Introduction
As the UAE and the Kingdom of Saudi Arabia (KSA) continue to develop their Value Added Tax (VAT) frameworks, businesses participating in promotional trade schemes are facing new VAT-related challenges. The UAE introduced VAT in January 2018 under Federal Decree-Law No. (8) of 2017, while KSA followed with VAT implementation under Royal Decree No. M/113. With the evolving VAT landscape in these countries, the implications for promotional activities across industries, such as FMCG, retail, and electronics have grown increasingly complex. Navigating these complexities is critical for businesses to ensure compliance and optimise their VAT strategies effectively.
The dynamics of trade schemes
Promotional trade schemes are widely used across various industries to boost product visibility and drive sales. While effective for business growth, these schemes bring VAT complexities that require careful attention. Each scheme - whether offering direct discounts, providing rebates or delivering additional services like premium shelving or advertising requires careful consideration. Each scheme—whether it involves offering a direct discount, providing a rebate, or delivering additional services such as premium shelving or advertising—must be individually assessed to determine the correct VAT treatment. Thorough analysis is essential to ensure compliance and optimise the tax impact of these promotional activities.
VAT Treatment of trade schemes
Trade schemes can be broadly categorised from a VAT perspective into two main types: Discounts and rebates and promotional and marketing services.
- Discounts and rebates:
These typically include volume, cash, or trade discounts, as well as promotional rebates that directly reduce the price of the original goods sold or services supplied. VAT is calculated on the reduced price as reflected in the sales invoice. However, in the case of post-sale discounts or rebates, credit notes should be issued to adjust the output tax originally reported, in alignment with UAE and KSA VAT regulations.
- Promotional and marketing services:
Promotional services often involve more complex arrangements where the retailer engages in activities beyond the mere sale of goods. Examples include providing special display placements, marketing initiatives, or additional services such as in-store promotions and product demonstrations.
For VAT purposes, such promotional and or marketing activities are treated as separate supplies and must be accounted for accordingly. This includes the issuance of tax invoices for the services provided and the application of VAT at the standard rate applicable to local taxable supplies. Proper documentation and VAT treatment of these services are crucial to ensure compliance with the VAT regulations in both the UAE and KSA.
In practice, it is common to encounter contracts that combine the purchase of goods, discount schemes and promotional and or marketing services, resulting in varying VAT treatments. Addressing these complexities requires careful analysis to ensure compliance and optimise VAT outcomes.
Example trade schemes
Trade schemes are commonly employed across various sectors to boost sales, increase product visibility, and attract customers. However, these schemes often bring about complexities from a VAT perspective, necessitating a thorough review of the promotional strategy under the respective VAT laws in the UAE and KSA. Both jurisdictions stress the importance of accurately categorising these activities for VAT purposes and ensuring the proper generation and retention of supporting documentation. Below, we explore some of the most common scenarios and their VAT implications in both regions
Trade scheme examples and tax treatment
| Scenario | Description | High-level VAT implications for UAE and KSA |
| Fixed percentage rebates | A manufacturer offers a 10% rebate if a retailer achieves predefined sales targets. | Linked to the original supply of goods, requiring a tax credit note for adjustment when the customer achieves certain sales/purchases targets. |
| Premium shelving | A manufacturer compensates a retailer for allocating premium shelf space to its products. |
Treated as a separate supply (i.e., Promotional service), requiring a tax invoice. |
| Marketing support | A manufacturer contributes funds towards a retailer's advertising that features its products. | Treated as a separate element of service, independent from the original transaction, the grounds that the client engages in specific promotional activities which are autonomous and not intrinsically connected to the initial provision of goods. |
Practical challenges and compliance
Navigating the intricacies of VAT compliance within trade schemes seems challenging in practice, particularly for sectors with high transaction volumes or complex arrangements, such as offering complementary goods or allocating loyalty rewards.
These challenges are multifaceted, including determining the correct VAT application, preparing accurate supporting documentation, assessing the commercial implications of VAT, and ensuring that tax credit notes are correctly associated with their corresponding invoices. Each of these steps requires careful consideration to ensure full compliance and minimise potential risks under the UAE and KSA VAT regulations.
In practice, some businesses adopt a 'first in, first out' approach to simplify processes. However, this method may be challenged, such as by the UAE Federal Tax Authority (FTA), leaving businesses in a grey area or require a thorough examination, as in Saudi Arabia, to ascertain the correct VAT treatment. This necessitates a comprehensive assessment to ensure compliance and mitigate the risk of regulatory challenges.
A further layer of complexity arises when foreign suppliers request local UAE or KSA business to comply with their sales and or promotion and or marketing requirements without assessing the appropriate VAT treatment. This in a number of cases will entail having to charge local UAE or KSA VAT on certain promotional and or marketing services. As such foreign suppliers incur local UAE and or KSA VAT.
Fortunately, both KSA and UAE have VAT refund systems in place that, under specific conditions, allow foreign suppliers to reclaim VAT and prevent it from becoming a cost for either the foreign supplier or the local business.
While the KSA VAT refund process is well-established, the UAE’s system is still evolving and can present practical challenges. Despite this, filing VAT refund claims remains critical to safeguarding entitlements, and improvements in the UAE process continue to develop. Proactive management of these refund claims is essential to mitigate costs and maintain compliance.
Proactive steps for businesses: Navigating an evolving VAT landscape
In today’s dynamic business environment, ensuring VAT compliance is crucial, particularly when it comes to promotional trade schemes. These schemes often involve complex transactions, making it essential for businesses to stay up-to-date with VAT regulations. Below are key practices that businesses are recommended to follow to ensure proper VAT treatment of their promotional activities:
Regularly assess VAT implications, especially for promotional trade schemes, to stay aligned with current regulations, and update contractual agreements with partners accordingly, if applicable.
Ensure accurate invoicing for promotional services and maintain comprehensive documentation to substantiate VAT positions.
Explore and monitor non-resident VAT refund options in both KSA and UAE for VAT paid by non-resident parties involved in trade schemes.
As the VAT law and regulations in both the UAE and KSA continue to evolve, staying informed and compliant is more crucial than ever. Businesses must remain vigilant about legislative changes and seek expert guidance when navigating the complex VAT scenarios associated with promotional trade schemes. Ensuring compliance not only helps avoid non refundable VAT, costly penalties and also ensures the smooth operation of business activities.
Contact Us
Our experienced team is here to assist you in managing the complexities of trade scheme transactions and ensuring compliance with UAE & KSA VAT regulations. Contact the PwC Consumer Markets team to discuss your specific needs and explore how we can support your business in effectively managing VAT obligations related to trade schemes.
