Lots of clar­i­fi­ca­tion in the VAT draft, but some sce­nar­ios left un­clear

The National - News - - BUSINESS - JEREMY CAPE Jeremy Cape is a tax lawyer at Squire Pat­ton Boggs, which has of­fices in London, Dubai and Abu Dhabi. Fol­low him on Twit­ter @jere­my­d­cape

So the Fed­eral Tax Au­thor­ity has fi­nally pub­lished the draft Ex­ec­u­tive Reg­u­la­tion in re­la­tion to the VAT De­cree-Law. It seems to con­firm that the value added tax (VAT) will not be de­layed be­yond Jan­uary 1, 2018, al­though it ap­pears it will not ap­ply un­til 7am on New Year’s Day, which is sen­si­ble.

What are the head­line con­clu­sions?

Lots of pos­i­tives. Al­though there hasn’t been a for­mal con­sul­ta­tion on how VAT should work in the UAE, those that drafted the reg­u­la­tion ap­pear to have lis­tened to busi­nesses and me­dia com­men­ta­tors that high­lighted cer­tain con­cerns.

The ma­jor con­cern I had was re­lated to the tran­si­tional rules, in light of the fact that very few ex­ist­ing com­mer­cial con­tracts re­fer to who bears the risk of VAT.

The start­ing point in the De­cree-Law stated that if an ex­ist­ing con­tract was silent on VAT, the price would be VAT in­clu­sive. This might make sense in con­sumer con­tracts, but made less sense in re­la­tion to com­mer­cial con­tracts where the re­cip­i­ent was in a po­si­tion to re­cover the VAT charged by the sup­plier.

The UAE Ex­ec­u­tive Reg­u­la­tion takes a more considered ap­proach at mod­i­fy­ing this po­si­tion than (in my opin­ion) the sim­pler but ul­ti­mately un­sat­is­fac­tory ap­proach taken in the Saudi leg­is­la­tion.

Un­der the Ex­ec­u­tive Reg­u­la­tion, if a con­tract is silent on VAT, the con­sid­er­a­tion will be treated as exclusive of VAT, and the re­cip­i­ent will be re­quired to pay VAT in ad­di­tion if, broadly speak­ing, 1) the re­cip­i­ent of the sup­ply is reg­is­tered for VAT; and 2) the re­cip­i­ent of the sup­ply has the right to re­cover the VAT charged in full or in part.

In my ex­pe­ri­ence, busi­nesses were ex­tremely wor­ried that the in­tro­duc­tion of VAT would re­sult in them giv­ing a 4.72 per cent price cut to their cus­tomers; the Ex­ec­u­tive Reg­u­la­tion will give them con­sid­er­able com­fort.

How­ever, it is still un­clear (at least to me) what the po­si­tion is when it comes to sup­plies to gov­ern­ment en­ti­ties – for ex­am­ple, de­ter­min­ing whether an en­tity is in fact a gov­ern­ment en­tity, whether a gov­ern­ment en­tity is re­quired to be reg­is­tered and whether it has the right to re­cover VAT. There was less de­tail than one might have ex­pected in re­la­tion to gov­ern­ment en­ti­ties in the Ex­ec­u­tive Reg­u­la­tion, which makes me think there may still be un­re­solved is­sues with re­gard to their treat­ment. The Ex­ec­u­tive Reg­u­la­tion is clear that prices must be ex­pressed in­clud­ing VAT un­less some­thing is be­ing supplied for ex­port or where the cus­tomer is reg­is­tered for VAT. Al­though this is aimed – laud­ably – at pre­vent­ing busi­nesses from mis­lead­ing con­sumers by adding 5 per cent to the price at the till, it still gives rise to prob­lems where busi­nesses are sup­ply­ing to a com­bi­na­tion of con­sumers, non-reg­is­tered busi­nesses and reg­is­tered busi­nesses, and where they make both do­mes­tic and in­ter­na­tional sup­plies.

Those that hoped for special treat­ment for free zones will also be dis­ap­pointed. There was ref­er­ence to “Des­ig­nated Zones” be­ing treated as out­side the UAE in the De­cree-Law, but the Ex­ec­u­tive Reg­u­la­tion makes it clear these must be “a spe­cific fenced ge­o­graphic area [which] has se­cu­rity mea­sures and cus­toms con­trols in place to mon­i­tor en­try and exit of in­di­vid­u­als and move­ments of goods to and from the area”.

It sim­ply wasn’t per­mis­si­ble un­der the GCC Frame­work Agree­ment, or the de­sign of VAT gen­er­ally, to treat the Dubai In­ter­na­tional Fi­nan­cial Cen­tre dif­fer­ently from any­where else in the UAE.

In ad­di­tion, fur­ther rules were con­tained to de­ter­mine the VAT treat­ment of cer­tain sup­plies, and busi­nesses must now move rapidly to de­ter­mine where they are. This will be oner­ous for banks, who will need to work through Ar­ti­cle (42) of the Ex­ec­u­tive Reg­u­la­tion to de­ter­mine which of their sup­plies are ex­empt and which are stan­dard rated. For ex­am­ple, sup­plies can­not be ex­empt if they are “con­ducted in re­turn for an ex­plicit fee, dis­count, com­mis­sion, and re­bate or sim­i­lar”.

Fur­ther­more, in re­la­tion to Is­lamic fi­nance prod­ucts, the draft­ing is cur­rently un­clear on whether each sep­a­rate part of a prod­uct will need to be cer­ti­fied as Sharia com­pli­ant, or whether only a prod­uct gen­er­ally has to have been cer­ti­fied.

Fi­nally, many chal­lenges re­main for cer­tain sec­tors. Health­care ser­vices, which are gen­er­ally zero rated, are de­fined as a sup­ply “that is gen­er­ally ac­cepted in the med­i­cal pro­fes­sions as be­ing nec­es­sary for the treat­ment of the re­cip­i­ent of the sup­ply in­clud­ing pre­ven­tive treat­ment”. That’s not just a ques­tion for a tax lawyer. That’s a ques­tion for a doc­tor.

“Is there a doc­tor in the build­ing?” It’s an emer­gency.

The Na­tional

Ac­cord­ing to the draft Ex­ec­u­tive Reg­u­la­tion, free zones like DIFC, above, will be given no special treat­ment

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