Issue

Value Added Tax ('VAT') in the UAE is regulated by the Federal Decree-Law No. 8 of 2017 on Value Added Tax ('Decree-Law'). The Federal Decree- Law No. 18 of 2022 on the Amendment of Some Provisions of the Federal Decree-Law No. 8 of 2017 on Value Added Tax has been issued, which amends or updates several articles of the Decree- Law and takes effect on 1 January 2023.

Summary

The following Articles of the Decree-Law have been amended:

– Article 1 on Definitions, including the insertion of new definitions.

– Article 5

– Article 7

– Article 13

– Article 15

– Article 21

– Article 26

– Article 27

– Article 30

– Article 33

– Article 36

– Article 45

– Article 46

– Article 48

– Article 55

– Article 57

– Article 61

– Article 62

– Article 65

– Article 67

– Article 74

– Article 76

– Article 77

– Article 80

– Article 83

A new Article 79 bis has also been inserted in the Decree-Law on Statute of Limitation. This Article is further clarified in this Public Clarification.

The list above does not include Articles where the translation to English has been enhanced.

This Public Clarification is specifically intended to inform persons of the changes in the VAT Decree- Law, in relation to the main amendments as effective from 1 January 2023:

1. New definitions (Article 1)^[1]

2. Exception from registration for persons already registered for VAT (Article 15)^[2]

3. Deregistration initiated by the FTA (Article 21)^[3]

4. Place of supply of goods when the date of supply is determined under Article 26(1)^[4] of the Decree-Law (Article 27)^[5]

5. Clarifying the place of residence of the principal where its agent regularly negotiates and contracts in favour of the principal, or regularly maintains inventory of the principal to fulfill supply arrangements (Article 33)^[6]

6. Value of supply and deemed supply between related parties (Article 36)^[7]

7. Clarifying the period within which tax credit notes must be issued (Article 62)^[8]

8. Clarifying the period within which tax invoices and tax credit notes must be issued (Article 67)^[9]

9. Statute of limitation (Article 79 bis)^[10]

Detailed analysis

New definitions

The majority of the new definitions were introduced to align with the definitions provided in the Tax Procedures Law. This includes the definitions for tax evasion, tax audit, tax assessment and voluntary disclosure.

The term "pure hydrocarbons" was introduced and defined to clarify that only pure compounds of the chemical formula consisting solely of hydrogen and carbon, i.e. CXH Y, may be considered for the purposes of the reverse charge mechanism under Article 48(3) of the Decree-Law^[11].

For example, lubricants and any other products containing components other than hydrogen and carbon would not be subject to the reverse charge mechanism.

The term "relevant charitable activity" was previously defined in the Executive Regulation, and is now also contained in the Decree-Law.

Exception from registration for persons already registered for VAT (Article 15)

Before amendment of the Decree-Law, the exception from registration could only be granted to persons who were not registered, provided they make only zero-rated supplies.

To allow for fair treatment of businesses, existing registrants only making zero-rated supplies may also apply to be excepted from registration from 1 January 2023.

Once the registrant's request for an exception from registration is accepted, the person will be deregistered if all the requirements are met, including that all due tax and administrative penalties have been settled. The person is required to notify the Federal Tax Authority ("FTA") if circumstances change, e.g. if it starts making standard rated supplies.

Deregistration initiated by the FTA (Article 21)

Before the amendment, deregistration could only be initiated at the request of the registrant.

However, there are instances where the integrity of the tax system is prejudiced, for example in some cases of tax evasion, or where a business ceases to exist, but the registrant fails to apply for deregistration.

From 1 January 2023, the FTA may initiate tax deregistration procedures. The Executive Regulation shall set out the controls and conditions in this regard.

It shall be noted here that the registrant also remains liable to apply for deregistration as specified in the legislation. Administrative penalties can otherwise be imposed in case of non-compliance with Article 21 Decree-Law.

Place of supply of goods when the date of supply is determined under Article 26(1) of the Decree-Law (Article 27)

The Decree-Law was amended to confirm that the place of supply of goods supplied under any contract that includes periodic payments or consecutive invoices, shall be the UAE if the ownership of the goods is transferred in the UAE at any time under the execution of the contract.

For example, if a tax invoice was issued against the first of two instalments for goods that are to be imported from outside the UAE where the ownership would transfer in the UAE, VAT will apply to all amounts invoiced in regards to the goods.

Clarifying the place of residence of a principal (Article 33)

The amendment in the Decree-Law confirms that in the following instances, the agent's activities in the UAE will result in the principal having a place of residence in the UAE:

• If the agent's place of residence is in the UAE and the agent regularly negotiates and enters into agreements in favour of the principal;
• If the agent regularly maintains a stock of goods to fulfill supply arrangements for the principal.

The deemed place of residence in the UAE for the principal through its agent will result in the principal having to comply with all tax obligations mentioned in the tax legislation.

Moreover, the reverse charge principles as laid down in Article 48(1) of the Decree-Law^[12] and Article 48(3) of the Executive Regulation^[13] will not apply where the principal has a place of residence in the UAE through an appointment of an agent.

Value of supply and deemed supply between related parties (Article 36)

The amendment to Article 36 of the Decree-Law explains that where the provisions of Article 36 and 37 of the Decree-Law apply, then Article 36 supersedes and the value of the supply will be the market value.

The meaning of "market value" is set out in Article 25 of the Executive Regulation, and generally refers to the consideration in money which a supply would generally achieve if supplied in similar circumstances at the same date in the UAE if made between persons who are not connected in any manner.

Consequently, where a person gives a right to use an asset in respect of which input tax was recovered, to a related party for no consideration, this is a deemed supply and below the market value of that right since no consideration is charged. Hence, the requirement under Article 36(1) of the Decree-Law is met.

For the purposes of Article 36(2) of the Decree-Law, the tax status of the related party receiving the right of use of that asset needs to be determined, specifically whether the related party would be eligible to full input tax recovery if VAT had been charged.

For example, if the related party uses the asset to make exempt supplies, or if the related party is not a registrant, the related party would not have been entitled to recover VAT in full had it been charged. Hence, the requirement under Article 36(2) of the Decree-Law is met.

Consequently, as all requirements of Article 36 of the Decree Law have been met, the value of the supply will be the market value, regardless of whether the requirement of Article 37 of the Decree Law are also met.

In instances where the requirements of Article 36 of the Decree Law are not met, but the requirement of Article 37 of the Decree Law is met, then the value of the supply shall be the total cost incurred by the taxable person to make the deemed supply of goods.

Specifying the period within which tax credit notes must be issued (Article 62)

The amendment to the Decree-Law specifies the period within which tax credit notes must be issued.

If output tax must be reduced after the date of supply, as a result of any of the instances listed in Article 61 of the Decree-Law, the registrant must issue a tax credit note within 14 calendar days from the date of the occurrence of the mentioned instance.

For example, on 15 January 2023, a wholesaler of computer hardware delivers 10 laptops to a business for a total consideration of AED 20,000 + VAT and the tax invoice is issued and the amount is paid on the same day. On 21 January 2023, the business returned 5 of the laptops which appeared to be faulty. After checking the claim, the wholesaler refunded 50% of the consideration + VAT on 6 February 2023.

The wholesaler must issue the related credit note no later than on 20 February 2023 (i.e. within 14 calendar days).

Issuance of tax invoices (Article 67)

The amendment to the Decree-Law clarifies the period within which tax invoices must be issued.

A registrant must issue a tax invoice within 14 calendar days from the date of supply. This date of supply is any of the dates as outlined in Articles 25 or 26 of the Decree-Law as the case may be.

For example, in case of a contract for the provision of advisory services containing clauses for periodical payments aligned with the meeting of delivery milestones:

• The tax invoice must be issued within 14 calendar days of each agreed and achieved delivery milestone; or

• The tax invoice must be issued within 14 calendar days of receiving a payment should this payment occur before achieving delivery milestones or the full completion of the service contract.

Statute of Limitation (Article 79 bis)

A Statute of Limitation Article has been introduced to the Decree-Law, that sets the maximum timeframe in which the FTA can act. Once this period expires, the FTA is generally precluded from taking any actions such as commencing an audit or issuing a tax assessment.

Generally, the FTA may not conduct a tax audit or issue a tax assessment to a taxable person after the expiration of 5 years from the end of the relevant tax period.

As an example, the tax period from July 2022 to September 2022, with the related tax return to be filed no later than 28 October 2022, generally cannot be subject to a tax audit or the issuance of a tax assessment after 30 September 2027.

As an exception to the general rule, the FTA may conduct a tax audit or issue a tax assessment to the taxable person after 5 years from the end of the relevant tax period in the following instances:

• If the FTA notified the taxable person of the tax audit before the expiry of the 5-year period, provided that the tax audit is completed or the tax assessment is issued, within 4 years from the date of the notification of the tax audit.

For example:

If the FTA notified the taxable person on 23 December 2022 that it will audit the tax periods of 2018, this tax audit must be completed, or the relevant tax assessment must be issued, before 23 December 2026.

• If the person submitted a voluntary disclosure in the fifth year from the end of a tax period, provided that the tax audit is completed or the tax assessment is issued, within one year from the date of submission of the voluntary disclosure.

It must be noted that the registrant cannot submit a voluntary disclosure after 5 years from the end of the relevant tax period.

• In the case of tax evasion, the FTA may conduct a tax audit or issue a tax assessment within 15 years from the end of the tax period in which the tax evasion occurred.

• If a taxable person failed to register for VAT within the prescribed period, the FTA may conduct a tax audit or issue a tax assessment within 15 years from the date on which the taxable person should have registered for VAT.

For example:

A taxable person was required to register for VAT - under the provisions of Article 13 of the Decree-Law – from 1 July 2019. An application for registration was, however, submitted and effective from 1 January 2021. For the period from 1 July 2019 to 31 December 2020, the FTA may conduct a tax audit to be completed before 1 July 2034 or issue a tax assessment before that date.

In all cases, the statute of limitation will be interrupted where any of the reasons as stipulated in Federal Law No. 5 of 1985, promulgating the Civil Transactions Law and its amendments, occur.