As per recent public clarification number VATP022 issued by Federal Tax Authority (“FTA”), Dubai Owners’ Associations are required to deregister from VAT due to implications from Law No. 6 of 2019 issued in September 2019 Concerning Ownership of Jointly Owned Real Property in the Emirate of Dubai (“Law No. 6”). Management Entities are responsible to fulfill VAT obligations for such properties.
- On 3 November 2019, all rights and obligations of Dubai Owners’ Associations were transferred to Management Entities, which resulted in Dubai Owners’ Associations no longer making taxable supplies.
- Dubai Owners’ Associations were, therefore, required to apply for VAT deregistration within the period prescribed in the tax legislation of 20 business days; that is, no later than 4 December 2019.
- Management Entities are regarded as making supplies to the owners of Jointly Owned Real Property and required to fulfill VAT obligations in this regard, including the issuing of valid tax invoices and VAT reporting.
Requirement of Law 6
Under Article 49 of Law No. 6, all rights and obligations of Owners’ Associations which arose before the effective date of that Law had to be transferred to the Management Entities. The Management Entity will, therefore, supersede the Owners’ Associations in the business of managing the Jointly Owned Real Property, including Units.
Requirements of VAT law, its Executive Regulations and Tax procedure law
As per article 16(2) of VAT decree law and article 14(2) of Executive Regulations, a registrant applies for deregistration within 20 business days from the date the registrant stops making taxable supplies or where the value of taxable supplies made over the past 12 months is less than AED 187,500.
As per Article 25(1)(d) of the Tax Procedures Law, the administrative penalty for failing to submit a deregistration application within the prescribed period is AED 10,000.
Owner associations to deregister
On the basis of Law 6 above all of the Owners’ Associations’ rights and obligations were transferred to Management Entities, the Owners’ Associations no longer make any taxable supplies.
Based on the above, VAT registered Dubai Owners’ Associations were required to apply for deregistration no later than 4 December 2019.
Any VAT registered Owners’ Association that failed to apply for VAT deregistration within 20 business days from the date it stopped making taxable supplies is liable for administrative penalties.
Management Entities to Account for VAT
For VAT purposes, the Management Entity is not regarded as an agent but as a person supplying goods and services to the owners of the units (as a result of Law No. 6), thus Management Entity becomes a taxable person and under Article 65(1) of the Decree-Law is required to issue valid tax invoices to the recipients of these supplies.
The management of a Jointly Owned Real Property constitutes a taxable supply of services, which is subject to 5% VAT
The Management Entity is entitled, under Article 54(1)(a) of the Decree-Law,7 to recover VAT paid in respect of goods and services acquired to manage the Jointly Owned Real Property, provided the it obtains and retains valid tax invoices addressed to the Management Entity.
Management Entity, as a VAT registrant, is liable for any penalties which may arise as a result of non-compliance from VAT.
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Issue with VAT registration of Sole Establishments
A natural person may own a number of sole establishments. There has been uncertainty on whether each sole establishment needs to obtain VAT registration separately or whether all such establishments could be included under one VAT registration.
This Public Clarification clarifies the VAT registration obligations of a natural person in respect of its sole establishments.
A individual owning a number of sole establishments needs to obtain only one VAT registration for all its sole establishments and does not require separate VAT registrations for such establishments.
The Federal Tax Authority (‘FTA’) will review, in certain cases, the VAT registrations by taxable persons in respect of sole establishments and will inform them of the corrective steps to be taken, if any.
Meaning of Sole Establishment
A sole establishment (also referred to as sole proprietorship or المؤسسة الفردية ) is a legal form of business which is 100% owned by a natural person. A sole establishment does not have a legal personality that is independent of its owner and is accordingly considered to be the same person as its owner. It should be noted that this Public Clarification does not apply to a One-Person Company LLC or other similar legal entities, which are seen as distinct and separate legal persons from their owners (unless the applicable legislation treats such entity and the natural person as the same person).
For the avoidance of doubt, it should be noted that a legal person (e.g. a company) cannot own a sole establishment.
VAT registration obligations of Sole Establishments
A natural person may own a number of sole establishments, which may perhaps undertake different lines of business.
On the basis that a sole establishment does not have a legal personality that is independent or different from its owner, and that each person can obtain only one VAT registration, it is hereby clarified that a natural person should include all its sole establishments under one VAT registration. Therefore, separate VAT registrations should not be sought for the different sole establishments of the same owner.
The VAT registration in such cases should be obtained ideally in the name of the natural person that owns the sole establishments. However, if a natural person, owning multiple sole establishments, wishes to obtain the VAT registration in the name of one of its sole establishments, the person may apply to the FTA accordingly.
It is important to note that the taxable supplies by a natural person, as well as his sole establishment, must be considered collectively in order to determine the VAT registration obligations
Review of previous VAT registrations of sole establishments
The FTA notes that there are some instances where a natural person may have received separate VAT registrations for different sole establishments.
The FTA wishes to state that it will review such VAT registrations in certain cases and inform the relevant taxable persons of the corrective steps they should take, if any. It should be noted that for any VAT registrations received in the past, no action is required to amend the VAT registrations, until specifically directed by the FTA. For all future VAT registration applications, the applicants must conform to the position stated in this Public Clarification.
For the avoidance of doubt, please note that if a natural person owns one or more sole establishments, the value of supplies made by the natural person and all its sole establishments must be aggregated to assess whether the VAT registration threshold has been exceeded.
Consequently, if a registrant disregarded any of his sole establishments or his own taxable supplies for VAT purposes (for example, on the basis that the sole establishment or his taxable supplies did not reach the VAT registration threshold on a stand-alone basis), the registrant is required to inform the FTA of any undeclared output tax by submitting a voluntary disclosure in accordance with Article 10(1) of the Federal Law No. 7 of 2017 on Tax Procedures. 1
If the natural person and his sole establishments failed to register for VAT, even though the aggregate value of supplies listed in Article 19 of the Federal Decree-Law No 8 of 2017 on Value Added Tax (hereafter referred to as “Decree-Law”)2 made by the natural person and his sole establishment(s) exceeded the mandatory registration threshold of AED375,000, the natural person will be required to notify the FTA and corrective action must be taken to account for the outstanding VAT.
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Issue with VAT free special Offers
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.
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.
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-Law1, 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.
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-Law2, in the case of a discount, the value of the supply is reduced in proportion to the discount. Article 28(3) of the Executive Regulation3 confirms that the value of the discount is the amount by which the consideration is reduced.
If a motor vehicle’s normal price is AED105,000 and a special VAT-on-us promotional price is AED100,000, the seller is regarded as providing a AED5,000 discount to its customer.
VAT inclusive prices
According to Article 38 of the Decree-Law4, the advertised price of taxable supplies shall include the VAT.
Article 27(1) of the Executive Regulation5 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.
If during the promotional period a motor vehicle is advertised for AED100,000 “VAT- free”, the consideration for the supply is AED100,000. The seller is therefore required to account for AED4,761.90 VAT (VAT = 100,000 / 21 = 4,761.90) in its tax return, regardless of the wording used in the promotional campaign.
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.
For Legislative references and the Arabic version click here
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This article will give you an overview of circumstances that lead to FTA’s VAT audit in UAE and also few records that need to be prepared and maintained for an tax audit.
Process of FTA VAT Audit
The process of VAT audit in UAE is done by the FTA (Federal Tax Authority) and the main importance or duty of the FTA is to assess the VAT liability and to make sure that the taxable person is following the guidelines of the UAE VAT law or uncover any sort of fraud or inaccurate tax returns.
According to Article 78 of Federal Decree Law it’s mandatory for a taxable person to keep these records as listed below and to be presented to FTA when asked:
- All Tax Credit Notes and alternative documents issued.
- Records of exported Goods and Services.
- Both tax transactions and alternative records relating to products or services receivables
- Details of Goods imported to the state along with Customs declarations and Supplier Invoices.
- To Business, showing Taxes paid for the same.
- All Tax Credit Notes and alternative documents received.
- Records of adjustments or corrections made to accounts or Tax Invoices.
- All Tax Invoices and alternative documents issued.
- Records of Goods and Services purchased and for which the Input Tax was not deducted.
- Records of all imports of any sort of goods and services or supplies.
- Records of Goods and Services that have been disposed of or used for matters not related
VAT returns are necessary for businesses to file, but it must be prepared correctly and reported with the correct values in the correct boxes. In UAE, tax agencies will help you get it done within the prescribed time-limit.
Moreover, significantly, the tax due on or before the stated due date must be paid and cleared off. If you have already employed an authorized tax officer, he/she will ensure compliance with the VAT of the company according to FTA guidelines.
The circumstances due to which FTA’s VAT audit in UAE occurs is if you don’t:
Tax Returns : If there has been incorrect tax returns for eg if the tax amount was wrongly charged that could affect the overall tax returns amount.
Tax Evasion: If there’s a taxable income that has not been disclosed or the payable tax amount is intentionally reduced by the taxable person.
VAT Registration: when you fail to apply for VAT registration within the period defined by the VAT
VAT deregistration: The authority can initiate tax audit to ensure the company has deregistered on proper grounds and applied for deregistration within the timeframe stated in the law.
Perform Pre-audit health check & assess VAT Penalty
The FTA has been informing companies that they will be audited five working days after the date of the email sent to them for the year Jan 1st to April 30th, 2018, and May 1st to July 31st, 2018 tax periods.
Businesses must get ready and ensure that their legitimate expenses, appropriate documents, revenue are all in place and accounted for. Due tax need to be calculated and paid periodically.
VAT Payments and heavy penalties that heavily affect the business’s cash flow statements can be unpleasant for small businesses. They will suffer if they don’t set aside enough funds for their payments.
Audit can be intimidating for anyone who isn’t prepared for it. The FTA will usually notify the auditee in advance, that is, 5 business days. Although, in certain cases like Suspected Tax Evasion or if there is a reason to not notify as it may deter the audit process, the notice will not be given.
The tax audit will be conducted at the business’s place or the FTA’s office. The audit is typically done in FTA’s business hours. The tax auditor in charge of performing the audit should be given the required assistance from the auditee’s side, which may be their tax agent or legal representative.
The following are the conditions that the taxable company must comply to on receiving the tax audit notice;
- The audit grounds need to be accessible.
- Pertinent records of tax, invoices, books of accounts etc. are accessible.
- Pertinent staff should be available.
- Original copies of the documents should be present.
- The Audit FAF File for Auditors need to be generated.
It is the business’s responsibility to generate Audit file in FTA designed FAF file format and respond to the FTA quickly. The business’s VAT accounting software need to capable of doing so.
Once the audit is completed, the FTA will communicate the results to the auditee. If the audit’s results point to any of the following cases, then tax assessment will be issued.
- Failure to apply for registration within the time frame specified by the VAT law.
- Failure to submit a tax return within the time fame specified by the Vat Law.
- Failure to settle the payable tax stated as such on the VAT return that was submitted within the time limit specified by the Tax Law.
- Submitting an incorrect VAT return.
- The registrant failing to account for Tax on behalf of another person when he is obligated to do so under the Tax Law.
- The shortfall in VAT payable as a result of tax evasion.
According to the Cabinet Resolution No. (40) of 2017 on Administrative Penalties for violations of Tax Laws in the UAE, In the event of failure to provide the required records or assistance for tax audit conduct, applicable penalties may be levied on the tax payer.
How to prepare for an audit check:
- Check the timely submission of VAT returns and ensure that you have performed the reconciliation when accounting for the input and output VAT.
- Gather all original documents like income and expenses labelled and organized by tax year.
- All relevant documents should be reconciled with bank records and available to the auditor.
- Tax Invoice requirements need to be met as the payments made should be based on an original invoice marked ‘Invoice’ and supplier VAT registration Number is mentioned on the invoice.
- Ensure that the goods/services qualify as taxable supply and VAT is properly calculated.
- Ensure that the Sales Order Processing system is automatically generating correct VAT values by reference to the customer or type of goods or service, country and designated zones as per VAT Law.
- Check VAT calculation under Capital Asset Scheme for acquisition and disposal of capital assets and/or improve transactions processed during the period.
- Ensure the accuracy of your VAT calculations on Entertainment and Business expenses.
If all the above considerations have been met, the smoother the audit process is for the auditor.
If you are charged with a penalty and don’t agree with the decision, stay patient as you can file for an appeal.
VAT Experts at Executive Business Solutions are committed to providing the best VAT Advisory Service in the UAE to clients in compliance with the rules and regulations of VAT in the UAE having their international experience in Taxation.
MANDATORY DE-REGISTRATION AS PER FTA REGULATION
VAT-registered companies with a taxable supply of less than 187,500 in the past consecutive 12 months, are to de-register on or before January 20, 2019. Failure at doing so will result in the company being charged with a penalty fee of AED 10,000.
According to the conditions specified in the Cabinet Resolution No. (40) of 2017, a registrant can apply for Tax de-registration if: –
- The registrant stops making taxable supplies.
- The value of the taxable supply for 12 consecutive months is less than the Voluntary Registration Threshold of AED 187,500. The registrant must meet the condition specified in Clause (2) of Article (17) of this Decree-Law. An exception applies, if the total value of the taxable supply in next 30 days, will be more than the Voluntary Threshold Limit of AED 187,500.
For a VAT-registered company to De-register as per law, their taxable supply must consist of zero-rated supplies, imports or incur costs. Exempt or out-of-scope supplies are excluded from this; the total value of the taxable supply must also be less than AED 187,500 in the past 12 consecutive months.
The process of De-registration comprises of: –
- The application for De-registration needs to be done within 20 business days.
- All administrative penalties and due tax have been paid and tax returns have been filed.
- Once the application for de-registration has been approved, the registrant’s company will be de-registered from a date decided by the FTA or the last day of the tax period.
- Once the de-registration is complete, a notification will be sent to the registrant within 10 days after the application is approved.
De-registration can also be done online over the following steps: –
On your dashboard, click the ‘De-Register’ button on ‘De-registration status’.
- Input the reason for De-registration and the date from which you require it done.
- Provide other relevant information to support your application and click ‘Submit’.
- Once you have received the approval from FTA, you will be notified of the results accordingly.
VAT Experts at Executive Business Solutions are committed to providing the best VAT Advisory Service in the UAE to clients in compliance with the rules and regulations of VAT in the UAE having their international experience in Taxation. The Tax team at Executive Business Solutions is professionally equipped with relevant industry experience from different ends of the globe.
The penalties range from as low as Dh3,000 and go up to Dh50,000 depending on the offences committed by the entities or individuals.
The UAE on Monday announced services fees and fines for non-compliance of value-added tax (VAT) laws as the country heads towards implementation of the consumer-focused taxation system from January 2018.
The regulations covers individuals, companies, tax agents and their legal representatives who come under the gambit of this new VAT regulations. The penalties range from as low as Dh3,000 and go up to Dh50,000 depending on the offences committed by the entities or individuals.
As per the new regulations, if the person fails to keep required records and other information specified in the laws will be fined Dh10,000 in the first instance and Dh50,000 in case of repetition.
The law further states that if the person fails to submit data, records and documents related to tax in Arabic to authority when requested, he would be penalised Dh20,000.
The UAE will implement 5 per cent VAT – which is one of the lowest in the world – from next year on a host of goods and services as part of the GCC-wide agreement. As per the UAE regulations, companies that provide goods and services with annual turnover of Dh375,000 or higher will be subject to VAT. While businesses with taxable supplies below Dh375,000 and above Dh187,500 will have the option to register. The UAE aims to raise Dh12 billion through VAT collections in the first year and Dh20 billion in the second year. Analysts and economist believe that the VAT will increase inflationary pressure in the country.
As part of the GCC deal, Saudi Arabia will also join the UAE from January 2018 while other Gulf nations will jump into the bandwagon at a later stage.
A press statement issued on Monday said the UAE Council of Ministers adopted Cabinet Decision No. 39 of 2017 on fees for services provided by the Federal Tax Authority and Cabinet Resolution No. 40 of 2017 on penalties for violations of tax laws in the UAE.
“These decisions bring an added layer of transparency to the Authority’s relationship with its customers,” said Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and UAE Minister of Finance. “This, in turn, provides extra incentive for stakeholders and all concerned parties to abide by tax regulations.”
“All customers can refer to the official Directory of Services Fees to know what is required of them to be in compliance with tax procedures,” Sheikh Hamdan bin Rashid explained.
Thomas Vanhee, founding partner, Aurifer Middle East Tax, said: “After having opened the possibility to VAT register in the UAE and after the introduction of excise taxes on October 1, 2017, the UAE government has now decided on the applicable fees and penalties for non-compliance with the VAT and excise tax legislation. This complements the Federal Tax Procedures Law and its Executive Regulations. These laws already give much power to the UAE’s Federal Tax Authority. The considerably high penalties applicable will now additionally give the FTA an important instrument to deter taxpayers from non-compliance.”
Vanhee elaborated that the penalty framework is very strict.
“This can be explained by the fact that the same penalties apply to excise tax and VAT. In mature jurisdictions penalties on excise goods, such as tobacco, are also high, since they are very fraud sensitive goods. Penalties for VAT offences though are usually lower and provide for a framework in which voluntary disclosures are encouraged by automatically waiving penalties for tax payers coming forward,” Vanhee added.
The fine for not registering is Dh20,000, which is double the fine applicable in Saudi Arabia, he said, adding that if the tax payer does not pay his taxes due, after one month a daily penalty applies of one per cent. In the oldest jurisdictions in the EU which have implemented VAT and have a relatively limited VAT gap, the late payment penalties usually vary between 0.4 and one per cent per month – with exceptions up to 2.75 per cent. In case of an error in the voluntary disclosure by the person/taxpayer, it will result in Dh3,000 fine for the first time and Dh5,000 in case of repetition.
But in case of failure of the taxable person to voluntary disclose errors in the taxable returns will also incur a fine of Dh3,000 for the first and Dh5,000 for repetition.
According to Federal Tax Authority, tax registration service and issuance of e-tax registration certificate will be free of charge but an attestation will incur a fee of Dh500. However, tax agents will have to pay Dh3,000 fee for registration and renewal for three years.
According to FTA, registration and renewal fee for an accounting software provider will be Dh10,000 for one year, whereas registering a Designated Zone will cost Dh2,000 per year.
However, there will be no service fee for registering a warehouse keeper or issuing an electronic warehouse keeper registration certificate. But an official printed certificate will cost Dh500.
Via: Khaleej Times