FTA publishes amendments to the UAE VAT Law

28 October 2022: The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published amendments to the Federal VAT Decree-Law No. 8 of 2017 (UAE VAT Law). This is the first update to the UAE VAT Law since its introduction in 2017.

The amendments impact a wide range of areas of the Law and also introduce a new article on the statute of limitations for the FTA to conduct tax audits. The amendments are effective from 1 January 2023. 

In this alert, we have set out a high-level summary of the changes to the UAE VAT Law.

Summary of the key changes

The following is an overview of the key amendments to the UAE VAT Law. The most significant of the changes is an extension to the time limit for the FTA to conduct audits into prior VAT periods, and we recommend that particular attention is given to the implications this is likely to have for businesses.

Extension of audit timeline beyond five years
  • The amendments include a new Article 79 bis on statute of limitations. According to the new article, where the FTA provides notice of an audit within five years of the end of the relevant tax period, the FTA may conduct an audit within four years from the date of notification. 
  • This significantly expands the FTA’s potential window to conduct a tax audit and means that the FTA in theory has a window of nine years from the end of a tax period to conduct an audit if the audit notification is provided just before the end of the initial five year period.
  • In addition, the statute of limitations will be extended by one year in the event that the audit relates to a Voluntary Disclosure (VD) submitted by the taxpayer in the fifth year from the end of the tax period. 
  • Further, a taxable person cannot submit a VD after five years have passed from the end of the relevant tax period. This means that in circumstances where an audit notification is received prior to the expiry of the fifth year from the end of the tax period, the business will not be able to submit a VD to correct any errors which it becomes aware of after the five year period has expired. In these circumstances the only mechanism of correction will be via tax assessment.
Domestic Reverse Charge Mechanism applicability for Hydrocarbons 
  • Article 48(3) has been amended to clarify that the domestic reverse charge mechanism (RCM) applies to Pure Hydrocarbons, which are defined as any kind of different pure combinations of a chemical equation made only of hydrogen and carbon. 
  • As per Article 48(4), the domestic RCM will also apply to crude or refined oil, unprocessed or processed natural gas, or any Pure Hydrocarbons where the recipient of goods has provided a written declaration to the supplier that the acquisition of the goods is for the use for production or distribution of any kinds of energy.
Zero rate applicability for import of goods
  • Article 45 on goods and services subject to the zero rate has been amended to also include the import of the means of passenger transport, rescue aircraft/vessels, crude oil and natural gas, and concerned goods and services relating to the supply of preventive and basic healthcare services.
  • This supports the position for reporting RCM transactions with 0% VAT (where applicable), which was already being applied in practice by many taxpayers.
Record-keeping requirements for VAT recoverability
  • Article 55 on the requirements for recovery of input tax has been amended to specify evidence required to be kept to recover input tax on import of goods and services. 
  • In order to recover input tax on the import of goods and services, invoices must be kept for the imports (similar to how a valid tax invoice is required to recover input tax on local purchases).
  • In practice, this has not previously been a legal requirement and therefore it will be important to ensure that the foreign supplier’s invoice is received and booked prior to recovering VAT on import. For goods in particular, this should be carefully monitored as the invoice may be received after the actual import of goods. This enhances the need for a thorough reconciliation of the values automatically populated in Box 6 of the VAT return for import VAT incurred on imported goods, and for strong governance around this aspect of compliance.
  • Taxpayers may therefore need to consider requesting overseas suppliers to issue invoices at an earlier stage in order to be entitled to recover input tax on the imports.
Timelines for tax invoices and tax credit notes
  • Article 67(1) when read in conjunction with Article 26, states the date of issuance of a tax invoice relating to the date of continuous supply should be within 14 days from the date of supply. This extends the requirement to issue a tax invoice within 14 days which was previously only mentioned for Article 25 scenarios.
  • Article 62(2) specifies that in the event of an output tax adjustment, a tax credit note must be issued within 14 days from the date on which the instance giving rise to the tax credit note occurred. Previously a specific timeframe for issuing a tax credit note had not been specified within the legislation. 
  • Taxpayers should therefore examine their current processes for issuing tax invoices and tax credit notes to determine whether sufficient controls are in place to ensure that documents are issued within the required timeframes.
  • This may also present challenges for businesses with arrangements involving the issuance of credit notes to grant retrospective discounts, as it will become important to track the instance giving rise to the discount and when the credit note should be issued.
Recovery of tax by government entities and charities
  • Article 57 has been amended to explicitly state that government entities may recover input tax incurred for the purposes of carrying out their sovereign activities, and that charities may recover input tax incurred for the purposes of carrying out their relevant charitable activities.

Key considerations and suggested actions for businesses

The amendments to the UAE VAT Law should be studied carefully by taxable persons in the UAE to determine whether changes are required to their current tax processes.

Amongst the most notable changes is the significant expansion of the potential period for the FTA to conduct audits of submitted VAT returns, and the restriction on the period in which taxpayers can submit VDs for prior VAT returns. 

With VAT having been implemented in the UAE on 1 January 2018, the five year statute of limitation will soon commence for the earliest tax periods, which will start to fall out of time for audit from 31 January 2023 for monthly VAT filings. In the event an audit notification is received before the end of the relevant period, it will remain open for audit for a further four years, however taxpayers will not have the ability to correct any errors which they become aware of after more than five years.

As such, the importance of undertaking risk reviews or health checks for the earliest tax periods prior to the entry into force of the statute of limitation has increased further, and we recommend consideration is given now to whether VDs are required. This will manage the potential penalties which may arise, which are significantly greater when errors are notified through a tax assessment as compared to a VD.

How can Deloitte help?

Deloitte can assist your business by conducting a mock audit to simulate the type of review the FTA may conduct. The review would identify points of non-compliance and provide you with recommended actions to bring your business into compliance with the UAE VAT legislation, and can also include assistance with filing VDs.

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