UAE: VAT treatment of e-commerce sales

UAE: VAT treatment of e-commerce sales

The tax authority in the United Arab Emirates issued guidance concerning the value added tax (VAT) treatment of e-commerce sales and of electronic services. The guidance also addresses the VAT position of the tax authority.

  • Guidance for e-commerce sales: The guidance explains the place-of-supply rules and the VAT collection measures regarding goods sold from, in or to the UAE.
    • With reference to the application of the zero VAT rate for goods exported from the UAE, the guidance outlines the requirements and provides clarification.
    • In relation to the requirement to provide “official evidence,” this generally would require the exporter to retain a certificate issued by UAE customs, and includes as an example of such evidence, the exit certificate or a similar document evidencing the export (which nature has not been specified in the guide). When companies are not able to provide the exit certificate or a similar document, the application of the zero VAT rate could be challenged by the tax authorities. Companies that are not in a position to provide these documents may want to consider applying for an administrative exception for alternative export documentation.
  • Electronic supplies of services: The guidance sets out further measures about the use-and-enjoyment rules (when electronic services are deemed to be used and enjoyed) and gives some indications to determine the customer’s location.
  • Reverse-charge mechanism: For both e-commerce sales of goods and electronic supply of services, the guidance addresses the application of the reverse-charge mechanism. A notable exception applies for non-established companies already registered for VAT in the UAE.
  • Supplies made through agents: The guidance clarifies the VAT position of agents and the different types of agency arrangements, and clarifies that in case of businesses operating through undisclosed agents, two different supplies would need to be distinguished.
  • Legal status of guidance: The guidance is not legally binding for the tax authority and is only intended to provide guidance in understanding and applying the VAT legislation.

Read an August 2020 report prepared by the KPMG member firm in the UAE

Implications of Saudi Arabia VAT rate increase for UAE businesses

The VAT rate increased in Saudi Arabia from 5% to 15% effective 1 July 2020, and this may affect current UAE-Saudi Arabia distribution arrangements.

Many local and international manufacturers and retailers have established distribution hubs in the UAE to supply the Saudi Arabia and the broader GCC region. For various commercial, legal, regulatory and tax related reasons, many businesses tend to prefer operating in Saudi Arabia, via a third-party distributor, rather than establishing a local Saudi Arabia entity.

Typically, this presents both the third-party distributor and the UAE-based business (recipients of distribution services) with an inherent VAT challenge. This challenge arises from the fact that unlike the UAE there are very limited circumstances whereby Saudi Arabia distributors can apply the zero VAT rate to the supply of cross-border services. Therefore, more often than not, Saudi Arabia distributors tend to treat the services provided to and other recharges made to UAE businesses as subject to Saudi Arabia VAT at the standard rate of 15% (previously 5%).

Read an August 2020 report prepared by the KPMG member firm in the UAE

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