Decoding VAT on Designated Zone
Businesses should ensure that the prescribed conditions are fulfilled
Over the last decade, free zones have continuously given globalising edge to business in the UAE by promoting foreign trade. With the advent of VAT in the UAE, many questions on applicability of VAT have arisen. Let's decipher few of these interesting questions.
Whether all free zones are Designated Zones for VAT?
As per Article 51 of the Executive Regulations on VAT, Designated Zone (DZ) for VAT purposes shall be treated as outside the state and outside the implementing states. In this regard, as per Cabinet Decision No. 59, out of the 45 free zones in the UAE, 20 DZ (including JAFZA North and South) are notified for VAT purposes.
Given that special provisions are applicable to DZs, businesses should ensure that the prescribed conditions are fulfilled before any position of non-applicability/applicability of VAT is adopted.
Whether entity in DZ is required to obtain registration?
It is pertinent to note that no specific relaxation is provided to entities established in DZ for obtaining VAT registration. Thus, if the taxable supplies by an entity in DZ exceed the prescribed threshold limit, registration as per UAE VAT will trigger.
Recently, to facilitate VAT compliance, the Federal Tax Authority (FTA) announced its decision to waive-off administrative penalty of Dh20,000, in cases where businesses register prior to April 30, 2018. Thus, in case a business is yet to obtain VAT registration, then on an immediate basis, evaluation of applicability of registration should be undertaken.
Table Summary of VAT implications on key transactions by/with DZ
Place of supply in case of a DZ
The UAE VAT law has jurisdiction to tax only those transactions wherein the Place of Supply (PoS) of such transaction is inside the UAE. However, to determine PoS of a transaction, it's necessary to classify transaction as 'goods' or 'services'.
The businesses should not only ensure that the VAT related compliances are adequately carried out but also ensure that its employees and IT infrastructure are equipped to handle day-to-day tasks as it is correctly said that VAT is not merely a tax change, but indeed it is a change in business processes.
Also, each business scenario has separate tax implications thereby making it essential for businesses to carry out VAT Health Check/Review or have customised VAT Manuals to safeguard itself from adverse administrative penal provisions.
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The author is Partner & CEO, Morison MJS Tax Consultancy