ℹī¸ Fast-loading version for search engines - Click here for the interactive version
Document Type: PC - Public Clarification
Guidance Code: VATP0035
Year:
Related Law: uae-indirect-vat-8-of-2017
Authority: Federal Tax Authority

Ministerial Decision No. 262 of 2023 on the Criteria to be Followed in the Determination of Parts and Pieces of Electronic Devices - VATP0035

VATP0035 - Ministerial Decision No. 262 of 2023 on the Criteria to be Followed in the Determination of Parts and Pieces of Electronic Devices

VATP0035

VAT Public Clarification

Ministerial Decision No. 262 of 2023 on the Criteria to be Followed in the Determination of Parts and Pieces of Electronic Devices

Issue

Cabinet Decision No. 91 of 2023 on the Application of Reverse Charge Mechanism on Electronic Devices among Registrants[1] in the State for the purposes of Value Added Tax ("Cabinet Decision No. 91") has defined a distinct tax treatment for certain supplies that relate to Electronic Devices.

Under application of Article 3 of Cabinet Decision No. 91, a Ministerial Decision No. 262 of 2023 on the Criteria to be Followed to Determine of Pieces and Parts of Electronic Devices ("Ministerial Decision No. 262") has been issued.[2]

This public clarification should be read together with VATP034 on the Application of the Reverse Charge Mechanism on Electronic Devices among Registrants in the State for the purposes of Value Added Tax.

Summary

Article 3(1) of Ministerial Decision No. 262 states three criteria according to which pieces and parts will be considered to be related to Electronic Devices and fall within the scope of the VAT treatment and related compliance obligations implemented by Cabinet Decision No. 91.[3]

The pieces and parts will be considered related to Electronic Devices if they meet one or more of the three criteria and do not fall within the exceptions stated in Article 3(2) of Ministerial Decision No. 262.[4]

Ministerial Decision No. 262 takes effect from the same day that Cabinet Decision No. 91 takes effect, i.e. on 30 October 2023.

Detailed analysis

For its application, Cabinet Decision No. 91 has defined Electronic Devices as "Mobile phones, smart phones, computer devices, tablets and pieces and parts thereof".[5]

Ministerial Decision No. 262 sets the following three criteria to determine if pieces or parts are related to Electronic Devices:

  • The pieces and parts are normally used for the manufacturing or production of Electronic Devices and they are necessary for the normal operation of the Electronic Devices.

  • The pieces and parts, even if not normally used for in the manufacturing or production process, are normally necessary for the operation of Electronic Devices, such as chargers, power cords, battery packs and other similar pieces and parts.

  • The pieces and parts are a replacement for the pieces and parts meeting either of the previous two criteria.

The criteria are to be considered separately from each other. It is possible that a piece or part does not fall under one criterion but, because of its characteristics, meets another criterion.

Criterion One – Normally used in the manufacturing or production and necessary for the normal operation

This criterion applies to all pieces and parts that are used in the manufacturing or production of mobile phones, smart phones, computer devices and tablets, the scope of which has been clarified in Public Clarification VATP034. It is also required that the pieces and parts are necessary for the normal operation of the devices.

As examples, the pieces and parts that would meet this criterion would be the coils, capacitators, couplers, diodes, regulators, resistors, transistors, microchips and other such pieces and parts of smart phones, mobile phones and tablets. The criterion would also be met by, for example, for accelerometers, heart rate monitors, gyroscopes processors, etc. built into smart watches that are an extension of a smart phone or mobile phone or that can connect independently and directly to cellular networks ("Smart Watches") as such Smart Watches do fall within the definition of Electronic Devices under Cabinet Decision No. 91.

Pieces and parts that are part of the hardware of a computer device are meeting the criterion, such as the CPU, RAM, hard drive, optical drive, network interface card, etc.

To meet the criterion, the above pieces and parts must also be required for the normal operation of the devices. This is normally the case for all internal components of an Electronic Device, but would also, for example, include the keyboard of a portable computer device.

External input devices, such as computer mice, external output devices, such as monitors and printers and secondary storage devices, such as external hard disks do not fall under this first criterion, since they are not normally used in the manufacturing or production of the Electronic Devices.

Pieces and parts that may be used in the manufacturing or production but are not normally used or are not necessary for the normal operation of the Electronic Device, do not meet the criterion. This may be the case, for example, for the crystals or gold leaves applied on certain smart phones during the manufacturing process or jewelry elements applied to Smart Watches.

Criterion two – Pieces and Parts that are not normally used for the manufacturing or production of Electronic Devices, but are normally necessary for the normal operation of Electronic Devices

Article 3(1)(b) of Ministerial Decision No. 262 provides examples of pieces and parts that are considered to be necessary for the normal operation of Electronic Devices.[3]

Whilst the Electronic Devices may operate normally for a certain amount of time without the use or application of such pieces and parts, their continuing normal operation can only be ensured with the use of the pieces and parts that meet this second criterion, such as chargers (whether wired or wireless).

External monitors, mice and keyboards for desktop computers would be further examples of pieces and parts meeting this second criterion since they are necessary for the normal operation of such Electronic Devices.

Criterion Three – Replacement Pieces and Parts

Pieces and parts that meet the third criterion are those pieces and parts that are a replacement for any of the goods that meet either of the first two criteria.

For example, and as clarified above, coils, capacitators, couplers, diodes, regulators, resistors, transistors, microchips and other such pieces and parts of smart phones, mobile phones and tablets, meet criterion one. Such pieces and parts are also classified as "replacement parts" that meet criterion three when separately supplied by a Registrant to another Registrant, who intends to resell these.

Exclusions

Pieces and Parts that enhance the functioning or enjoyment of Electronic Devices, but are not necessary for the operation of the Electronic Devices or the activation of their features

Under the exclusion stated under Article 3(2)(a) of Ministerial Decision No. 262, pieces and parts that merely enhance the functioning or enjoyment of Electronic Devices, are considered not to be meeting the criteria to be related to Electronic Devices.[4]

This exclusion applies to external pieces and parts. Examples of such pieces and parts include but are not limited to external speakers, phone cases and covers, a keyboard with device cover combination for a tablet, headphones and earphones, screen protectors, selfie sticks, device holders, power adapters, pencils for tablets, projectors, USB sticks, dongles, etc.

The supplier will need to consider the application of Article 4 of the Executive Regulation and assess if the supply constitutes a single composite supply for the application of Cabinet Decision No. 91.[6]

SIM Cards and other external smart cards

Whilst Subscriber Identity Module ("SIM") cards and other smart cards of the same nature or with the same purpose are normally necessary for the normal operation of certain types of Electronic Devices, these are, however, explicitly excluded from the application of Ministerial Decision No. 262 and, hence from the application of Cabinet Decision No. 91.

Smart cards of the same nature or with the same purpose are, for example, R-UIM cards, eSIMs, subscriber cards, etc.

Also, when SIM and similar cards are supplied, the supplier will need to consider the application of Article 4 of the Executive Regulation and assess if the supply constitutes a single composite supply for the application of Cabinet Decision No. 91.[6]

Final Comment

This Public Clarification intends to clarify the new legislation and the goods meeting the criteria. Any examples given in this Clarification are examples only and it remains the responsibility of the Registrants in the transaction to determine if goods supplied meet the criteria stated in Ministerial Decision No. 262 and, hence, whether the supply of these goods falls within the scope of the tax treatment defined in Cabinet Decision No. 91.

This Public Clarification issued by the FTA is meant to clarify certain aspects related to Federal Decree-Law No. 8 of 2017 on Value Added Tax and its Executive Regulations and their amendments, Cabinet Decision No. 91 of 2023 on the Application of Reverse Charge Mechanism on Electronic Devices among Registrants in the State for the purposes of Value Added Tax and Ministerial Decision No. 262 of 2023 On the Criteria to be Followed in the Determination of Parts and Pieces of Electronic Devices.

This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.

Legislative References:

In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as "Decree-Law", Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as "Executive Regulation", Cabinet Decision No. 91 of 2023 on the Application of Reverse Charge Mechanism on Electronic Devices among Registrants in the State for the purposes of Value Added Tax is referred to as "Cabinet Decision No. 91" and Ministerial Decision No. 262 of 2023 On the Criteria be Followed in the Determination of Parts and Pieces related to Electronic Devices "Ministerial Decision No. 262".

[1] Article 1 of the Decree-Law defines the term "registrant" as the taxable person who has been issued with a TRN.

[2] Article 3 of Cabinet Decision No. 91 states that for the purposes of the implementation of Cabinet Decision No. 91, the Minister of Finance shall issue a decision to specify the criteria that should be followed in determining the pieces and parts related to electronic devices.

[3] Article 3(1) of Ministerial Decision No. 262 states that pieces and parts are considered related to electronic devices, if the pieces and parts meet any of the following criteria:

  1. Pieces and parts that are normally used for the manufacturing or production of Electronic Devices, and such pieces and parts are considered necessary for the normal operation of the Electronic Devices.

  2. Pieces and parts that are not normally used for the manufacturing or production of Electronic Devices, but are normally necessary for the operation of the Electronic Devices, such as chargers, power cords, battery sets and other similar pieces and parts.

  3. Pieces and parts that are a replacement for pieces and parts that meet the criteria in paragraphs (a) and (b) of Clause 1 of the Article.

[4] Article 3(2) of Ministerial Decision No. 262 states that, notwithstanding the provisions of Clause 1 of the Article, the criteria in Clause 1 of the Article shall not be considered to be met in any of the following cases:

  1. Pieces and parts that enhance the functioning or enjoyment of Electronic Devices, but are not necessary for the Electronic Devices' operation or to activate their features.

  2. SIM cards or other external smart cards of the same nature or with the same purpose.

[5] Article 1 of Cabinet Decision No. 91 defines the term "Electronic Devices" as mobile phones, smart phones, computer devices, tablets and pieces and parts thereof.

[6] Article 4 of the Executive Regulation states that:

  1. Where a person made a supply consisting of more than one component for one price, the person shall determine whether the supply constitutes a single composite supply or multiple supplies.

  2. The phrase "single composite supply" means a supply of goods or services, where there is more than one component to the supply, and taking into account the contract and the wider circumstance of the supply.

  3. A single composite supply shall exist in the following cases:

    1. Where there is supply of all of the following:

      1. A principal component.

      2. A component or components which either are necessary or essential to the making of the supply, including incidental elements which normally accompany the supply but are not a significant part of it; or do not constitute an aim in itself, but are instead a means of better enjoying the principal supply.

    2. Where there is a supply which has two or more elements so closely linked as to form a single supply which it would be impossible or unnatural to split.

  4. A single composite supply may exist under Clause 2 of the Article if all of the following conditions are met:

    1. The price of the different components of the supply is not separately identified or charged by the supplier.

    2. All components of the supply are supplied by a single supplier.

  5. Where a taxable person supplies more than one component for one price and the supply is not a single composite supply, then the supply of the components shall be treated as multiple supplies.