How VAT will impact ecommerce business
When people hear about e-commerce, they immediately think of buying and selling on the Internet. However, e-commerce covers more than just transactions for goods but also services. In the UAE, e-commerce companies are embedded in our lives in one aspect or another, from searching for accommodation to searching for jobs, from ordering food to ordering a taxi.
E-commerce has become the mega trend for businesses in the UAE, with an estimated value of $2.5 billion (Dh9.2 billion) driven mainly by transformative change in culture and shopping habits among the country’s fast growing young population.
According to a research done by MasterCard, at least half the population confirmed to shop for goods and services on the Internet, and the total value of e-commerce is forecasted to reach $10 billion by 2018.
With the country all set to introduce VAT early next year, how are the tax dynamics going to impact the e-commerce business model? If you sell goods online from your own website, or via an online market place like Souq (Amazon), dubizzle or eBay, it is very important that you understand the VAT obligations and liabilities of selling to customers.
It is important for the seller to find out whether the type of goods and/services are taxable. If the answer is yes, the formalities to charge and deliver the VAT to the relevant tax authorities need to be fulfilled.
Let’s start by performing a dichotomy of VAT parameters: The VAT system is based on different rules, mainly with regards to the place of taxation and applicability to the object of the transaction (that is, whether it’s a ‘good’ or ‘service’). The basic rule for goods is that, ‘where goods are not dispatched or transported, the place of supply shall be deemed to be the place where the goods are made at the disposal to the customer’. If the supplier organises the transportation of the goods, the place of supply is where it is located at the time of commencing the transport. While ‘the place of supply of services shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied, unless the customer is taxable business or the service falls under the special service categories in the VAT laws.’
Taxing point is one of the terms used in VAT literatures and refers to the time when the supply for both goods and services are taxed. The determination of taxing points should not be mistaken with the revenue recognition under the accounting standard in the UAE.
In view of this, how then, will the rules be applicable to electronically supplied goods and services?
It is crucial for the e-commerce companies to define where their services are taxed. This is even more important for cross border transactions.
Other dynamics exist, particularly pertaining to treating digital ‘goods’ as ‘services’. Just to mention a few examples: You can buy a hardcopy of this newspaper, or alternatively, you can download its e-edition in PDF format. From the VAT point of view, the printed hardcopy of this newspaper would be a ‘good’ while the virtual, on-line version, with exactly the same content, is deemed to be a ‘service’.
Software is another very good example. Until a few years ago, buying music or computer programmes on a physical support (such as CD, disk) was common practice, while today, a user can buy the desired music or software online and download it from the Internet directly on his computer. A number of goods which in the past could be supplied physically only, can now be transferred in digitalised form and become competitive substitutes on the market. It is therefore necessary to highlight the importance of such categories of services, which really lies at the crossroad between taxation and technology.
Even if the purposes and objectives of the two transactions are the same (that is, supply of goods) the applicable VAT regime is conceptually different, in some cases, the practical consequences arising from the application of the two sets of rules.
To conclude, let me state that this explosive growth of sales to consumers via the Internet is huge, and brings new responsibilities for retailers in terms of understanding the VAT liabilities and charges in each GCC state. Failure to learn about these responsibilities will leave any online retailer exposed to investigations and potential fines.