GCC VAT Alert - 18 July 2018

18 July 2018

UAE VAT Updates: VAT benefit extended to three additional free zones, public clarification on VAT treatment of compensation-type payments, eligible goods for profit margin scheme and supply of labor accommodation

Updated list of designated zones
In continuance to the Cabinet Decision (59) of 2017 with regards to designated zones, the Federal Tax Authority (FTA) has recently added three free-zones under the category of designated zones. Two such free-zones is based in Abu Dhabi and the third being in Dubai. List of additional free-zones as below:

Al Ain International Airport Free Zone – Abu Dhabi
Al Butain International Airport Free Zone – Abu Dhabi
International Humanitarian City – Jebel Ali – Dubai

Businesses established in the aforesaid free zones shall be eligible to avail the eased provisions under UAE VAT law.

VAT treatment of compensation-type payments
The FTA, through Public Clarification VATP001^[1], seeks to provide guidance on whether payments to compensate for any loss, omissions or other wrongdoings are taxable under UAE VAT or not. The clarifications aim to provide principles that should be used in determining whether VAT should be due on compensation-type payment. The FTA has discussed in detail about the taxability on payments such as contractual payment to compensate for the loss, payment to settle a dispute, a fine or penalty and payment for damaged goods.

In summary, taxability of such payment shall be by whether such payment is not a consideration for supply; if yes, then no VAT is due on the payment.

Eligible goods for Profit Margin Scheme^[2]
It is essential to critically examine the applicability of profit margin scheme on ‘second hand’ goods that may not have been subject to VAT before the implementation of VAT in the UAE. The FTA has clarified that only those goods which have previously been subject to VAT before the supply in question may be subject to the profit margin scheme. As a result, stock on hand of used goods which were acquired prior to the effective date of Federal Decree-Law No. (8) on Value Added Tax (VAT law), or which have not previously been subject to VAT for other reasons, are not eligible to be sold under the profit margin scheme.

The clarification issued by the FTA provides a concise list of scenarios for determining the eligibility of transitional stock.

VAT applicability on labor accommodation
The Public Clarification VATP003^[3] aims to clear out the ambiguity with regards to the applicability of VAT provisions on the supply of labor accommodation. There may be instances where the supply of certain labor accommodation shall be a supply of residential property, and other instances where the supply of certain labor accommodation shall be a supply of serviced accommodation. The distinction is important as it will affect the VAT liability on the supply. The public clarification intends to draw a difference between pure residential supply and service accommodation and has discussed in details the aspects to be considered by the supplier in such regards.

Suppliers are required to consider the extent of the additional services supplied along with the accommodation in order to determine the nature of the supply. Additional services such as telephone and internet access, catering, cleaning of the rooms and laundry service may be considered as indicators for service accommodation. It also discusses the related provision with regards to single and mixed supply as applicable to supply of labor accommodation.

^[1] Public Clarification VATP001 - https://www.tax.gov.ae/pdf/compensation-type-payments.pdf

^[2] Public Clarification VATP002 - https://www.tax.gov.ae/pdf/profit-margin-scheme.pdf

^[3] Public Clarification VATP003 - https://www.tax.gov.ae/pdf/Labour-Accommodation.pdf

SKP comments
The aforesaid clarifications are addressing industry concerns thereby ensuring that businesses comply to VAT provisions. Also by way of such clarification, the FTA is clarifying the interpretations once should adopt while applying specific provisions. This also gives way to reach out to FTA for areas which have multiple interpretations and seek clarifications on particular transactions

Where any contradicting interpretations have been relied upon for the previously filled VAT returns, adequate steps should be taken by businesses to ensure that such errors are rectified. Businesses can avail the facility of filling voluntary disclosure form wherever applicable.

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