UAE Issues VAT Legislation to Ease Gold, Diamond Trade Slumps

The United Arab Emirates has published legislation introducing a value-added tax reverse-charge mechanism for the wholesale trade in gold and jewelry.

The legislation, dated May 22, was introduced several months after the country instituted a 5 percent VAT, causing sales to plummet in the gold and diamond industry. The area accounts for about a quarter of all Dubai’s non-oil foreign trade, and jewelry executives have been urging the government to offer relief.

Under the reverse-charge mechanism, VAT on wholesale transactions is recorded in business accounts without any actual payment. This is intended to ease cash flow without affecting the retail purchaser’s final tax liability. 

“This constitutes an important decision for the diamond and gold sector,” Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai, said in an email May 29. He noted that “retail sales of gold and diamonds are still fully subject to VAT at five percent,” while the import and sale of precious metals for investment are already zero-rated.

The law is effective from June 1 and applies when both the supplier and purchaser are VAT-registered and licensed to conduct the relevant business.

In transactions involving “gold, diamonds and any products where the principal component is of gold or diamonds,” and where “the acquisition of the goods is for the purpose of resale or use to produce or manufacture any of the goods,” the recipient “shall calculate the tax on the value of the goods supplied to him and shall be responsible for all applicable tax obligations related to the supply and for calculating the due tax in respect of such supplies,” the law states.

Bringing Relief

“Importantly, the buyer needs to declare in writing that he can buy with application of the reverse charge. Buyer and seller are also potentially jointly liable for the VAT applicable on the sale of these diamonds or gold,” Vanhee said. “Rumours have it that the gold lobby in Saudi Arabia is requesting similar relief.”

Saudi Arabia also introduced VAT in 2018. The four remaining Gulf Cooperation Council countries are expected to introduce VAT by Jan. 1, 2019.

Shiraz Khan, senior tax adviser at Al Tamimi and Co. law firm in Dubai, said in a May 29 email the legislation will help ease cash-flow issues for businesses in the sector.

It means the “onus to account for VAT on the supply of diamond and gold will shift from the investor and wholesaler to the VAT registered manufacturer or retailer,” Khan said.

Big Questions

“There remains information outstanding from the Ministry of Finance that is to be revealed,” said a spokesperson for the Dubai Multi Commodities Center, who declined to comment further.

While the legislation may ease some issues for the UAE’s jewelry industry, its wording may create new problems, warned Jeremy Cape, tax and public policy partner at Squire Patton Boggs law firm in London.

“The cabinet decision is not well drafted,” Cape said by email May 29. “It applies in relation to ‘Gold, diamonds and any products where the principal component is of gold or diamonds.’ What does ‘principal component’ mean? Largest component by mass? By value? From the perspective of the customer?”

“The question of whether VAT is chargeable by the supplier or not may also require an analysis of whether a supplier was aware ‘or was supposed to be aware’ of a recipient’s non-registration,” he said. “It’s generally not a good idea for a tax analysis to depend on awareness or hypothetical awareness. I see much trouble ahead for suppliers in applying this cabinet decision to gold and diamonds.” 

For More Information Please Contact Us HERE 

 

Recto: TRAIN contains 'self-executory' fuel tax-freeze provision

MANILA, Philippines — Amid calls to suspend the implementation of the excise tax on fuel under the tax reform law, Senate President Pro Tempore Ralph Recto said on Thursday that the statute had a “self-executory” tax-freeze provision in the event of high prices of oil.
According to Recto, the tax-freeze provision of the Tax Reform for Acceleration and Inclusion Law would kick in when the benchmark price of crude oil reached $80 per barrel.
Recto said that the TRAIN provided for a “price-triggered collection moratorium” which was reiterated by the Bureau of Internal Revenue Revenue Regulations 2-2018, the law’s implementing rules and regulations on petroleum products.
“The tripwire is USD80 per barrel, based on Dubai crude as reflected in MOPS,” Recto said.

“This is the circuit breaker in TRAIN. When oil touches this price, the excise tax increase on gas is suspended,” he added.
He also rejected the argument by officials from the Department of Finance that for this to take effect the agency must first issue a separate IRR.
Recto stressed that the language of the law was clear and it must be self-executory and automatically implemented.
“The halt in the collection of petrol taxes should be as fast as our collection under TRAIN when oil prices soar,” he said.
On Wednesday, Sen. Paolo Benigno “Bam” Aquino urged his colleagues in Congress to amend the TRAIN law to put in place more safeguards in the statute amid concerns over climbing inflation.
Aquino said that the suggestion from the Palace that the excise tax on fuel could be suspended in 2019 was “too little, too late.”
The Liberal Party senator is urging the passage of an inflation-based suspension of the TRAIN Law’s excise tax provision.

Advertisement

 

Powered By YuMe

Under his proposal, the collection of additional petrol taxes would be suspended if inflation for the past three months exceeded official estimates.
Recto cited Section 5 of RR 2-2018 which provided for the suspension of excise taxes on fuel if the average Dubai crude oil on the Mean of Platts Singapore for the past three months reached or exceeded $80 per barrel.
Sen. Grace Poe meanwhile wants to provide another layer of social protection for poor families amid the spike in the prices of goods and services that may have been partly caused by the TRAIN Law amid reports that the government has failed to provide cash transfers to many of its 10 million household target.
“We should think of ways to lighten the burden of our countrymen especially in the province due to the increase in the price of electricity, water and goods and the possible fare hike,” she said in Filipino.
Poe’s Senate Committee on Public Services is scheduled to conduct a meeting in Iloilo City on Friday to ascertain the possible “domino effect” of the TRAIN Law.
Recto said that compounding the problem of inflation was the depreciation of the value of the peso and the soaring prices of petrol.
Just this week, the peso fell to its lowest value in 11 years, closing at 52.465 to a dollar.
The TRAIN Law kicked into effect on Jan. 1, 2018 and was sold by the government as an important revenue source for its ambitious infrastructure and social services programs.
It has been blamed for the increase in inflation in the past months, with inflation rate for April settling at 4.5 percent, the highest in five years. This pushed the year-to-date inflation to 4.1 percent which was already above the 2 to 4 percent target of the Banko Sentral ng Pilipinas.

For More Information Please Contact Us HERE 

 

VAT q&a: 'Do I have to use the FTA's approved software provider to make my tax return?

I’ve heard people talking about Federal Tax Authority accredited accounting software and can see on the FTA website that there are only four software providers listed, with most of the well-known names missing. Is it mandatory to use one of these accredited providers? I’ve been happily using an unaccredited accounting package since January and don’t want to change it unnecessarily. LA, Fujairah

The Decree Law and Executive Regulations do not prescribe that a business must use accredited accounting software to record their financial transactions and you have rightly noticed that many of the best known and trusted financial software providers are missing from the list. As far as I am aware there is also no mandatory requirement for software providers to become FTA accredited.

One of the key requirements is that it can produce a VAT return file that integrates with the FTA’s e-Tax portal and automatically populates the tax return. This means you do not need to manually input numbers from your VAT reports into the online return, and may reduce the risk of errors in the submitted return.

However, what is most important is that your accounting software of choice meets your business needs and fully complies with the VAT legislation in terms of producing compliant tax invoices and credit notes. Further, that it captures key data to facilitate submission of your quarterly returns and is also capable of being audited in detail by the FTA should they wish. The FTA require that VAT records are retained for a minimum of five years so the system should be effectively backed up and archived for the required period. I suggest you read the sections in the Legislation and Executive Regulations covering tax invoices and credit notes , and record keeping. These start at articles 65 and 78 of the Decree Law, and articles 59 and 71 of the Executive Regulations. As long as your chosen accounting system allows you to fully adhere to the FTA requirements there is no issue with it not being accredited

For More Information Please Contact Us HERE 

 

UAE Scraps Tax on Diamonds 

 

The United Arab Emirates (UAE) has exempted trading in gold, diamonds and precious metals from value-added tax (VAT), according to government news outlets.

The government is implementing the change by introducing a “VAT reverse-charge” mechanism, the Emirates News Agency (WAM) reported Tuesday. That process transfers the tax obligation from an overseas supplier to the recipient. The recipient makes the declaration of both the purchase and the sale, meaning that the two entries “cancel” each other out, resulting in no tax payment.

“#UAE Cabinet approves a decision to exempt…gold-and-diamond investors and importers from… value-added tax,” the Dubai Media Office said in a Twitter post the same day.

Though VAT was introduced in the UAE only recently, authorities made the decision to exempt gold and diamonds to improve the ease of doing business in the country, according to WAM. Trade has declined by up to 60% following the implementation of the tax in January, Arabian Business cited retailers as saying.

The Dubai Multi Commodities Centre, which had opposed the VAT introduction, declined to comment.  

For More Information Please Contact Us HERE

The UAE's new residency and ownership rules - a watershed moment

New UAE rules will have far-reaching effects across the country's economy

The UAE’s surprise announcement that it will allow full foreign ownership in companies and grant long-term visas to select investors and professionals is set to have far reaching effects, ranging from the encouragement of foreign investment and helping the UAE become a magnet for highly skilled professionals to providing a positive boost to the country’s real estate sector, according to a number of experts.

The new rules will allow for residency visas of up to 10 years for specialists in scientific, medical, research and technical fields, and are a long awaited departure from the previous regulations that called for the establishment of businesses to have a local partner owning 51 percent of the venture. Additionally, the new rules provide for five-year visas for students and 10 year-visas for “exceptional” students.

Attracting FDI

The UAE’s decision to allow full foreign ownership comes at a time when the country is in the midst of an ambitious diversification effort as it moves to become even less dependent on oil. Among the main benefits of the change, many are claiming, is that it will boost growth by attracting more foreign direct investment, primarily into non-oil sectors, as well as encouraging foreigners to set up more businesses in the country.

“Many people held back from investing here as they felt there was no long-term tenure and they were dependent on a short-term visa,” Chavan Bhogaita, the head of market insights and strategy at First Abu Dhabi Bank told Bloomberg. “Now, with a 10-year visa and 100 percent foreign ownership, investors and people looking to set up and grow businesses here will have more confidence.” 

A boon for the real estate sector

Real estate is one of the sectors that stands to benefit most from this move, as the changes should encourage the UAE’s expatriate population to remain in the country for longer periods. The announcement was immediately hailed by real estate professionals and construction executives as a genuine turning point for the industry.

“Longevity of residence for expats is going to be a game changer as the population’s historically transient nature gives way to semi-permanency,” Faisal Durrani, partner and head of research at Cluttons, told Arabian Business. “The move will clearly go some way to stemming the loss of human talent from the UAE and will also contribute to more stable and sustainable demand for residential and commercial property from domestic buyers. This privileged group of expats [who benefit from the changes to the rules] will undoubtedly feel a greater sense of belonging, which will facilitate the emergence of stronger and deeper communities.”

Durrani’s comment was echoed by Core Savills partner Edward Macura, who said the announcement would be a boost to both supply and demand in the property sector “by way of attracting and retaining long-term investors and also skills professionals.”

“Direct and indirect effects are expected to come into play, such as population stabilisation and growth, renewed confidence in the property market and an increase in expat end-user purchasers, who are likely to invest in their own homes within the UAE instead of repatriation to their home markets.”

“Extremely encouraging” for start-ups and entrepreneurs

The new rules are expected to help start-ups and entrepreneurs by cutting down on costs. According to Aramex founder and Wamda Capital managing partner Fadi Ghandour, the new ownership rules are “truly a game-changer any way you look at it. 

“It will make life much easier for entrepreneurs and businesses for entrepreneurs and businesses in general,” he added. “It will attract new investments, new talent, new capital, certainly new start-ups.”

Fares Ghandour, a partner at Wamda Capital, said that the longer residencies and ownership rules created by the changes to the law will also encourage more people to begin operating as freelancers and reduce their dependence on free zones.

“Beyond employment, the residency will give more cushioning for freelancers and researchers to reside in the country without the need to depend on employment,” he noted. “I think the local ownership laws are more interesting than the residency permit laws actually, because [they] will reduce dependence on free zones and free zone real-estate which is inflated relative to the onshore market.”

Free zones here to stay

Despite the fact that the new ownership laws will mean that businesses hoping to set up shop in the UAE will no longer need to be located in free zones to avoid having to have a local partner, that isn’t to say that the importance of free zones will diminish. In fact, according to Virtuzone chairman Neil Petch, free zones also stand to benefit, as do UAE nationals.

“The new mandate will remove the worry of personality liability from PSCs [professional services companies] whilst at the same time not removing the revenue stream for local agents which would have caused resistance to this highly positive move,” he said. “Indeed, Emiratis exposed to liabilities from defaulting expats would no longer be a concern. In short, it’s a win-win, boosting confidence and thus the economy.”

Petch also remarked that while some companies may “evolve” onto onshore companies in the wake of the rule changes, he doesn’t believe that there will be a decrease in the number of companies seeking to set up shop in free zones. “The changes with respect to mainland companies will serve more as an obvious means to evolve for smaller companies now growing into larger ones than as a competitor to the start-ups being incubated in the UAE’s low tax environment,” he says.

“For every company that evolves from free zone to onshore, expect five or ten to come from Europe, Asia or the States as they realise that the UAE’s low tax environment represents a far better choice than previous favourites Cyprus, Malta, Singapore, Hong Kong and Monaco.” 

For More Information Please Contact Us HERE 

 

VAT q&a: My Abu Dhabi start-up now qualifies for VAT. Can we reclaim any tax paid before registration?

The company has crossed the earnings threshold of Dh375,000 and is unclear on what it can claim

We are a UAE startup, whose sales for the first year did not cross the UAE VAT threshold of Dh375,000. However, recently we realised that our sales will exceed the threshold in the next 30 days. Therefore, while we did not charge VAT for the first 10 months, we will now be charging it. We have heard we can reclaim the entire input VAT paid before registration. Is this process acceptable to the Federal Tax Authority? We did not register in the first few months of operation as were unsure we would cross the threshold. HJ Abu Dhabi

Article 56 of the Decree Law allows the recovery of input tax paid on goods, services and imported goods prior to the date of VAT registration, “provided that these goods and services were used to make supplies that give the right to input tax recovery upon tax registration”. Input VAT is the VAT you are charged by your suppliers on goods and services purchased.This means that you can only recover VAT paid before registration if VAT charged on the same goods and services post registration would be recoverable. You should understand the exclusions to input tax recovery contained in the full decree law and executive regulations and apply the same rules that apply to input VAT recovery generally, when determining how much pre registration input VAT can be offset. 

There are four exceptions to this rule listed in the decree law. The first is receipt of goods and services for purposes other than making taxable supplies. The next is for input tax related to capital assets that are already partially depreciated before the date of registration, for example, if you purchase a fixed asset with an expected life of five years and when you register for VAT the asset has only two years of use left, you can only reclaim two fifths of the VAT you originally paid. The third exception is for services received more than five years prior to the date of registration. Note this refers to services only, rather than goods and services. 

Finally you cannot reclaim input tax paid if you have moved goods to another implementing GCC state prior to the registration in that state. This is because if you supply goods to another GCC state then the recovery of input tax is permitted only in that other state. Therefore, to recover input VAT you need to be registered in that other GCC state.

have read about UAE companies receiving invoices without UAE VAT, where such companies need to record the VAT under the reverse charge mechanism. In such cases, this means the FTA will not receive any VAT. Is it logical that some non-resident companies are obliged to register for and charge VAT but others do not? Is there ambiguity in the law here? HJ Abu Dhabi

 

This question highlights why the reverse charge mechanism is a hard concept to grasp and at first does not seem to make sense. The reverse charge mechanism applies if you make input and output VAT adjustments on your VAT return where you have purchased goods or services from an overseas company and have not been charged VAT. 

When considering this, remember the end consumer bears the cost of VAT not the companies involved in the production chain. The companies have to charge VAT, but can also reclaim any VAT they are charged.

If a UAE resident company is purchasing services from another UAE resident company, and both are VAT registered, then the supplier will charge the recipient company VAT and will pay this over to the FTA on their next return. Meanwhile, the recipient company will pay the supplier VAT but will then reclaim this from the FTA on their next return. So from the FTA’s perspective, there is a zero net effect from this transaction, albeit that there are equal and opposite actual cash flows.

If a UAE company buys services from an overseas company that is not registered for UAE VAT, the UAE recipient company must use the reverse charge mechanism when accounting for this VAT. They will record equal and opposite VAT payable and VAT reclaimable on their VAT return. As these amounts net each other off on the same VAT return, there will not be any actual movement of cash, but the zero net effect is the same. So there is no ambiguity in these two scenarios, the net effect for both the FTA and the UAE-registered company is the same.

For More Information Please Contact Us HERE. 

 

Some UAE businesses are paying more VAT than they need to

While companies should not pay VAT unnecessarily, they should also steer clear of tax avoidance schemes

One of the many nice things about being a tax lawyer is that as well as being paid to solve complex problems and argue, you also get to help your clients save money. Sometimes a lot of money.

Tax avoidance, tax planning and tax mitigation are expressions that have acquired a bad reputation (quite often with some justification) but it remains possible in most jurisdictions - and that includes the UAE - to structure commercial arrangements in such a way as to minimise VAT.

As Lord Tomlin famously said in the Duke of Westminster case (1936). “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”.

This is an oversimplification of how things work today, but there is a truth at its core.

There are some tax lawyers who still push the boundaries of what is acceptable from a tax point of view. It was recently reported, for instance, that British Olympic Medallist and Tour de France winner Sir Bradley Wiggins had been advised to invest in the Cup Trust scheme, which is one of the most shocking pieces of attempted tax avoidance of recent years. The scheme used a registered charity purportedly to generate huge tax losses but with only a tiny proportion of the tax saved going to charitable causes. There really is little excuse for advisers who advise on these artificial schemes and absolutely none for taxpayers who invest in them.

My advice to any business looking to do anything artificial to avoid UAE VAT, or create a timing advantage, is not to bother. Artificiality sometimes worked when tax and tax avoidance was regarded as fair game (around 1973, if you are wondering), but now courts around the world are taking a far dimmer view of anything that whiffs even slightly of avoidance, and I’ve no reason to think that the tax courts in the UAE will be any different.

For example, I would be highly wary of setting up a “shell” company to create a more favourable VAT result, invoicing the “wrong” party or creating artificial transactions between group companies solely in an attempt to accelerate tax recovery.

One advantage of the UAE having few exemptions compared to other countries is that most businesses should be able to recover VAT in any event, which means that it is the banks and other entities that aren’t making supplies for VAT purposes that will most likely to suffer a cost.

If I were a bank, I would be considering whether I could look at my overall structure and operations with a view to minimising the 5 per cent VAT cost on my supplies. This isn’t simply a matter of documenting a deal differently (if a contract doesn’t reflect reality, it won’t be respected by the Federal Tax Authority or the courts) but there is often some flexibility to set up operations or structure arrangements in a more favourable way.

Jurisprudence from across the world shows that subtle differences in the way in which a contract is drafted can fundamentally affect the VAT treatment. So, for example, in determining whether there is a “single composite supply” of zero-rated services (such as a new villa with a fully-fitted kitchen) or a zero-rated supply of a new villa and a standard-rated supply of a kitchen, the legislation specifically requires one to look at the contract, among other things.

It is important for banks and other entities (or individuals) who cannot recover VAT to consider whether there is a VAT cost in the way they have decided to create legal relations and whether that cost could be mitigated by creating those legal relations slightly different. The same goes for international supplies of goods and services, where there is much potential for irrecoverable VAT in circumstances where – arguably – the position should be cash neutral.

It goes even further. In my 20 years or so of having advised on VAT in the UK, and the last year in the UAE, there have been occasions where – somewhat to my surprise – on reading the legislation and applying it to the facts, VAT has not applied to a transaction where the client had expected it to be.

Obviously with VAT currently standing in the UAE at a rate of 5 per cent, compared to rates of typically around 20 per cent in other countries, many businesses may instinctively feel able to absorb the VAT cost or pass it on to customers, particularly if it arises in respect of an unusual, one-off but relatively small transaction. But why should a developer charge VAT on a kitchen if, as a matter of law, it does not have to? Few UAE businesses can easily knock 5 per cent off their margin and few consumers are happy voluntarily to pay 5 per cent more.

It’s unlikely that the FTA would agree to waive VAT in the event that it unexpectedly or unfairly arose as a matter of law, and nor should they. Conversely, businesses should not feel obliged to charge more VAT than they need to. But that requires a careful appreciation of businesses’ supply chains, careful reading of the law and careful application to the particular contract.

For More Information Please Contact Us HERE.