The draft UAE Executive Regulations provide two immediate action points – register for VAT as soon as possible and review your contractual position. In this article we explain why these two steps are important.
The much awaited UAE VAT Executive Regulations of Federal Decree Law No. 8 of 2017 on Value Added Tax have been widely circulated in draft (the Draft Regulations). On 8 November, the Director General of the UAE Federal Tax Authority (the FTA) stated that the draft has been signed by the UAE Cabinet.
Register for VAT as quickly as possible
Under Article 17 of the Draft Regulations, a person required to register for VAT with effect from 1 January 2018 (the Implementation Date) must apply for that registration in accordance with the deadlines announced by the FTA. This will affect any business which anticipates that the total value of all its VATable supplies will exceed the mandatory registration threshold of AED375,000.
The FTA has announced on its website the following deadlines:
- Businesses with a turnover of greater than AED150 million should have applied for registration before 31 October 2017;
- Businesses with a turnover of greater than AED10 million should apply for registration before 30 November 2017;
- All businesses which will reach the mandatory registration threshold in 2018 must register before 4 December 2017 to minimise the risk of "not being registered in time for the beginning of the new year". This will apply to businesses with a turnover of VATable supplies of between AED375,000 and AED10 million, but also appears to be a "harder" deadline for all businesses to avoid late registration.
Ultimately any business which is registered late for VAT due to a failure to comply with the FTA announced deadlines may be subjected to administrative penalties under Article 25 of the Tax Procedures Law (Federal Law No. 7 of 2017). Cabinet Resolution No. 40 of 2017 on administrative penalties for breach of the UAE tax laws provides that the fine for this breach will be AED20,000.
The process of registering for VAT may be completed online on the FTA website. The FTA requires a wide range of information and documentation as part of that process. Clyde & Co can assist your organisation in obtaining a Tax Registration Number, email UAE.VAT@clydeco.com for more information.
Review your contractual position: deal with VAT silent agreements
Ideally, all commercial agreements entered into before the Implementation Date will expressly contemplate how VAT will affect prices, as being either VAT inclusive or VAT exclusive. All UAE businesses looking to enter into commercial agreements from now on should insert clear VAT language to deal with this point.
However, in recognition of the fact that many UAE businesses will have entered into long term contracts before the Implementation Date which are silent on VAT, the Draft Regulations contain transitional provisions in Article 70.
In short, the Draft Regulations state that consideration set out in contracts entered into before the Implementation Date will be treated as exclusive of VAT provided that:
- the recipient of the VATable supply is a VAT registered business itself;
- the recipient is able to recover the VAT on that supply as input VAT (fully or partially); and
- the supplier of the VATable supply requests confirmation of the above two points before the Implementation Date.
Prices set out in contracts entered into before the Implementation Date for supplies to non VAT registered recipients, or VAT registered persons making exempt supplies, will be deemed to be inclusive of VAT if the contract does not deal with VAT expressly.
The recipient of the supply has up to 20 days to reply to the supplier in writing, upon receipt of this request. If the recipient does not reply within that timeframe, the supplier is entitled to treat the supply as exclusive of VAT in any event. Of course, it may be difficult in practice for a UAE business to know whether a business customer is registered for VAT - in most cases, this will depend on whether the business meets the mandatory registration threshold, or has opted to register for VAT if it satisfies the conditions for voluntary registration. To date, there is no indication from the FTA as to whether there will be a searchable public database of VAT registered companies and their TRNs. Without this, it is possible that non VAT registered customers in the UAE may be improperly charged VAT in addition to the agreed prices due to a failure to respond to a request for information within 20 days.
As an anti-avoidance measure, if the recipient misinforms the supplier as to its VAT status, the VAT Executive Regulations make clear that the recipient will be prohibited from reclaiming the VAT as input VAT. This is helpful in that the VAT is a real cost to the recipient, but it is still disadvantageous for the supplier, who has to bear the cost of the VAT within its pre-agreed prices.
The approach taken by the UAE government in relation to VAT silent contracts differs to the KSA government's stance. As we reported in our earlier briefing, the KSA government has chosen to zero rate business to business supplies instead. This means that the KSA government will only recover the VAT at the time of final supply to the end consumer, rather than throughout the supply chain as in the UAE. However, the crucial date against which to assess provisions for VAT treatment in KSA is set at 30 May 2017. In essence, the KSA government has signalled that it expects that contracts entered into from 31 May 2017 to deal expressly with VAT on prices. However, where they do not, the supply is deemed to be inclusive of VAT.
Urgent action points for business contracts
Clients are well advised to:
- perform due diligence on their pre-Implementation Date supply contracts, to assess whether they contain a VAT clause, or a clause which may enable them to renegotiate the terms in the absence of such a provision;
- send immediate confirmation requests to all customers within the UAE, in order to ascertain whether supplies to them after the Implementation Date will be exclusive or inclusive of VAT (other than supplies which are clearly retail in nature);
- log all confirmations received and the deadlines for failure to respond;
- apply the relevant VAT treatment to the invoicing procedures on the basis of the confirmations received;
- businesses which are not required to be VAT registered in the UAE on or before 1 January should:
- respond promptly to all requests for information, or risk the agreed supply price being deemed to be exclusive of VAT;
- carefully consider whether to agree to any request to amend contractual terms to allow for VAT to be charged on top of prices agreed before the Implementation Date.
- VAT registered businesses in the UAE which regularly receive supplies of goods or services from suppliers from KSA should notify their KSA suppliers of their TRN to avoid being charged KSA VAT, and to enable the reverse charge mechanism.