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VAT on E-Commerce Industry

1) Overview of E-commerce

E-commerce refers to business transactions (sales and purchases) that are conducted electronically, as on the Internet.

 

If a person is supplying goods or services in UAE via the Internet or any other electronic media, he is accountable for the collection of VAT as in traditional commerce. This also applies notwithstanding that the transactions are effected through a third-party e-commerce service provider.

 

The medium through which the transaction occurs does not alter the taxability of the transaction.

 

All physical goods supplied over the Internet attract VAT if the supplier is a taxable person and the supply is made in UAE. For example, if a taxable person sells goods via the Internet and the goods are delivered locally, he is making a standard-rated supply and VAT is chargeable at 5%.

2) What is Value Added Tax

VAT is a consumption tax imposed at each stage of the supply of goods & services. VAT is payable at every taxable supply and deemed supply made by the taxable person and on the import of concerned goods. However, there are certain supplies that are either zero rated or exempt from VAT as mentioned in the Federal Law no. 7 of the 2017 and the executive regulations thereby. VAT is charged at 5% standard rate or zero rated.

 

Only a VAT-registered person can charge and collect VAT on all supplies of goods and services made in UAE apart from exempt or zero-rated supplies. The VAT-registered persons need to account and pay the VAT collected to the Federal Tax Authority within 28 days from the end of his tax period.

 

A person making taxable supplies is required to register himself mandatorily if the value of his supplies reaches AED 3,75,000. He can also get registered voluntarily if the value of supplies reaches AED 1,87,500.

 

Business Records to be maintained:

  • Records of all supplies and imports of goods and services.
  • All tax invoices and alternative documents related to receiving goods & services.
  • All tax credit notes and alternative documents received.
  • All tax invoices and alternative documents issued.
  • All tax credit notes and alternative documents issued.
  • Records of goods and services that have been disposed of or used for matters not related to business, showing taxes paid for the same.
  • Records of goods and services purchased and for which input tax was not deducted.
  • Records of exported goods and services.
  • Records of adjustments or corrections made to accounts or tax invoices.

 

VAT records are to be maintained for 5 years after the end of the tax period to which they relate.

 

Complete and submit the tax returns and pay the Federal Tax Authority the amount of tax no later than 28 days following the end of the tax period concerned or by such other date as directed by the authority.

3) Taxability of Supply

Physical goods supplied over the Internet

The medium through which the transaction occurs does not alter the taxability of sale of goods.

 

Physical goods – Standard-rated

All physical goods supplied over the Internet attract VAT if the supplier is a VAT-registered person and the supply is made in UAE. The guiding principle for charging of VAT on e-commerce transactions is the same as that for traditional commerce. Therefore, as a VAT-registered person, if someone sell goods via the Internet and the goods are delivered locally, he is making a standard-rated supply and VAT is chargeable at 5%.

 

Physical goods – Zero-rated

Supply of goods made over the Internet will be zero-rated only if the goods are exported out of UAE to a non-implementing state. However, necessary export documents are required to be maintained.Hence, whether VAT is charged at 5% or 0% on the supply of goods depends on the destination of delivery (export to an implementing state is an exception to this).

 

For example, if a taxable person sells books over the Internet, he will need to charge VAT at 5% on the price of the books if these are delivered to a local destination. However, if he exports the books to another country (non-IS), he will be able to zero-rate the supply of the books provided he maintains the necessary documents to prove his exports.

 

For goods supplied over the Internet which are exported via a postal or courier company, the taxable person needs to maintain:
a)parcel posting receipt/courier consignment note and
b)invoice to the overseas customer.

 

Services / Digitized Goods – Services supplied via the Internet

A sale of digitized goods such as music and software over the Internet to an individual consumer or a business entity is a supply of services for VAT purposes. The relevant VAT rules for services will apply. In case of zero-rated services, VAT is levied at 0%.

 

How to determine the place of residence of the customer?

If the customer is a business (e.g. a company or a partnership), the customer shall be treated as belonging in UAE if:

  • It has a place of establishment or some fixed establishment in U.A.E.
  • It has such establishments both in U.A.E. and outside of U.A.E. The establishment at which the services are most directly used or to be used is the place of establishment.

 

For e-commerce transactions, to determine if the business customer belongs to UAE, it should be examined if the customer has a UAE address in supplier’s membership database (for instance, a regular business customer), a UAE domain name or a UAE IP address. These are indications that he belongs to UAE.

 

The following may indicate that the customer belongs to a country outside UAE:

  • address of the business entity as shown in supplier’s membership database is outside UAE;
  • domain name or IP address indicates that the business is a foreign establishment;
  • the customer gives a declaration, at the time of the transaction, that the company is located outside UAE; and
  • any other information that indicates that customer belongs to a foreign country.

 

If the customer is an individual, the customer is considered as belonging in UAE if UAE is his or her usual place of residence. To determine his place of residence the following steps are to be taken:

  • If a customer has a UAE address in supplier’s membership database, a UAE domain name or a UAE IP address (e.g. bba432539.alshamil.net.ae), indicates that he belongs to UAE.
  • If the customer does not have a UAE domain name nor a UAE IP address, the supplier should obtain a declaration of his usual place of residence at the time of the transaction.

4) Levy of VAT

The time of supply of the goods determines when we should charge and account for VAT. As per time of supply rules, the liability to pay VAT arises either at basic tax point or the actual tax point; whichever occurs earlier.

 

Description Applicability DateofSupply
Transfersupervised bysupplier Goods Transfer of lawful possession
Supervisionbysuppliernotrequired Goods Collection with lawful possession
Assemblyandinstallation Goods Completionofassembly  or installation
Importundercustomslegislation Goods As per customs legislation
Delivery towards“saleonapproval” Goods Acceptance or 12 months from delivery
Provisionofservices Services Completion of service
Receiptofpayment/issuanceoftaxinvoice Both Actual date

 

These are the general rules to determine the time of supply. In case of online purchase of goods and services it can be inferred from the above table that either the time of payment or the time of issuance of invoice will be the time of supply as mentioned below.

 

There can be two cases in e-commerce:

  1. Payment at the time of placing the order
    In this case, the payment is already made when the order was placed, hence the time of making such payment will be the time of supply.
  2. Payment as per cash on delivery
    In this case, though the payment is made at the time of receiving the goods, but the invoice is already issued at the time when the goods are dispatched for delivery. Hence, the time of supply here is the time of issuance of invoice.

 

The payment received must be to discharge an obligation to pay for the supply arising from the adoption of the sale. The mere receipt of payment will not be regarded as consideration received if it is held as security pending the adoption of the sale. If such security deposit is collected upfront, payment is received only when the deposit is applied as all or part of the consideration for the supply, following the adoption of the sale.

 

Once there is a payment received or an invoice issued, VAT must be accounted for based on the full selling price of the goods. A supplier should account for VAT on e-commerce supplies together with other business transactions in his VAT returns. In general, documents such as sales order, pro-forma invoice, statement of accounts and letter/statement of claims are not considered as invoices to determine the time of supply. This is because these documents are often not billing for payments and would therefore not be treated as invoices based on normal commercial practices.

 

A Tax Invoice shall contain all of the following particulars:

  1. The words “tax invoice” clearly displayed on the invoice.
  2. The name, address and tax registration number of the registrant making the supply.
  3. The name, address and tax registration number of the recipient where he is a registrant.
  4. A sequential tax invoice number or a unique number which enables identification of the tax invoice and the order of the tax invoice.
  5. The date of issuing the tax invoice.
  6. The date of supply if different from the date of tax invoice.
  7. A description of the goods or services supplied.
  8. For each Good or Service, the unit price, the quantity or volume supplied, the rate of tax and the amount payable expressed in AED.
  9. The amount of any discount offered.
  10. The gross amount payable expressed in AED.
  11. The tax amount payable expressed in AED together with the rate of exchange applied where the currency is converted from a currency other than the U.A.E. Dirham. Where the invoice relates to a supply under which the recipient of goods or services is required to account for tax, a statement that the recipient is required to account for tax, and a reference to the relevant provision of the Decree-Law.
  12. Where the invoice relates to a supply under which the recipient of goods or services is required to account for tax, a statement that the recipient is required to account for tax, and a reference to the relevant provision of the Decree-Law.

 

A simplified tax invoice shall contain all of the following particulars:

  1. The words “Tax Invoice” clearly displayed on the invoice.
  2. The name, address, and tax registration number of the registrant making the supply.
  3. The date of issuing the tax invoice.
  4. A description of the goods or services supplied.
  5. The total consideration and the tax amount charged.

 

A simplified tax invoice may be issued in either of the following situations:

  1. Where the recipient of goods or services is not a registrant.
  2. Where the recipient of goods or services is a registrant and the consideration for the supply does not exceed AED 10,000.

 

If there are or will be sufficient records available to establish the particulars of a supply, a taxable person is not required to issue a tax invoice for the supply where the supply is a wholly zero-rated supply.

 

The taxable person may issue a tax invoice by electronic means provided that:

  1. The taxable person must be capable of securely storing a copy of the electronic tax invoice.
  2. The authenticity of origin and integrity of the content of the electronic tax invoice should be guaranteed.

 

Where the supply of goods or services is considered as supplied in an implementing state, the taxable person must include the following additional particulars in the document issued:

  1. The tax registration number of the recipient of goods or services issued to him by the competent authority of the implementing state in which the supply is treated as taking place.
  2. A statement identifying the supply as between the state and the implementing state.

 

You can issue either a physical tax invoice or an electronic tax invoice for the sale via the Internet.

 

All prices displayed, advertised or published over the Internet for any supply of goods or services should be inclusive of VAT.

 

VAT Treatment of Sales of Services / Digitized Goods supplied over the Internet

 

Situation VAT Treatment
Customer’s domain name ends with dot ae Standard-rate
Customer treated as belonging to U.A.E.andservice isconsumedinU.A.E.
Customer’s domain name does not end with dot ae (e.g. kate@aol.com) and customer declares that his usual place of residence is outside U.A.E. Zero-rate
Customer treated as belonging in a country outside U.A.E. and the service is provided to a non-resident. In case customer belongs to an implementing state and he is registered there as a taxable person, then the place of supply is that implementing state and supplier need not pay any VAT. In case customer belonging to implementing state but not registered there as a taxable person, then the place of supply is U.A.E. and the VAT is charged @ 5%. This is not a zero- rated export.
Customer’s domain name does not end with dot ae (e.g. phillip-rae@hp.com) and customer declares that his usual place of residence is in U.A.E Standard-rate
Customer treated as belonging toU.A.E. based on his declaration and service is consumed in U.A.E.
Customer’s domain name does not end with dot ae and a customer does not declare his usual place of residence. Standard-rate
Customer treated as belonging toU.A.E.

5) About IMC

IMC is a cross border advisory firm focusing on the AMEA (Asia, Middle East, and Africa) markets. We specialize in corporate advisory services, global mobility services, private client and family advisory, international tax, corporate finance, mergers and acquisitions, investment advisory and business support and outsourcing solutions. IMC has been operating in GCC for over 10 years. We have a dedicated “VAT in GCC” team set-up in Dubai, UAE.

 

How can IMC assist you?

IMC’s comprehensive approach to tax advisory comes from a thorough understanding of ground realities and decades of experience of serving clients around the world. You can trust us your partners in the successful adoption of VAT practices in your business and being 100% compliant. Our team is involved in every stage of the process followed by a post adoption review and continuously updating you about the amendments to the laws. IMC can assist as follows:

 

Impact Analysis

  • Understanding the needs of client’s business and estimating the impact of VAT on the business
  • Preparing Pre and Post scenarios for ascertaining the impact on business
  • Analysing various areas of positive or negative impact and the causes behind them
  • Providing most accurate information for decision making

 

Assistance in Implementation

  • Advise client about various legal and procedural requirements
  • Checking and verifying the books and records as per the legal requirements
  • Prepare an implementation plan based on requirements of the client
  • Registration with relevant Governmental authorities
  • Completing documentation and other requirements
  • Liasoning with authorities and governmental bodies on behalf of the client
  • Undertaking detailed study about the business and cash flow
  • Identifying and highlighting the impacts of the VAT
  • Advising on Key Compliance Requirements
  • Suggesting the amendments required in the business policies
  • Advising on the implementation of new systems and IT systems for complying with the law and reducing the burden on organizations’ cash flow
  • Providing continuous updates about the changes in the regulatory regime
  • Preparation of the Compliance manual for the organization
  • Doing internal audits for ensuring 100% compliance

 

Contact details

Intuit Management Consultancy
M02 NBQ Building
Khalid Bin Al Waleed Road
Bur Dubai, P.O. Box 115887
Dubai, United Arab Emirates
Tel: +971 4 3709963
E-mail:bc@intuitconsultancy.com
Website:www.intuitconsultancy.com

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