Gold and Diamonds - Amendment to Tax Treatment of Making Service - VATP032
VATP032
VAT Public Clarification
Gold and Diamonds â Amendment to Tax Treatment of Making Service
Issue
Jewellers generally receive a consideration for the supply of gold and diamond jewellery to cover the price of the gold and diamond as well as the Making Service.
In some instances, taxable persons supplying gold or diamond jewellery reflect the gold or diamond price and the Making Charges separately on the tax invoice issued for the supply, and in other cases both are reflected as a single price without disclosing the separate prices of each component.
This Public Clarification replaces VATP029 published in June 2022, and provides guidance on the application of the VAT legislation with regards to the Making Charges received by jewellers in accordance with the amendment to Cabinet Decision No. 25 of 2018 on the Mechanism of Applying Value Added Tax on Gold and Diamonds between Registrants in the State ('Cabinet Decision No. 25').
Terms Used in This Public Clarification
For the purposes of this Public Clarification, the terms below shall have the meaning assigned against each:
"Gold": Gold and/or Diamonds.
"Making Service": The service of making / manufacturing Gold Items.
"Making Charge": The price charged by jewellers in return for Making Services.
Summary
Tax registrants supplying Gold are not required to impose VAT on the supply of Gold and products which mostly consist of Gold, if the conditions of Cabinet Decision No. 25 are met. In such instances, VAT in respect of the Gold is accounted for under a special reverse charge mechanism which requires the registered recipient to account for VAT on the supply instead of the supplier.
Based on a new decision by the Cabinet, the definition of goods in Cabinet Decision No. 25 has been amended to state that it may include Making Services directly in connection with the Gold, for the limited period between 1 June 2018 and 31 December 2022.
This temporary change in definition would allow for the application of the reverse charge mechanism on the Making Services that are directly in connection with the supply of Gold, where the conditions as stipulated in Cabinet Decision No. 25 of 2018 are met for that specific period only.
However, from 1 January 2023, the application of the reverse charge mechanism will be restricted to the supply of Gold and any products where the principal component consists of Gold.
Hence, if the supplier[1] charges separate considerations for the Gold and the Making Services, or reflects the price of these components separately, from 1 January 2023, the supplier is required to impose VAT on the service component.
Detailed Analysis
Scope
This clarification only applies to Gold and products consisting mostly of Gold,[2] that do not qualify for zero-rating. These goods are collectively referred to as 'Gold Items'.
From 1 June 2018 up to 31 December 2022, the reverse charge mechanism may be applied to Making Services that are supplied with and are directly in connection with the Gold Items as a consequence of the amendment to the definition of 'Goods' in Cabinet Decision No. 25.
Making services are regarded as being directly in connection with the Gold Items if the service is performed on the Gold Item being supplied.
The export of Gold Items[3] and the supply of investment precious metals[4] do not qualify for the special reverse charge mechanism and, therefore, fall outside the scope of this clarification.
Reverse charge mechanism
Tax registrants supplying Gold Items, shall not impose VAT on the supply of a Gold Item if the following requirements are met:[5]
The recipient is registered for VAT.
The supplier retains a written declaration from the recipient confirming all of the following:
The recipient will use the Gold Item to produce or manufacture other Gold Items, or to re-sell the Gold Item received.
The recipient is registered for VAT on the date of supply.
The recipient shall account for the VAT on the Gold Item supplied to him.
If all of the above conditions are met, the recipient shall calculate VAT on the value of the Gold Items supplied to him, and be responsible for all the tax obligations related to that supply.
For the period from 1 June 2018 until 31 December 2022, the supply of Gold Items subject to the reverse charge mechanism may also include Making Services directly in connection with the supply of the Gold Items.
Gold and Making Services supplied between 1 June 2018 and 31 December 2022
In instances where the taxable person applied the provisions of Cabinet Decision No. 25, during the period from 1 June 2018 to 31 December 2022, on Gold Items only without the Making Services, there is no requirement to make changes to their previous VAT Return filings.
Furthermore, in instances where the taxable person applied the provisions of Cabinet Decision No. 25, during the period from 1 June 2018 to 31 December 2022, on Gold Items as well as the Making Services that are directly connected to the supply of such Gold Items, there is no requirement to make changes to their previous VAT Return filings.
Moreover, the taxable person who corrected their VAT return filings by submitting a voluntary disclosure to the FTA as per Public Clarification VATP029 on Gold-Making Charge, in order to apply VAT on the Making Services where these were separately listed on the invoice from the Gold Items, and they had previously applied reverse charge mechanism to such services, is not required to file an additional voluntary disclosure to reverse the voluntary disclosure submitted.
Gold and Making Services supplied from 1 January 2023
As the amendment to the definition of goods under the decision by the Cabinet shall only apply until 31 December 2022, the reverse charge mechanism will no longer be applicable to Making Services separately listed from the Gold Item on the invoice after this date.
Consequently, from 1 January 2023, any supplier of Gold Items and Making Services has to consider whether the supply constitutes a single composite supply of a Gold Item or multiple supplies consisting of both the Gold Item and Making Services.[6]
Single composite supply[7]
If the supplier charges a single price for the Gold Item, including the Making Service, the supply will be regarded as a single composite supply of the Gold Item if all of the following conditions are met:
The supply consists of a principal component (Gold Item) and ancillary/incidental elements, e.g. related services (including the Making Service from 1 January 2023), or these components are so closely linked that they constitute a single supply which would be impossible or unnatural to split;[8]
The price for the Gold Item and the related services is not separated;
The Gold Item and the related services are supplied by the same supplier.[9]
If all of the above requirements are met, the supply of the Gold Items (including the related services) would constitute a single composite supply which may qualify for the reverse charge mechanism if all of the requirements of Cabinet Decision No. 25 are met.[10]
In such a case, both the supplier and recipient are required to retain sufficient supporting evidence, including a tax invoice issued by the supplier reflecting one single consideration for the Gold Item (including the related services) stating that the reverse charge mechanism was applied.
Multiple supplies
If the supplier charges separately for the Gold Items and for the related services (including the Making Service from 1 January 2023), or where the price of these components are separately reflected, the supplier is regarded as making multiple supplies[11]. In these cases, the supplier is required to treat each component as a separate supply[12] and apply the correct tax treatment to each separate component.
In instances of multiple supplies, only the VAT related to the Gold Items may be accounted for under the reverse charge mechanism, provided all the requirements of Cabinet Decision No. 25 are met.
Since the supply of the related services does not fall under the special reverse charge mechanism under Cabinet Decision No. 25 in cases of multiple supplies, the supplier is required to account for VAT on these services if the supplier is a taxable person.
Furthermore, the supplier will be required to issue tax invoices in respect of the taxable supply of related services where such a supply is regarded as a separate supply, i.e., where the supply does not constitute part of a single composite supply.
If the recipient is a registrant, the input tax may be recovered in accordance with the general input tax recovery rules.
Transitional Provisions
For the purposes of determining whether the supplies occurred before or from 1 January 2023, the supplier shall consider the date of supply rules as provided in the VAT legislation.
Correction of errors
Where a supplier applied an incorrect VAT treatment, other than what has been clarified above, the supplier shall submit a voluntary disclosure. Further guidance on the process and requirements to submit a voluntary disclosure is available in the Voluntary Disclosure User Guide.
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 and its amendments, Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments, their Executive Regulations, and Cabinet Decision No. 25 of 2018 on the Mechanism of Applying Value Added Tax on Gold and Diamonds between Registrants in the State.
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 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', and Cabinet Decision No. 25 of 2018 on the Mechanism of Applying Value Added Tax on Gold and Diamonds between Registrants in the State is referred to as 'Cabinet Decision No. 25'.
[1] Article 1 of Cabinet Decision No. 25 defines the following terms:
'Registrant' - The taxable person who has been issued with a tax registration number and is licensed to conduct any activity related to the Goods by the competent government entity.
'Supplier' - the registrant who is supplying goods in the State.
'Taxable person' - Any natural or legal person registered or obligated to register for tax purposes under the referenced Decree-Law.
[2] Article 1 of Cabinet Decision No. 25, defines the term 'Goods' as gold, diamonds and any products where the principal component is of gold or diamonds. Based on a decision by Cabinet, this definition shall be replaced for a limited period from 1 June 2018 to 31 December 2022 with 'gold, diamonds and any products where the principal component is of gold or diamonds, which may include Making Services directly connected to the supply of these goods'.
[3] Article 45(1) of the Decree-Law states that the zero-rate shall apply to a direct or indirect export of goods or services to outside the Implementing States as specified in the Executive Regulation.
[4] Article 45(8) of the Decree-Law states that the zero-rate shall apply to the supply or import of investment precious metals. The Executive Regulation shall specify the precious metals and the standards based on which they are classified as being for investment purposes.
Article 36(2) of the Executive Regulation defines the phrase 'investment precious metals' as gold, silver and platinum that meet the following standards:
The metal is of a purity of 99 percent or more.
The metal is in a form tradeable in global bullion markets.
[5] Article 2(1) of Cabinet Decision No. 25 states that, where a supplier makes a supply of goods to a registrant recipient in the State, and the recipient intends to either resell such goods or use them to produce or manufacture any of the goods, the following rules shall apply:
The supplier shall not be liable for calculating the tax in relation to the supply of the goods and shall not include it in his tax return, in cases where the registrant recipient declares in writing the following:
The acquisition of the goods is for the purpose of resale or use to produce or manufacture any of the goods.
The recipient is registered on the date of supply.
The recipient shall calculate tax on the value of the goods supplied to him.
The recipient of the goods shall calculate the tax on the value of the goods supplied to him and shall be responsible for all applicable tax obligations related to the supply and for calculating the due tax in respect of such supplies.
[6] Article 4(1) of the Executive Regulation states that, 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.
[7] Article 4(2) of the Executive Regulations defines the phrase 'single composite supply' as 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 circumstances of the supply.
[8] Article 4(3) of the Executive Regulation states that a single composite supply shall exist in the following cases:
Where there is supply of all of the following:
A principal component.
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.
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.
[9] Article 4(4) of the Executive Regulation states that a single composite supply may exist under Clause 2 of this Article if all of the following conditions are met:
The price of the different components of the supply is not separately identified or charged by the supplier.
All components of the supply are supplied by a single supplier.
[10] Article 46(1) of the Executive Regulation states that, for the purposes of the supply consisting of more than one component, where a supply is a single composite supply as provided in Article 4 of the Executive Regulation, the tax treatment of the supply shall follow the tax treatment of the principal component of the supply.
[11] Article 4(5) of the Executive Regulation states that, 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.
[12] Article 46(2) of the Executive Regulation states that, for the purposes of the supply consisting of more than one component, where a supply consisting of multiple components is not a single composite supply, the supply of each component is to be treated as a separate supply.