FTA has published an interesting public clarification

The Federal Tax Authority (‘FTA’) has come with the most interesting and awaited public clarification with respect of export of services. Now, all business who have export of services need to again review all transactions, agreement, additional informational of customers and also need to calculate financial impact of these amendment. Here there are two important concept i.e. residency and location of recipient of services after the amendment in Article 31(2) of Cabinet Decision No. (52) of 2017 on the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (“Executive Regulations”) via Cabinet Decision No. of 2020 as follows. Article 31(1)(a) of the Executive Regulation allows the zero rating of export of services subject to the conditions that the Services are supplied to a Recipient of Services who does not have a Place of Residence in an Implementing State and who is outside the State at the time the Services are performed. The above provision has 2 aspects which have been clarified by FTA:

Aspect 1: Place of residence of the recipient

Services can be zero rated if the recipient does not have a place of residence in the UAE. Supplier must check when providing the services to a multi-national companies as to which entity is most closely related in provision of service i.e. the entity situated in the UAE or its branch or head office situated outside the UAE and accordingly taxability will be determined. Factors like contractual obligation, Invoicing, payments etc. should be considered while analyzing the establishment most closely related. Services will be zero rated if the supplier is providing service directly to the establishment outside the UAE (e.g. Head office) even though the said establishment has another entity in the UAE (e.g. Branch).

Aspect 2: Location of the recipient

Services can be zero rated if the recipient is located outside the UAE at the time when the services are performed. This requires consideration of the nature of the services supplied, and the period or duration during which the services are performed by the supplier and consumed by the recipient. Where services are such that they are continuously performed and consumed for a duration of time, then any presence of the recipient during commencement, throughout, or during completion of the service in the UAE would result in the recipient being treated as being within the UAE “at the time the services are performed. If the services are of a nature that they are performed and consumed at the time that they are completed, then the location of the recipient at the time of completion of the services will determine whether the recipient is outside or inside the UAE at the time the services are performed. This will have an impact of the multi-national entities who create temporary establishments in the UAE for a particular project wherein the entity in the UAE is most closely related to the supply making the supplier charge 5% VAT. E.g.: where a UK resident company appoints a UAE based layer for arbitration services and if company’s representative comes to the UAE to be present during the hearing, the law firm making the supply would not be able to zero-rate the supply of the services as relating to the arbitration process during which the client was present in the UAE.

Extension the term “outside the State:

Zero-rate a supply is not affected where the recipient has a UAE presence which is both short-term and is not effectively connected with the supply e.g. A UK-resident company employs a UAE law firm to represent it during an ongoing litigation before the UAE courts. During the course of the litigation, one of the company’s employees comes to the UAE for a conference not related to the ongoing litigation.

Therefore, in order to ensure that the zero-rated treatment is applied correctly, the supplier should consider all available facts and seek information from the recipient to identify the recipient’s residency status and location at the time the services are performed. If the supplier is not able to establish the necessary facts to ascertain if the zero-rating conditions are met, the supplier must charge VAT at 5%.

Location of tangible goods:

When the service is provided in relation to any tangible goods situated in the UAE then, the services will be liable to VAT at 5% even though the recipient is situated outside the UAE even though the performance is not received by any person in the UAE. This burdens the non-resident with the additional cost. Let us understand with following examples:

• UAE company providing Inspection and Testing services (e.g. in respect of Oil or gas) in the UAE to non-resident customers have to charge 5% VAT even though the customer is situated outside UAE.
• UAE Companies providing storage or warehousing facilities to Non-resident customers in respect of the international transportation of goods even if storage is for temporary period.
• Repair services provided on the goods brought back in the UAE which were exported outside the UAE
• Services provided by real estate agent to non-resident customers in respect of real estate located in the UAE

 

How MBG can help:

With this in mind, it is an opportune time for taxpayers to assess & change the tax treatment on export of services if required. One of the best ways to prepare for this is to undertake a tax health check. A high-level health check of transactions may highlight key compliance areas like exports where more attention is required.

MBG is a Certified Tax Agency by Federal Tax Authority (FTA) & having a large team of experienced tax professionals. We have a bouquet of tax services like VAT Health Check, VAT Compliance Review, Tax Representation for Penalty Waiver, VAT Refund, VAT Registration & Helping companies during FTA Audit etc.