VAT in UAE: Mind your boundaries

Dubai - The VAT Law provides that the services shall be provided where they are performed or physically carried out.

It is a fundamental principle of value-added tax (VAT) that it can be charged only on goods or services sold within the defined boundaries of a country - which in technical terms is referred to as 'VAT jurisdiction' or 'territorial scope'. If goods or services are sold outside such boundaries, it would not attract VAT.
Every country which has introduced VAT, specifically defines its boundaries, either in the VAT Law or any other ancillary Law. The UAE's VAT Law does not define 'the UAE'. However, the Constitution of the UAE provides that the union shall exercise sovereignty over all territory and territorial waters lying within the international boundaries of the member Emirates. Further, it is understood that the sovereignty of the UAE extends beyond its land territory and internal waters, to its territorial sea, the airspace over the territorial sea as well as its bed and subsoil.
Thus, if goods or services are sold outside the defined boundaries of the UAE, be it soil, airspace or sea, it would be treated as outside the scope of UAE VAT and then tax would not apply. In the following cases, the VAT Law provides that the services shall be provided where they are performed or physically carried out.
. Services related to goods, such as the installation of goods supplied by others;
. Restaurant, hotel, and food and drink catering services;
. Any cultural, artistic, sporting, educational or similar services.
Additionally, for the supply of services related to real estate, the supply shall be made where the real estate is located.
Thus, any supply of service which is performed outside the boundaries or territorial limits of UAE or where the real estate is located outside the UAE, such services may be considered as outside the scope of UAE VAT Law and would not attract VAT. The following examples would be relevant.
. Catering services provided on rigs located beyond the territorial sea limits of UAE would not attract VAT since the services are performed outside the boundaries of the UAE.
. Instructor lead trainings provided outside the UAE to employees of a UAE-based company should be outside the scope of UAE VAT Law.
. For goods sold by one person to another in the UAE where the goods never physically come within the boundaries of the UAE; such transactions would not attract VAT.
. Oil exploration services provided beyond the continental shelf or boundaries of the UAE would be outside the scope of the UAE VAT Law since they are performed outside the boundaries of the UAE. This would be irrespective of where the supplier and customer are located.
. Repairs and maintenance services provided for ships or oil rigs located outside boundaries of the UAE may not attract VAT.
. Insurance of a property located outside the UAE, which is owned by a UAE resident may be outside the scope of UAE VAT Law. Again, this is irrespective of whether the insurance company or property owner are in the UAE.
Under the UAE VAT Law, a person who supplies goods or services which attract five per cent VAT, is eligible to claim back the VAT paid on goods and services purchased by such person. Further, the law provides that a person who supplies goods or services which are exempted from VAT is not allowed to claim back the VAT incurred on his expenses.
The law also provides that a person can claim back VAT paid on goods and services used for making supplies made outside the boundaries of the UAE which otherwise would have attracted five per cent VAT had they been made within the defined boundaries of the UAE.
In all the above cases, the supplier of the service would be eligible to claim back VAT paid on expenses incurred for rendering the out of scope supplies. This is in light of the fact that such services would have been taxable had they been performed within the boundaries of the UAE.
It may be noted that the above are few illustrations and there could be other supplies made outside the boundaries of UAE VAT Law. It is observed that some taxpayers have not considered the territorial scope of the UAE and have incorrectly charged five per cent VAT even though the supply is outside the scope of UAE VAT Law. Thus, the territorial scope and the place of supply needs to be carefully determined, i.e. whether the supplies are made within the boundaries of the UAE and hence would attract VAT. In the event of ambiguity, it would be ideal to approach the Federal Tax Authority to seek clarity on the territorial scope of UAE VAT Law.
- Deepak Agarwal is an associate partner at WTS Dhruva Consultants. Views expressed are his own and do not reflect the newspaper's policy.