FTA issues guidelines for foreign businesses’ VAT refund in UAE
The foreign business must not have a place of establishment or fixed establishment in the UAE
The Federal Tax Authority (FTA) has outlined four conditions that would allow foreign businesses to recover value-addded tax (VAT) incurred in the UAE.
To be eligible for the VAT refund, the first condition is that foreign businesses must not have a place of establishment or fixed establishment in the UAE or in any of the VAT-implementing GCC states.
Secondly, such foreign businesses must not be a taxable person in the UAE. Thirdly, they must also be registered as an establishment with a competent authority in the jurisdiction in which they are established; and finally, they must be from a country that implements VAT and that equally provides VAT refunds to UAE businesses in similar circumstances.
The authority clarified that the period of each refund claim shall be a calendar year, noting that for claims in respect of the 2018 calendar year, refund applications can be made as of April 1, 2019. However, for subsequent calendar years, the opening date for accepting refund applications will be March 1 of the following year; this means that for the period from January 1 to December 31, 2019, applications will be accepted as of March 1, 2020.
The FTA went on to stress that the minimum claim amount of each VAT refund application submitted by business visitors is Dh2,000, which may consist of a single purchase or multiple purchases. The Authority urged potential applicants to hold on to the original tax invoices on the purchases for which they would like to reclaim VAT, as they will be required to be submitted along with the refund applications.
The state may still submit a VAT refund application to reclaim VAT incurred in the UAE under this scheme, the FTA assured, outlining only three situations where VAT cannot be reclaimed.
The first situation is if the foreign business in question makes supplies in the UAE, unless the recipient is obliged to account for VAT under the reverse charge mechanism. Secondly, a VAT refund cannot be processed if the input tax in respect of any goods or services is “blocked” from recovery and, therefore, not recoverable by a taxable person in the UAE. The third situation where a refund is not possible is if the foreign business is a non-resident tour operator.
Khalid Ali Al Bustani, director-general, FTA, noted that this procedure reflects positively on many sectors, including tourism, trade, exhibitions, conferences, etc.
He further explained that reciprocity is a key condition for the procedure, whereby the Authority will refund the VAT to businesses resident in countries that refund VAT for UAE businesses visiting their territories.
650,000 VAT returns submitted in first year of tax levy
The Federal Tax Authority (FTA) on Saturday announced that the number of businesses registered for value-added tax (VAT) exceeded 296,000 while 650,000 VAT returns were submitted in 2018.
Highlighting the results of the first year of imposition of VAT, it said 7,200 retail shops took part in the tourist refund scheme, with over 5,000 transactions being processed on average per day.
The authority, however, didn’t disclose its target of Dh12 billion revenues from VAT in the first year of operation.
Khalid Ali Al Bustani, director-general of FTA, said a holistic and balanced tax system has been set up to make the UAE one of the world’s first countries to implement a fully electronic paperless tax system. He attributed the high compliance rate to the easy procedures set for submitting tax returns and paying due taxes.
The introduction of VAT in the UAE went into effect on January 1, 2018, at a 5 per cent rate on the supply of most goods and services in the country.
Thomas Vanhee, founding partner at Aurifer Middle East Tax, said the FTA realised a feat which no other mid-to-big size economy has realised before.
“It introduced excise tax and VAT in a country which had no federal taxes and no national enforcement body. The numbers of the first year of VAT show a high take-up by businesses and a high compliance rate in terms of the registrations and VAT returns filed. Stakeholders have been engaged to ensure a smooth implementation,” he said.
As in-depth audits are being planned for 2019, Vanhee said there will be greater scrutiny of the VAT returns filed and the numbers behind them.
“This will constitute an important test of how businesses implemented VAT beyond the mere filing of returns. The strict penalty framework constitutes an incentive to get matters right. The public and private clarifications go a long way in getting interpretations right. However, a lot of businesses should be making tax and penalty provisions for 2018 as they face relatively important exposures,” he added.
Mayank Sawhney, partner, Crowe, said the first year came with its own share of teething problems such as wrong interpretation and applications of the provisions of VAT law, wrong and delayed filing of VAT returns, people making taxable supplies in the UAE above the registration threshold limits such as director’s remuneration, rent from commercial properties, etc., not having registered for VAT on time and hence not having charged VAT on their taxable supplies, etc.
Going forward, the FTA is going to conduct tax audits on businesses, which will ensure that the they take compliance with VAT more seriously than what they have been doing in the first year.
“Therefore, in due course of time, we expect these teething problems faced in the first year of VAT implementation to get settled and all the businesses in the UAE with help of professional tax advisors, will become fully compliant in terms of correct interpretation and application of VAT,” Sawhney said.
In 2019, Al Bustani expects further improvement in tax compliance rates, promote registration among taxable businesses and combat tax evasion.
“The authority is currently working to launch new campaigns, most notably the tax invoice campaign, which is set to take place during the first quarter of 2019 and aims to ensure the use of tax invoices for all business operations,” he said.