Alice in TAXland: the wonders of taxation!

Taxation is often considered as a mundane subject. Truth be told, taxation is as fascinating as Alice’s wonderland if one delves deep into tax interpretations. In this week’s ‘Tax Conversations’, let’s travel down the rabbit hole and discuss landmark tax issues.

1) Excess/advance payments to telecommunications services provider

It is a usual practice for telecom operators to issue monthly tax invoices for the internet/phone connections and charge UAE VAT thereon. Any excess payment against an invoice is adjusted in the next monthly invoice.

The situation could change dramatically from January 1, 2023. The telecom operators would be required to issue a tax invoice within 14-days from the date of receiving an advance/excess payment. Any delays could result in penalties.

Globally, the position is a bit different. The UK VAT laws requires a supplier to pay tax on excess payments received in a tax period but the obligation to issue a tax invoice is relaxed. The Indian tax laws permit to pay tax on excess payments up to Rs1,000 (Dh45) in the next periodic invoice.

Would the UAE telecom operators need to update the billing software to generate additional tax invoices for excess payments, and exclude such payments from the next monthly invoice? Would the scope of administrative exceptions be updated to allow telecom operators to seek an exception from the issuing tax invoices on time?

2) Supply of Paintings: Goods or Services?

Let us take an example of an artist being commissioned by an overseas customer to make a painting. The painting is made in the UAE and thereafter exported to the overseas customer.

Is the artist making a supply of goods or a supply of services? If it is treated as a supply of goods, the physical export of the painting could be zero-rated. But if it is a supply of service, the artist would need to charge VAT even if the painting is physically exported out of the UAE.

Should the nature of supply be based on the artist’s fame or skills? Would the nature of supply change from goods to service if the artist is commissioned to make only one painting (a masterpiece!) instead of say, 100 pieces of a painting? Would the same test apply to sculptors, chefs or manufacturers using proprietary knowledge and skills to create exclusive goods?

The issue could equally impact many other services. The inherent aim of a client engaging a financial auditor is to receive a signed audit report on paper (i.e. goods). Does a financial auditor supply services or goods? How should one differentiate between a supply of goods and supply of services?

3) Valuation: Non-monetary consideration

Any non-monetary consideration for a supply, or a barter transaction, needs to be valued for VAT. Such values are often a subjective value between the supplier and the recipient. The Indian apex court considered a case where a new manufacturer/seller supplied goods at less than the cost value to gain the market share against existing competitors. The court held that the expectation to gain market share is an additional non-monetary consideration and that tax should be paid thereon.

A consultancy company quotes varying fee to different clients in the expectation to gain entry into the client’s industry sector or to gain additional work from the client. Should the service fee be benchmarked to evaluate non-monetary consideration for every supply?

4) Notice Pay: Penalty or consideration?

An employment contract often contains a clause that either party could terminate by serving an advance notice of 1-2 months. An employee can agree with the employer to pay the salary of 2 months (‘notice pay’) instead of serving the notice period.

The payment from an employer to its employees (e.g. salaries) are outside the VAT purview. However, the payment from an employee to its employer could be subject to VAT e.g. payment for purchase of old furniture or electronics etc.

Should the notice pay paid by an employee be subject to VAT? Is notice pay a penalty for violation of employment contract or is the employer supplying a service i.e. a new contractual right of early termination of an employment contract?

Concluding remarks

Taxes such as VAT are essentially a tax on transactions. The manner in which a business transaction is structured could impact the tax implications thereon. Taxation could be fascinating and interesting for businesses once they start asking the right question to find the right answers.

(Pankaj S. Jain is the managing director of AskPankaj Tax Advisors. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.)

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