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The introduction of value-added tax in the United Arab Emirates on Jan. 1 forced many companies to overhaul their invoicing and accounting systems and re-appraise their business operations.
For the first time, businesses must check their supply-chain documentation for procurement and sales. They must ensure that VAT is being correctly applied so the input tax can be recovered and to avoid fines for failure to account for tax owing to the authorities. They must also assess their supply chains for tax efficiency.
Those tasks are complicated by the country’s 23 “designated zones,” which are subject to special VAT rules. A July Federal Tax Authority guide highlights the special tax status of the zones and their effect on supply chains involving goods to, from and inside the zones.
“A lot of people are confused about their supply chains running through free zones and designated zones; almost every company whose supply chain we look at we have to reorganize,” Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai, told Bloomberg Tax on July 31.
The slow rate at which the FTA refunds VAT, has hurt the cashflow for some businesses, as they effectively prefinance the VAT payable by their customers, he said.
“A way to avoid this VAT prefinancing is to make a ‘high seas sale’ and sell to the customer before the import. If the customer imports there is no VAT on the sale by the UAE vendor to their UAE customer,” Vanhee said.
The guide addresses one problem spot, in which VAT is applied to the purchase of goods inside a zone and then applied again when those goods move to the mainland.
“The import tax, in this case, can be recovered—provided that there were no intervening transactions in respect of the goods between the purchase by the importer and the actual import,” Vanhee said.
Another area that businesses found unclear was the treatment of goods exported from the UAE abroad by a business inside a designated zone.
Such goods “will be outside the scope of VAT rather than zero rated for VAT purposes as had been assumed by some businesses,” Shiraz Khan, senior tax advisor at Al Tamimi and Co. law firm in Dubai, said in an email July 31.
The publication runs to 18 pages and includes numerous examples but “there are still some other issues which are unattended by the FTA in this guide,” Vanhee said.
“One of the major practical issues is that for a lot of businesses which are established and registered for VAT purposes in other free zones but want to import into the designated zones, VAT is charged twice, once unduly on the import into the designated zone and also on the subsequent import into the mainland,” he said.
“Furthermore, the guide does not elaborate on the potentially questionable practice of imports being made by non-licensed businesses or by businesses which are not the owner of the imported goods. This poses a risk, amongst others, in terms of the input VAT deduction,” he said.
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