The outstanding VAT Cabinet Decisions in the UAE
What needs to be done while awaiting publication
Value Added Tax (VAT) came into effect in the United Arab Emirates (UAE) on 1 January 2018 under the provisions of the UAE VAT Decree-Law and Executive Regulations. These documents contain the vast majority of the rules and regulations governing the implementation of VAT in the UAE and can be relied upon to determine the VAT treatment of supplies in the majority of circumstances.
However, the Decree-Law and Executive Regulations contain instances where details of the application of certain rules will be contained within a Cabinet Decision to be issued at a later date. As it currently stands, the UAE is still awaiting the publication of Cabinet Decisions which will confirm the application of the VAT Decree-Law and Executive Regulations on the following matters:
- Confirmation of the areas which will be specified as Designated Zones for VAT purposes and therefore subject to special rules for the supply of goods located within the Designated Zone in certain cases;
- Confirmation of the Charitable bodies which will be subject to special VAT rules;
- Confirmation of the Government entities which will be subject to special VAT rules, including those activities qualifying as being conducted in a sovereign capacity by those entities;
- Confirmation of the pharmaceutical products and medical equipment which will be subject to the zero-rate of VAT.
We are currently seeking clarity regarding these outstanding Cabinet Decisions, however it is not yet known when the Cabinet Decisions will be published or whether they will have retrospective effect. In the meantime, Deloitte recommends that clients should follow the provisions of the VAT Decree-Law and Executive Regulations in the absence of the information contained within the Cabinet Decisions. We therefore recommend the following:
- Until such a time as the pharmaceutical products and medical equipment which will be subject to the zero-rate are confirmed, it would be prudent to charge VAT at the standard rate on all such supplies;
- Until such a time as the Cabinet specifies those areas qualifying as Designated Zones for VAT purposes, all geographical areas within the UAE should be treated as ‘onshore’ for VAT purposes and the special rules for Designated Zones should not apply. Therefore, VAT should be charged where applicable on all supplies made, under the normal VAT rules;
- Until such a time as the Cabinet confirms the charitable bodies and Government entities qualifying to recover VAT under the special scheme for such entities, those entities should assess whether VAT is applicable on supplies of goods and services made by them under the normal VAT rules. VAT on costs should be recoverable to the extent they relate to taxable supplies made by these entities, subject to the normal VAT rules.
Following publication of the Cabinet Decisions, it will be important to establish the date from which they are effective. If they are issued with retrospective effect and it appears that transactions have been treated as subject to VAT where they should correctly have been zero-rated or outside the scope, businesses should be able to issue credit notes to reverse the VAT incorrectly charged under Article 61 (1)(b) and Article 62 of the VAT Decree-Law.
Based on Article 51 of the VAT Executive Regulations, a Designated Zone specified in a Cabinet Decision should be a specific, fenced geographic area with security measures in place and Customs controls to monitor entry and exit of individuals and movement of goods to and from the area. Based on this provision, it is expected that fenced Free Zones (e.g. Jebel Ali Free Zone) should qualify to be specified within the Cabinet Decision as being a Designated Zone. However, until such a time as this is confirmed by the Cabinet, it should be assumed that no area is a Designated Zone.
Businesses which have not registered for VAT on the understanding their activities would be outside the scope of UAE VAT as a result of being wholly conducted within a Designated Zone should urgently assess their options. Please contact your usual Deloitte contact to discuss the position based on your specific circumstances and to obtain advice on the best way forward.
Failure to charge VAT where required could lead to administrative penalties being levied by the Federal Tax Authority (FTA).