SIGNIFICANT VAT CHANGES IN THE UAE- FEDERAL DECREE-LAW NO. 18 OF 2022

The UAE has issued Federal Decree-Law No. 18 of 2022 to amend a number of provisions of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (the VAT Decree-Law).

The amendments will take effect from 1 January 2023.

The main changes to the VAT Law are summarized below:

Article 1 – Definitions

The new Decree-Law introduced new definitions for

• Relevant Charitable Activity
• Pure Hydrocarbons
• Tax Evasion
• Tax Audit
• Tax Assessment
• Voluntary Disclosure

Article 7 – Supplies outside the scope of VAT

A new clause has been added to Article 7 that states the Executive Regulations may stipulate any other supplies (other than the supply of vouchers and the transfer of a business) that are explicitly considered outside the scope of VAT

Article 15 – Registration Exception

The exception to register will apply to registered persons in addition to non-registered persons who make taxable supplies are allowed to apply for an exception from VAT registration if all of their supplies are zero-rated or if they no longer make any supplies other than zero-rated supplies.

Article 21 – Tax Deregistration cases

In addition to deregistration apply by registrant, as per amendment The Federal Tax Authority (FTA) may forcibly de-register registered individuals in specific cases if deemed necessary.

Further, it has added that the deregistration of taxable persons shall not forfeit the FTA’s right to claim any tax dues or administrative penalties.

Article 26(1) – Date of supply in special cases

Determining the date of supply in special cases includes the date on which one year has passed from the date on which the goods or services are provided, as one of the events to determine the date of supply.

Article 30(8) – Place of supply in special case (transport-related services)

In addition to Transportation service, for transport related service also the place of supply will be where the transportation starts.

This amendment makes it clear that transport-related services, even if provided separately from transportation services (e.g., by different suppliers), would have the place of supply determined where transportation starts.

Article 33 – Place of residency (agent/principal)

Defines the place of residence of a principal to be the place of residence of the agent. Under the current VAT Law, it was stated that the place of residence of the agent shall be the place of residence of the principal.

Article 36 – Value of Supply and Deemed supply for related party

By this, the Amendment of VAT Law clarifies that where a deemed supply occurs between related parties, the value of supply would be determined by the market value.

As regards the specific rule related to the value of supply or import of goods and services in case of related party transactions will now override Article 37 (value of deemed supply).

Article 45 – Goods and Services Subject to Zero rate

Additional goods are listed in article 45 (clauses 4, 5 and 6) as subject to zero-rate of VAT. This includes

– Import of concerned goods, related to the supply of the means of transportation

– Import of Air or Sea rescue and assistance aircraft or vessels.

– Import of crude oil and natural gas.

– Import of healthcare related goods and service.

Article 48 – Reverse charge

Clause 3 of Article 48 specifies that the domestic reverse charge will apply to Pure Hydrocarbons (defined in the new Decree-Law as “any kind of different pure combinations of a chemical equation made only of hydrogen and carbon”).

Article 55 – Recovery of recoverable input tax in the tax period (imports)

Two new clauses have been added to Article 55 regarding the recovery of input VAT which specify the requirements for the taxable person to recover VAT paid or declared on the import of goods or services.

• The Taxable Person imports the Goods and receives and retains invoices and Import documents in accordance with the provisions of this Decree-Law and its Executive Regulation in relation to the Import on which Input Tax was paid or declared.
• 3The Taxable Person imports the Services and receives and retains invoices in accordance with the provisions of this Decree Law and its Executive Regulation in relation to the Import on which Input Tax was declared.

Article 57 – Recovery of tax by government entities and charities

It is now explicitly mentioned in Article 57 that government entities can recover input VAT that is incurred for the provision of sovereign activities. Similarly, charitable organizations can recover input VAT that is incurred for the provision of relevant charitable activities.

Article 61(1) – Output VAT adjustment

The output VAT adjustment stipulated scenario where the taxable person applies an incorrect tax treatment. The VAT Amendment Law has added in Clause 1(e) that a taxable person shall adjust output tax after the date of supply not only if the tax was charged in error but also if the application of the tax treatment was incorrect (e.g., where it was treated as exempt/zero rated instead of taxable at 5%)

In such cases, the taxable person should now issue a tax credit note to adjust the output tax.

Article 62(2) – Mechanism for Output Tax Adjustment/Timeline to issue a tax credit note

A taxable person must issue a tax credit note within 14 days from the date on which any of the instances provided in Article 61(1) occur.

Article 65 –Conditions and requirements for issuing tax invoices (obligation to pay VAT)

The Amendment of VAT Law added that not only when a person receives the VAT amount, but also when it issues a tax invoice in respect of VAT, it must pay such VAT amount to the FTA as the Tax Due amount.

Article 67 –Date of issuance of tax invoice (for continuous supplies)

The Amendment of VAT Law also included a reference to Article 26 (i.e., continuous supplies) requiring the registrant to issue a tax invoice within 14 days as of the date of supply determined by it.

Clause 2 have been added to specify – Executive Regulation shall determine cases in which the Tax Invoice shall be issued immediately in accordance with control specified therein.

Article 79(bis) – Statute of Limitation

New Article 79(bis) have been added in VAT Decree law to extend time limit for Audit to be conducted by Authority.

With certain exceptions, as specified below, the FTA may not conduct a Tax Audit or issue a Tax Assessment after the expiration of 5 years from the end of the relevant Tax Period.

• The FTA may conduct a Tax Audit or issue a Tax Assessment after 5 years from the end of the relevant Tax Period if it notifies the taxable person of the Tax Audit before the expiration of the 5th year, provided that the Tax Audit or issuance of Tax Assessment is completed within 4 years from the date of such a notice.
• The FTA may conduct a Tax Audit or issue a Tax Assessment after the 5th year from the end of the relevant Tax Period only if the Audit or Assessment relates to a Voluntary Disclosure submitted during the 5th year from the end of the Tax Period, provided that the Tax Audit or Assessment is completed/issued within 1 year from the date of Voluntary Disclosure submission.
• The article also permits amendment of the referred periods by virtue of a separate Cabinet Decision.
• A voluntary disclosure cannot be filed by the taxable person after the lapse of 5 years from the end of the relevant tax period.
• In cases of Tax Evasions or non-Tax Registrations, the FTA may conduct a Tax Audit or issue a Tax Assessment within 15 years from the end of the tax period in which the tax evasion occurred or from the date on which the taxable person was required to perform Tax Registration.

TAKEAWAY

The amendment to VAT law would come into effect from 1 January 2023, the underlying Executive Regulations are expected to be released soon, considering that changes are required to be undertaken in which businesses are functioning at present.

Businesses are required to review amendments made to the VAT Decree-Law and ensure implementation readiness. Accordingly, to avoid penal consequences, businesses are advised to ensure that changes in the underlying documentation and processes are carried out before the law comes into force.

They should conduct a detailed impact assessment as the amendments would impact:

• Policy changes – Like a change in the manner of raising invoices and credit note
• Revisiting the tax position already undertaken
• Maintenance of requisite documentation and record.

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