E-commerce poses many challenges to legal practitioners and companies
alike around the world, and the introduction of Value Added Tax (“VAT”)
in the United Arab Emirates (“UAE”) and in the Kingdom of Saudi Arabia
(“KSA”) has added an additional layer of complexity that should be borne
in mind by all stakeholders.
In this article, we will highlight two of the main issues that
usually arise, from a VAT perspective, on the supply of goods or
services in the e-commerce industry: (1) where is the supply taxable,
and (2) who should account for VAT on the supply.
Place of supply
VAT is typically imposed on consumption that takes place within the
territory of the concerned jurisdiction. However, as e-commerce is by
its very nature digital, law-makers are required to define in their
respective regulations where such supplies are deemed to take place.
We shall distinguish between supplies of goods and supplies of services.
Supplies of goods – general rule
The place of supply for goods depends on whether there is transportation or dispatch thereof:
The place of supply for goods which are not transported or dispatched
is, as a general rule, where the supply is made under the UAE rules, or
where the goods are situated at the time of supply under the KSA rules.
On the other hand, the place of supply for goods that are transported
or dispatched, by the supplier or on account of the customer, is
generally the place where the goods are located when the transportation
or dispatch commences. However, the UAE and KSA regulations provide
special rules for specific scenarios. For example, where the supply
includes transportation of the goods to a customer registered for VAT in
another GCC State that has implemented VAT the place of supply is the
customer’s State.
Finally, there are requirements to evidence the transportation.
Failure to comply with such rules or to submit the transportation
documentation as requested by the tax authorities may result in the
supplier being accountable for VAT in the supplier’s State.
Supplies of goods – special rule for distance supplies
As an exception to the above rules, there is a special regime for
intra-GCC supplies of goods to customers that are not registered for
VAT. The regime is broadly based on the “distance sales regime” under
the European Union Directive 2006/112/EC, as amended.
Under the distance sales regime, where a taxable supplier supplies
goods with transportation to customers that are not registered for VAT
in another GCC State that has implemented VAT, the place of supply is to
be considered in the supplier’s State if the supplier does not make
taxable supplies in that other State above the mandatory registration
threshold (as a general rule, SAR 375,000 or its equivalent in other GCC
currencies).
However, if the supplies made by that supplier to persons who are not
registered for VAT in that other State which has implemented VAT exceed
the mandatory registration threshold in that other State, the place of
supply of the sales made to those customers shall be in that other
State. Accordingly, the supplier will be required to register and to
comply with local VAT obligations in that other State.
In short, the distance sales regime allows taxable suppliers to
distance-sell goods to customers not registered for VAT in another GCC
State which has implemented VAT, without the need to register and
account for VAT therein where the taxable supplies do not exceed the
mandatory registration threshold in that other State.
This red-tape cutting measure may prove beneficial for small and medium businesses operating across the GCC.
Supplies of services – general rule
The place of supply of services is generally the place of residence
of the supplier. However, the place of supply of services supplied to a
customer who is registered for VAT is the place of residence of the
customer.
Supplies of services – special rules
There are several exceptions to the above general rule on the place
of supply of services. However, the key exception for supplies in the
e-commerce sector is related to electronic services.
A supply of electronic services is considered to take place in the
State where these services are actually used and enjoyed. The
determination of the place of the use and enjoyment may not be
straightforward; therefore it is recommended that businesses keep as
much evidence as possible to demonstrate where the services are used and
enjoyed.
The VAT regulations in the UAE and in KSA provide a non-exhaustive
list of services that are considered electronic services for VAT
purposes, including but not limited to supplies of live streaming via
the internet; supplies of music, films and games, and programs on
demand; and supplies of software and software updates. Therefore it is
important to consider whether the supply of services qualifies as an
electronic service.
Accounting for VAT
The person responsible to account for VAT is as a general rule the
supplier, except where the goods and services are received from a
non-resident supplier and the reverse charge mechanism applies.
An e-commerce supply may involve two, three or even more parties. In a
typical transaction, A (supplier or merchant) supplies goods or
services through the Internet to B (customer). However, in the recent
years, new business models have evolved, and it has become common for a
third party, C (known as the marketplace) to be involved in the supply.
In the case of e-commerce, it is important to accurately define the
functions performed and risks undertaken by all the parties to a supply.
If the agreements are not carefully drafted or reviewed, or if the
agreements do not reflect the facts in practice, unintended VAT
consequences may arise. For instance, there is a risk that the operator
of the online interface or portal acting as intermediary for the
non-resident supplier may be required to account for VAT.
Finally, with regard to foreign suppliers with no place of residence
in any GCC States that have implemented VAT, there is a risk that they
are liable to account for VAT if the supply takes place within a GCC
State that has implemented VAT and no other person is required to
account for and pay VAT on the supply.
It may be noted that other countries have introduced specific
measures to tackle administrative costs and ease the burden of
compliance with the VAT rules in e-commerce, therefore facilitating
intra-regional trade. In this regard, the implementation of the
mini-one-stop-shop (MOSS) by the European Union, whereby taxable persons
in one member State are relieved from registering for VAT in other
member States –which was initially restricted to the supply electronic
services, but is expected to extend to supplies of goods from 2021- may
be considered in the future by lawmakers across the GCC.
Final remarks
Whilst the e-commerce industry has expanded significantly over the
last decade, after the implementation of VAT in the UAE and in Saudi
Arabia, businesses that are involved in e-commerce need to consider the
VAT implications of their transactions.
In this regard, it is important for businesses to identify the
correct VAT treatment of the supplies and to comply with all the
obligations. This includes but is not limited to analysing whether the
supplies are in the nature of goods or services; the place of supply;
the existence of a place of residence; the applicability of any zero
rate treatment; the recovery of input VAT; as well as registration and
other compliance obligations.
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Nabila Popal, a senior research manager at IDC,
said the UAE market was experiencing a significant shift in consumer
spending as evidenced by the first-ever cancellation of the spring
edition of Gitex Shopper.
“The
size of the overall market in Saudi Arabia is expected to decline over
the coming years as a direct result of the new expat dependent tax,”
said Kafil Merchant, a research analyst at IDC.