United Arab Emirates: E-Commerce And VAT In The UAE And In KSA
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.
