GCC Indirect Tax Weekly Digest

UAE developments

UAE VAT return filing and VAT payment deadline extended by one month

The United Arab Emirates (UAE) Federal Tax Authority (FTA) has announced that the deadline for the submission of Value Added Tax (VAT) returns and payment of due tax for the tax periods ended 31 March 2020 has been extended by one month. The measures have been introduced on an exceptional basis by the FTA in order to ease the compliance burden on businesses facing challenges due to the preventive measures taken as a result of the COVID-19 crisis.

VAT returns and payment of due tax which would have been due on 28 April 2020 are instead due on 28 May 2020. This applies to VAT returns with a monthly tax period of 1 March 2020 to 31 March 2020, and VAT returns with a quarterly tax period of 1 January 2020 to 31 March 2020. Any payable tax amount must be received by the FTA by the revised deadline of 28 May 2020.

It is likely that taxpayers which file VAT returns on a monthly basis will therefore be required to submit two separate VAT returns for the March and April tax periods by 28 May 2020, rather than a single combined VAT return covering a two month tax period, in line with similar measures recently announced by the FTA in relation to Excise Tax returns. To date, there is no indication that further extensions will be granted for future tax periods, however businesses should monitor any further developments closely.

It should also be noted that these measures apply only to businesses due to file VAT returns for tax periods ending 31 March 2020, and that there have been no measures introduced to date to apply easements in relation to tax periods with an end date other than 31 March 2020.

The extensions granted by the FTA take place following similar developments in the Kingdom of Saudi Arabia, as tax authorities in the region take action to mitigate pressure on businesses dealing with the financial and administrative burden resulting from current economic and social conditions. For more details, please refer to our recent alert.  

COVID-19 Indirect Tax management

Focus on: the Real Estate industry

Nurena Tarafder 
Director, Indirect Tax
GCC Indirect Tax Real Estate industry leader

The real estate sector has implemented various measures in response to the economic impact from COVID-19, from landlords offering rent exemptions to developers waiving off certain charges on the acquisition of property. We look at the VAT impact of some of these below as well as how the sector can better manage VAT cash flow costs.

In recognition of temporary pay cuts, landlords are offering rent reductions through rent exemptions, discounts and rent free periods. Depending on the specifics of the arrangements, these initiatives may oblige the landlord to issue credit notes. However, since suppliers can only issue credit notes in limited circumstances, taxpayers should seek advice on the correct approach.

Property developers seem to have also introduced a number of measures to navigate this downturn. For example, in a bid to sell property, developers are increasingly enticing buyers with the provision of “free” goods and services e.g. savings on service charges, maintenance fees etc. Such savings could inadvertently result in VAT cost for the developer under the deemed supply provisions, and therefore we strongly recommend understanding the VAT impact of these initiatives and structuring sales contracts appropriately to reflect the substance of the transaction.

Additionally, in the UAE specifically, as demand for residential properties fall, developers may be at risk of properties being vacant for more than 3 years following their completion, such that their first sale or lease would no longer qualify for the zero-rating and potentially jeopardizing the recovery of VAT on development costs. Developers should consider the strategies available to manage this risk. Similarly, in cases of cancelled property sales, developers should consider the VAT impact of retained and returned sums based on the terms of the cancellation.

Managing cash flow and reducing VAT costs

Property developers involved in making exempt and taxable supplies, could consider revisiting the input tax apportionment method used to calculate recoverable VAT on residual costs of the business. Where businesses have been overly conservative in their approach to recover VAT on costs previously, they can now reassess whether any additional VAT can be recovered to which the business is entitled based on the guidance provided by the tax authorities, especially in the UAE where the application of the floor-space method has been clarified over time.

On the other hand, construction companies, often dealing with tight margins and high cash flow costs before the pandemic, will feel the crunch of the economic uncertainty, especially with projects being put on hold and extensions to payment terms. To manage VAT cash flow costs associated with delayed payments, the industry may wish to implement “pro-forma invoicing” or “demand for payment” arrangements which sees VAT invoices issued only once a customer makes a payment, relieving taxpayers of the burden of having to pay VAT to the tax authority before receiving it from customers.

Other ways of easing VAT cash flow costs, is to query whether suppliers are correctly charging VAT, for example on labour accommodation and supplies of bare land, both of which can be exempt from VAT in the UAE depending on the fact pattern, as well as reviewing whether VAT is due on all outputs such as penalties under lease agreements and supplies of residential property, where reliefs can apply. 

Overall, the VAT impact of strategies employed to manage the business’s cash flow situation during these times should be evaluated in order to avoid any compliance related risks moving forward.

This digest is for information purposes only and should not be construed as advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.