The FTA (Federal Tax Authority) in the UAE has officially published its updated version of Executive Regulations under the Federal Decree Law Number 8, 2017. This pertains to value added tax (VAT) and has been published on the official website as well. The version covers updates that were implemented via the Cabinet Decision Number 46 of the year 2020 although no separate release has been made regarding the specific decision by the Cabinet.
The biggest update is a significant change made to the important Article 31 (2) regarding Export of Services regulations.
It now states the following:
For the purpose of paragraph (a) of Clause 1 of this Article, a Person shall be considered as being “outside the State” if they only have a short-term presence in the State of less than a month and the presence is not effectively connected with the supply.
As can be noted, in the updated version of the above mentioned article, the word or has been switched with And. Hence, both conditions included in the above article have to be adhered to currently for supply of services to non-resident individuals to remain zero-rated for VAT in UAE. The change in Article 31 (2) seems to state that supplies which are made to businesses overseas with fixed UAE based establishments (representative offices/branches) come within the purview of UAE VAT Executive laws. There will be limited scenarios where zero rating will now apply.
What else should you know?
Whenever any business in the UAE offers a taxable solution/service to any business established outside the country, due diligence will be additionally required for working out whether zero-rate of VAT is applicable or not. The obligation to furnish proof of local establishment in the UAE for a global business is not present in the country and this may create an extra administrative layer for suppliers to ensure that VAT is not charged. The abilities of UAE based branches to recover paid input tax will also be considered in sync with regular recovery regulations for VAT.
There could be practical aspects to be worked out by branches where they may have to cover the VAT cost and service costs in case it considers that it has not been the recipient of services in reality. With the changes made to the Executive Regulations by the Cabinet, this will change the current legislation with prospective effect. However, the final confirmation of the interpretation of this change by the FTA is still awaited. Businesses should carefully analyze the implications arising from this new change and conduct a review of their contracts on which they have applied zero-rate for exported services. This will help them work out whether any changes are needed for VAT till date.
The procedure of determination of VAT liability that is applicable for these services should be analyzed carefully as well with consideration for introduction of extra controls to make sure that zero rating is effective only when the updated Executive Regulations are adhered to. If you are looking for solutions pertaining to company incorporation, VAT registration, filing, auditing and accounting in the UAE, you may consider reaching out to GCC Filings.