allowance for checked bags.


Supply of a means of transport

Certain supplies of a “means of transport” will also be zero-rated:

An aircraft which is:

  • Designed or adapted for commercial transport of passengers
  • Designed or adapted for commercial transport of goods
  • Not designed or adapted for recreation, pleasure or sports

Also includes:

  • A ship, boat or floating structure that is designed or adapted for use for commercial purposes & not designed or adapted for recreation, pleasure or sports
  • A bus or train that is designed or adapted to be used for public transportation of 12 or more passengers


Goods and services supplied in connection with means of transport

Certain goods and services supplied in connection with a zero-rated means of transport are zero-rated:

Goods

  • Goods supplied in the course of operating, repairing, maintaining or converting the means of transport.
  • The goods supplied must be incorporated into, affixed to, attached to, or form part of the means of transport.
  • Consumable goods that become unusable or worthless as a direct result of being used in operation, repair, maintenance or conversion process.

Services

  • Services supplied directly in connection with the means of transport for operating, repairing, maintaining or converting the means of transport.
  • Services supplied directly in connection with parts and equipment if the services are carried out onboard the means of transport for the purpose of repairing or maintaining it, provided:
    - The services are carried out on board
    - The equipment or part is removed for repair or maintenance and is subsequently held in stock for the future use as spares, or
    - The part or equipment cannot be repaired & is exchanged for a like-for-like replacement.
Note: Fuel and other oil and gas products are not zero-rated in this circumstance.



VAT liability - Zero-rating exports of goods

The export of goods outside of GCC is zero-rated when the following conditions are met:

Direct export - the supplier is responsible for arranging transport:

  • the goods are physically exported outside GCC or put into a customs suspension regime within three months of the date of the supply; and
  • official or commercial evidence of export is retained by the exporter.

Indirect export – the overseas customer arranges for the collection of the Goods from the supplier in the UAE, who exports the goods himself or via an agent:

  • the goods are physically exported outside GCC or put into a customs suspension regime by the overseas customer within three months of the date of the supply; and
  • official or commercial evidence of export is provided by the overseas customer to the supplier; and
  • the goods are not used or altered in the time between supply and export; and • the goods do not leave the State in the possession of a passenger or crew member of an aircraft or ship.

Exempt supplies in the UAE

  • Exempt supplies are not subject to VAT – no right to an input tax deduction on the corresponding expenses.

  • Exemptions should be applied strictly as they are an exception to the normal rule that VAT should be charged.

  • Examples of exempt supplies include:
    - Some specific financial services
    - Local passenger transport
    - Bare land
    - Residential buildings (other than zero-rated supplies)

 

Input Tax Recovery - Conditions

In order for input tax to be deductible by a person, a number of conditions must be satisfied by the recipient of the supply:

  1. Recipient must be a taxable person and must be registered for VAT

  2. VAT on the purchase must have been correctly charged by the supplier

  3. The goods or services have been acquired for an eligible purpose

  4. Recipient must received and retained a tax invoice evidencing the transaction

  5. The amount of VAT which the recipient seeks to recover must have been paid in whole or in part, or intended to be paid in whole or in part

  6. Certain incurred VAT is specifically blocked from being recoverable as input tax regardless of whether the above conditions have been met.

 

Repayment returns

  • Businesses making primarily zero-rated supplies will normally be in a repayment position i.e. they may be due a net refund of VAT from the FTA

  • Businesses in a repayment position will make a claim for repayment of the input tax via the VAT return
    - The FTA will approve refund claims or notify the taxable person of a rejection of the refund claim within 20 working days
    - The FTA may also notify the taxable person that consideration of the claim will take longer than 20 working days

VAT Return Net Value Output tax due on sales Input tax recoverable on purchases Total

Sales of goods exported outside the GCC

100,000 0 - 0

Local purchase of goods & services

60,000 - 3,000 (3,000)

Net VAT payable (recoverable) from FTA

      (3,000)

 

Transitional Rules - Contracts

Where a contract is entered into prior to the effective date of the VAT law which concerns a supply made wholly or partly after the effective date of the VAT Law, VAT will be due on the supply taking place after the effective date of the VAT Law.

If the contract does not mention VAT, the value of the supply stated in the contract shall be treated as inclusive of VAT.

Company A enters contract to sell to Company B for 5,000 AED – contract is silent on VAT
Company B pays 5,000 AED
Company A m
ust account for 5% VAT to the FTA on the value of the supply => 217.39 AED payment to the FTA


However, where Company B is registered for VAT and is entitled to full VAT recovery on costs incurred, Company A can treat the contract as if the price stated was exclusive of VAT and is able to charge VAT to Company B in addition.

Company A enters contract to sell to Company B for 5,000 AED – contract is exclusive of VAT
Company B pays 5,000 AED + 250 AED VAT
Company A must account for 5% VAT to the FTA on the value of the supply => 250 AED payment to the FTA

 

Transitional Rules – Early invoicing or payment

Where an invoice is issued or payment is received prior to the date the VAT Law comes in to effect, the value of the payment/invoice will be subject to VAT where the following takes place after the date the VAT Law comes in to effect:

  • Transfer of goods under the supplier’s supervision

  • Goods are placed in the possession of the recipient of the goods

  • Completion of assembly of the goods

  • A customs statement is issued

  • The customer accepts the supply of goods

The rules above are intended to avoid invoices being issued or payments being made prior to the effective date of the VAT law for supplies of goods which effectively take place after the effective date of the VAT law, for the purposes of avoiding tax.

 

Mechanics of Excise Tax

  • Unlike VAT, Excise Tax is only paid once within a supply chain.
  • Once Excise Tax has been paid on a product, that product is sold throughout the supply chain with ‘tax paid’ status – the purchase price includes the tax accounted for and that value is ultimately passed on to the end consumer.

1) Energy drink produced by Factory
2)
Sold to distributer for agreed price (2 AED) plus excise tax of 5 AED = 7AED
3)
Distributer sells to retailer for agreed price (4 AED) plus the excise tax = 9 AED
4)
Retailer sells to consumer for retail price (5 AED) plus the excise tax = 10 AED
5)
Excise price as per FTA published list is 5 AED. Excise tax is due at 100% of the price = 5 AED Excise tax paid to the FTA

Excise tax is paid once, however it is passed on throughout the supply chain.


Which products are subject to Excise?

  • 50% - Carbonated Drinks:
    - Any aerated beverage except for unflavored aerated water
    - Any concentrate, powder, gel or extract intended to be made into an aerated beverage
  • 100% - Tobacco & tobacco products:
    - All items listed within Schedule 24 of the GCC Common Customs Tariff
  • 100% - Energy Drinks:
    - Any beverage which is marketed or sold as an energy drink, containing stimulant substances that provide mental and physical stimulation e.g. caffeine, taurine, ginseng and guarana.
    - Any concentrate, powder, gel or extract intended to be made into an energy enhancing drink.

 

Excise tax impacts on the aviation industry

  • Airlines will often purchase excise goods for sale on board the aircraft
  • Exemption from excise tax for goods which are exported outside the UAE – this includes goods consumed on board an international flight
  • Businesses registered for excise tax are entitled to deduct excise tax previously paid on exported excise goods from the tax liability on their tax return
  • Only businesses which import, produce, stockpile, or release excise goods from a designated zone are required to register for excise tax – this may not necessarily include airlines
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