This first appeared in Bloomberg Tax, original author is Bastiaan Moossdorff - Senior Manager Indirect Tax.
Value-added tax was introduced in the UAE on Jan. 1, 2018 as the first tax levied on a federal level, administered by the Federal Tax Authority. The UAE consists of seven emirates—Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. To distribute the VAT collected between the federal government and the emirates, separate reporting requirements were adopted.
With the introduction of VAT in the UAE, VAT registered persons are required to report taxable supplies (this includes supplies subject to VAT at the standard rate, currently at 5%) in the emirate in which the fixed establishment related to a supply is located, in the case of resident taxpayers, or in the emirate in which the supply is received, in the case of nonresident taxpayers.
Emirate-level Reporting
The new rules, effective from July 1, require resident taxpayers to report taxable supplies made through e-commerce in the emirate in which the supply is received, when the total value of supplies made through e-commerce subject to this reporting requirement exceeds 100 million UAE dirham ($27 million) per calendar year. The new reporting requirement should result in a more equitable distribution of VAT revenue between the emirates and is in line with the global trend of taxing e-commerce supplies at the place of consumption.
On this basis, the taxable supplies will be reported in the taxpayer’s VAT return against the relevant emirate (box 1 of the VAT return).
New Reporting Mechanism for Taxable Supplies Made Through E-Commerce
On Oct. 21, 2022, the UAE cabinet issued Cabinet Decision No. 99 of 2022 amending the provisions of Article 72 of the UAE VAT Executive Regulations. The amendments are effective from Jan. 1.
The amended provisions of Article 72 of the UAE VAT Executive Regulations introduce specific record-keeping requirements for taxable supplies made through e-commerce. This is an exception to the default rule set out above.
Taxable persons making taxable supplies through e-commerce will be required, as of July 1, (subject to the threshold requirements) to keep records of e-commerce transactions based on the emirate in which the supply is received.
E-Commerce Definition
The new amendments refer to “e-commerce” as the process of selling goods or services through electronic means, an electronic platform, a store on social media, or electronic applications. The criteria and conditions have not yet been determined.
Threshold
The new record-keeping requirements apply to taxable persons making taxable supplies through e-commerce exceeding 100 million UAE dirham per calendar year.
Effective Date and Time Frame
The new record keeping requirements shall apply:
Starting from the first tax period beginning on or after July 1 and for a period of 18 months for the taxable person whose taxable supplies made through e-commerce exceed the 100 million UAE dirham threshold during the calendar year ending on Dec. 31, 2022.
For a period of two years starting from the first tax period of the calendar year that begins after the date of which taxable e-commerce supplies exceed the 100 million UAE dirham threshold for any year after 2022.
Nonresident Taxpayers
The reporting requirements for nonresident taxpayers have not been amended. Nonresident taxpayers have been required to report emirate-by-emirate, based on where supplies are received, since VAT was introduced in the UAE on Jan. 1, 2018. This applies to all taxable supplies made by nonresident taxpayers and from the first supply.
Although the requirements for nonresident taxpayers have not changed as a result of the amendment of the UAE VAT Executive Regulations, it is now more likely that the FTA will audit whether the nonresident is meeting the reporting requirements. In the case of incorrect reporting of supplies at emirate level, nonresident taxpayers would, effective from March 1, be required to submit a voluntary disclosure to rectify the error in allocation of taxable supplies at emirate level.
Requirement to Submit Voluntary Disclosures in Case of Incorrect Reporting
In addition to the amendment of the UAE VAT Executive Regulations, the president of the UAE, Sheikh Mohamed bin Zayed Al Nahyan, issued Federal Decree-Law No. 28 of 2022 on Tax Procedures on Sept. 30, 2022. The new law revokes Federal Decree-Law No. 7 of 2017 on Tax Procedures as amended by Federal Decree-Law No. 28 of 2021 (the current law). The new Tax Procedures Law will be effective as of March 1.
A key change is the requirement to submit a voluntary disclosure in case of a reporting error. Currently, taxpayers are only required to submit a voluntary disclosure when an error resulted in an understatement of VAT of more than 10,000 UAE dirham. By removing the monetary threshold, taxpayers are required to submit a voluntary disclosure in case of reporting errors. With the new Tax Procedures Law there is now a legal requirement for taxpayers to correct any details of supplies that have been incorrectly reported at emirate level.
Under the current law, there is a penalty for submitting an incorrect VAT return, of 1,000 dirham for the first instance and 2,000 dirham for subsequent instances. However, as an exception, if the incorrect tax return results in a tax difference less than the fixed penalty, the penalty shall be equal to the tax difference and at least 500 UAE dirham. Under the new law, the minimum penalty of 500 UAE dirham has been removed, but it is unclear whether the penalty for submitting an incorrect VAT return will remain.
Planning Points
UAE-registered persons should assess whether their supplies are made through e-commerce and, if so, whether they will exceed the threshold of 100 million UAE dirham of supplies in this calendar year. Systems and data collection may have to be enhanced to determine the emirate in which the supply is received.
Furthermore, following the introduction of the new Tax Procedures Law, taxpayers should review whether they are currently complying with the emirate level reporting requirement and consider submitting a voluntary disclosure to correct any incorrect reporting.
