This article presents an overview of the key issues that companies operating in the energy & infrastructure sector have been encountering.
1. Understanding when sale of crude and natural gas is taxable
The supply of crude oil and natural gas is zero rated under the UAE VAT Law (Article 45). However, unless it is an export, the reverse charge mechanism should be applied on the supply of crude or natural gas to a registered reseller; (Article 48(3)). Accordingly, if a registered reseller is taking the crude across the border, then a VAT invoice will need to be issued to the reseller. The key is to ascertain the status of the purchaser and what the purchaser plans to do with the purchased crude.
2. Defining place of supply of water and energy
Companies are having difficulties ascertaining precisely which rules apply when determining the place of supply for the distribution of water and energy through a pipeline and thus whether and how VAT is charged. Ultimately, the place of supply of water and energy through a distribution system depends on the status of the purchaser. If the purchaser is a taxable trader in another implementing state, then the place of supply is the place of residence of the trader (Article 28 of the UAE VAT Law). If the purchaser is a non-taxable person, then the place of supply is the place of consumption. Given that the supply of water and energy is treated as the supply of goods, it is unclear whether an intra-GCC supply of water and energy through a distribution system would be treated as an export pending the introduction of the Electronic Service System envisaged by the GCC VAT Framework.
Accordingly, companies need to take care in defining the parameters that will impact their potential VAT liability.
3. Supplies of crude or refined products to registered traders, producers or distributors
Companies need to compile adequate documentation required under the law in order to take advantage of the reverse charge provisions that apply to supplies of crude or refined products to registered traders, producers or distributors.
4. Real estate related services
Oil field service companies who do not have a fixed establishment in the UAE but who provide engineering services in the UAE could end up having to register for VAT if their customers are not registered in the UAE.
Such engineering services could be considered real estate related services if they relate to buildings or structures, and thus subject to VAT. Accordingly, the place of supply would be deemed to be the location of the structures, even if the service was provided outside the country.
5. Construction services and stage payments
Providers of construction services, where payments are typically made in instalments, are finding it difficult to administer the VAT process. The service provider needs to understand when the service is supplied, and then monitor the invoice issue date, the date payment is due and the date of actual payment, in order to assess when VAT is payable. Based on Article 26 of the UAE VAT Law, the date of supply is not the date on which the service is actually provided but rather the earliest of: a) the date of the instalment payment; b) the date of the tax invoice, or c) the date on which payment was due. Companies should note that this relief would not apply if the instalment is paid more than 12 months after the service is provided.
Potential challenges on the horizon
Due to the early stages of VAT implementation, there are a number of elements that businesses operating in the energy & infrastructure sector should keep an eye on now to ensure that they are prepared for the next stages in the evolution of the tax regime. In particular:
- Application of VAT to the operators of oil concessions, including the interface with the join venture partners/contracting parties.
- Supply of fuel as consumables for international transport.
- Reverse charge on supplies to registrants for resale or production.
- Supply of fuel for use in means of transport.
- Use of storage terminals in designated zones (and whether the storage is a transport-related service).
- Determining whether oil field services are real estate-related services.
- Imports and exports documentation;
- Optimizing operating models
- Clearly understand the impact of VAT on the business model and transaction flows.
- Document everything, particularly your rationale for adopting certain approaches.
- Keep accurate records in case you are audited.
- Insist your suppliers provide the information you need.
- Review your operating models to reduce inefficiencies and to align with the VAT system.