UAE VAT Updates – VAT Application for E-Commerce
In the light of COVID 19 circumstances, businesses have embraced the opportunity of supplying through online websites and applications. With this sudden increase, it is pivotal for the businesses to understand the impact of UAE VAT on their business activities. In addressing the general questions one would have, the FTA released a detailed guide explaining the various scenarios around the supply of goods and services using electronic means and defining the responsibility to account for the VAT.
VAT Legislation on E-Commerce
The provisions covering supplies through e-commerce under the UAE VAT Law and Executive Regulations are limited to the supply of Telecommunication and Electronic Services. The rule defines that the supply shall be taxable to the extent of use and enjoyment in the UAE. This is subject to further interpretations, more so when such supplies are provided by a non-resident supplier, or involve goods imported into the UAE.
To set clear rules and procedures in this regard, the FTA took an effort to clarify a few matters and put together the provisions applicable for e-commerce in one place as a guide to taxpayers.
Supply of Goods
The definition of ‘Supply of goods through e-commerce’ is restricted to the goods that are sold through an electronic platform, such as a website, or an electronic marketplace and are subsequently delivered to the recipient. Noting that the VAT impact would vary depending on the involvement of a non-resident supplier and the movement of the goods, it is suggested that the supplier must consider the VAT on the sale of the goods based on the place of supply rule for goods, and the importer must consider the impact of VAT charged on import of goods under reverse charge mechanism.
The table below summarises the VAT treatment of various scenarios involving supplies of goods by a supplier resident in the UAE and a supplier who is non-resident in the UAE. For this table, it has been assumed that the supply takes place before, or at the time the goods are dispatched, that is to say, in the location from which the goods are delivered.
Supply of Services
Article 23(2) of the Executive Regulations defined “Electronic Services” with an inclusive list of services that are delivered over the internet, or an electronic network, or an electronic marketplace.
The FTA, through the guide, clarified that a supply to qualify for special VAT rules for electronic services, must comply with two conditions:
- The service must be listed under Article 23(2). If not, it would not be considered as an Electronic Service though supplied using the internet or an electronic network.
- The service must be automatically delivered over the internet, an electronic network, or an electronic marketplace. Human intervention should not change the nature of the service as being essentially automated.
Referring to the special place of supply rule for Telecommunication and Electronic Services, the guide indicates that usage of the word “extent” would mean that a single supply may be apportioned for a place of supply rules so that it is treated as partly in the UAE and partly outside the UAE. This ability to apportion a supply is, however, limited to situations where a sufficient distinction exists between different parts of the supply (i.e., services supplied), or consideration (amounts charged for such services) so that it is practical and reasonable to divide them.In the absence of further legal provisions in determining the place of enjoyment, the following principles may be used as high-level guidance.
- In the case of an electronic service that is delivered to a physical place, the place of use and enjoyment of that service is that physical place.
- In the case of electronic services provided on a portable device, the use and enjoyment may be determined based on the recipient’s location at the time the services are supplied.
To determine the location of the recipient, some of the factors which may be indicative of the recipient’s location are:
- The IP address
- the country code stored on the SIM card
- the place of residence of the recipient
- the billing address of the recipient; and/or
- the bank details used by the recipient for the payment
Since the words used are “and/or” the factor/s to be used in determining the location of the recipient must be determined, the facts of each case.
The table below summarises the high-level indicative VAT treatment of various scenarios related to supplies of electronic services.
Supplies made through Agents
The VAT treatment on the e-commerce website, application, or marketplace would depend on the fact whether such electronic marketplaces sell the goods, or services themselves, or act just as an intermediary in connecting the suppliers and customers.
Where the electronic market place makes supplies in its capacity as the principal supplier, then the electronic marketplace is treated as the supplier of those goods or services for VAT purposes and would be required to comply with the VAT rules and obligations which are typically applicable to suppliers of those goods or services.
Where the electronic marketplace just acts as an intermediary, the VAT treatment would depend on whether it acts as a disclosed agent or an undisclosed agent.
- If the intermediary is acting as a disclosed agent, the supply is treated as being directly made by the supplier to the recipient. As a result, the VAT obligations for the supply would remain with the principal supplier, and the principal supplier should account for this VAT in its tax return if required under the normal VAT rules.
- If the intermediary is acting as an undisclosed agent, then there are two supplies for VAT purposes – from the supplier to the intermediary, and from the intermediary to the recipient. In effect, the undisclosed agent is treated as both the buyer and the seller of the goods or services. Both the principal supplier and the undisclosed agent must separately charge VAT applicable to the supply of the underlying goods or services and must account for this VAT to the FTA in their own VAT returns. Where it is eligible under the general input tax recovery rules, the undisclosed agent may also recover the VAT, which was charged to it by the principal supplier – this ensures that this VAT is not a cost to the agent.
In addition to the above, VAT on the agency commission charged by the agent must be determined separately and would vary for disclosed and undisclosed agents.
This concept of supplies made through disclosed or undisclosed agents would redefine the VAT impact of supplies made through e-commerce discussed above.
The guide released by FTA calls for an immediate check on the current treatment of VAT applied by both suppliers, recipients, and e-marketplace providers. Failing such analysis, the supplier may face the VAT of 5% on the supply and late payment penalties up to 300%. Also, in case of late or non-registration, FTA may late charge registration penalties.
How can we help?
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Our team of senior qualified tax advisors, finance experts, and tax accountants are happy to provide practical help and advice, to ensure timely and cost-effective VAT services.
Based on our local and international experience, we understand that VAT is a complex tax and would certainly suffer numerous changes in the upcoming years. Rethink’s VAT services are aimed to suit both basic and complex returns for SMEs and larger enterprises.
Senior Manager (Indirect Tax)