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Document Type: PC - Public Clarification
Guidance Code: VATP020
Year:
Related Law: uae-indirect-vat-8-of-2017
Authority: Federal Tax Authority

VAT-free special offers - VATP020

VATP020

VATP020

VAT Public Clarification

'VAT-free' special offers

Issue

Numerous retailers are offering "VAT-free special offers" as promotions to entice prospective buyers to purchase goods or services within a promotional period.

Referring to "VAT-free special offers" is misleading and contrary to the VAT legislation, since the goods or services are not actually supplied free of VAT.

This Public Clarification clarifies the VAT treatment of promotions where the seller absorbs VAT on promotional goods. For purposes of this clarification, the term "promotional goods" refers to goods which are sold as part of a special promotion.

Summary

VAT registered businesses should not advertise taxable goods or services as free of VAT or sell such goods or services without accounting for 5% VAT, except where the supply qualifies for zero-rating.

Detailed discussion

Legislative background

In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax 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 the "Executive Regulation", Federal Law No. 7 of 2017 on Tax Procedures is referred to as "Tax Procedures Law", and Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE is referred to as "Cabinet Resolution No. 40".

Liability to impose VAT

According to Article 2(1) of the Decree-Law, VAT shall be imposed on every taxable and deemed supply made by a taxable person.

Article 1 of the Decree-Law defines the terms -

  • "taxable person" as any person registered or obligated to register for tax purposes.

  • "taxable supply" as a supply of goods or services for a consideration by a person conducting business in the United Arab Emirates ("UAE"), and does not include an exempt supply.

Consequently, where the seller is a taxable person, the seller is, according to Article 3 of the Decree-Law[1], required to impose 5% VAT on the supply of all goods and services in the UAE, except where the Decree-Law explicitly provides for zero-rating or exemption.

Based on the above, any promotional campaign stating that the supply of promotional goods is "VAT-free" is misleading as the seller is obliged to impose VAT on these supplies. The seller may, however, make a commercial decision to offer a discount equivalent to the amount of VAT. As a consequence, VAT is always payable on taxable supplies and the seller is not entitled to choose whether or not VAT should be imposed on a supply.

Discounts

Sellers may take a commercial decision to absorb VAT in order to make the price of promotional goods more attractive to potential buyers, these are commonly referred to as "VAT-on-us" promotions. In these instances the seller is regarded as granting a discount to its customer which is equal to the VAT amount imposed on the promotional goods or services.

According to Article 39 of the Decree-Law[2], in the case of a discount, the value of the supply is reduced in proportion to the discount. Article 28(3) of the Executive Regulation[3] confirms that the value of the discount is the amount by which the consideration is reduced.

For example, if a motor vehicle's normal price is AED 105,000 and a special VAT-on-us promotional price is AED 100,000, the seller is regarded as providing a AED 5,000 discount to its customer.

VAT inclusive prices

According to Article 38 of the Decree-Law[4], the advertised price of taxable supplies shall include the VAT.

Article 27(1) of the Executive Regulation[5] confirms that, in the case of a taxable supply, the published prices shall be inclusive of VAT. According to Article 27(2) of the Executive Regulation, the taxable person may, however, declare VAT exclusive prices if the goods or services will be exported or where the customer is registered for VAT.

Even though a business may expressly advertise prices as "VAT-free" in respect of retail sales as part of business / marketing promotion labelling, for VAT purposes, the price charged to the customer shall include VAT. Consequently, the onus will be on the business to determine the correct amount of VAT payable. Further, businesses should comply with the rules in respect of publishing prices.

The amount paid by the customer for the promotional good will therefore constitute the VAT inclusive consideration, regardless of whether the promotion is published as "VAT-free" or not.

For example, if during the promotional period a motor vehicle is advertised for AED 100,000 "VAT-free", the consideration for the supply is AED 100,000. The seller is therefore required to account for AED 4,761.90 VAT (VAT = 100,000 / 21 = 4,761.90) in its tax return, regardless of the wording used in the promotional campaign.

Tax invoices

All tax invoices issued in respect of taxable promotional goods or services shall meet all the requirement set out in Article 59 of the Executive Regulation[6].

Consequently, as prescribed in the Article, the seller is required to reflect the rate of tax, tax amount and the gross amount payable in AED for each taxable good or service supplied on the tax invoice.

This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Law No 7 of 2017 on Tax Procedures, Federal Decree-Law No 8 of 2017 on Value Added Tax and their Executive Regulations.

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

[1]Article 3 of the Decree-Law states that, "without prejudice to the provisions of Title Six of this Decree- Law, a standard rate of 5% shall be imposed on any supply or Import pursuant to Article 2 of this Decree-Law on the value of the supply or Import specified in the provisions of this Decree-Law."

[2]Article 39 of the Decree-Law states that, "when discounts are made before or after the Date of Supply or subsidies provided by the State to the supplier for that supply, the value of the supply shall be reduced in proportion to such discounts or subsidies. The Executive Regulation of this Decree-Law shall specify the conditions and restrictions for calculating the Tax when the discount is made."

[3]Article 28(3) of the Executive Regulation states that "the value of a discount shall be the amount by which the Consideration is reduced."

[4]According to Article 38 of the Decree-Law, "for Taxable Supplies, the advertised price shall include the Tax. Instances where prices do not include the Tax shall be determined by the Executive Regulation of this Decree-Law."

[5]According to Article 27(1) and (2) of the Executive Regulation:

  1. In the case of a Taxable Supply, the published prices shall be inclusive of Tax.

  2. As an exception to Clause 1 above, the Taxable Person may declare prices as being exclusive of Tax in the following cases:

    1. The supply of Goods or Services for Export.

    2. Where the customer is a Registrant.

[6]According to Article 59(1) of the Executive Regulation, 'a tax invoice shall contain all of the following particulars:

  1. The words 'Tax Invoice' clearly displayed on the invoice.

  2. The name, address, and Tax Registration Number of the Registrant making the supply.

  3. The name, address, and Tax Registration Number of the Recipient where he is a Registrant.

  4. A sequential Tax Invoice number or a unique number which enables identification of the Tax Invoice and the order of the Tax Invoice in any sequence of invoices.

  5. The date of issuing the Tax Invoice.

  6. The date of supply if different from the date the Tax Invoice was issued.

  7. A description of the Goods or Services supplied.

  8. For each Good or Service, the unit price, the quantity or volume supplied, the rate of Tax and the amount payable expressed in AED.

  9. The amount of any discount offered.

  10. The gross amount payable expressed in AED.

  11. The Tax amount payable expressed in AED together with the rate of exchange applied where the currency is converted from a currency other than the UAE dirham.

  12. Where the invoice relates to a supply under which the Recipient of Goods or Recipient of Services is required to account for Tax, a statement that the Recipient is required to account for Tax, and a reference to the relevant provision of the Decree-Law.'