System of UAE VAT
In the VAT system, the tax shall be imposed on value addition made at each stage of the supply chain. The supplier shall collect the VAT from the customers on the value of supply made to them and can recover the VAT paid by him on his inwards supply as an input tax credit. Thereby, the entire incidence of tax will be passed on to the final consumer.
Concept of Deemed supply under UAE VAT Law
The principle of VAT on supply is charged based on the time of supply rules in the VAT Law. According to UAE VAT Law, we need to consider the supply of goods or services, its consideration and lace of its supply to determine the taxability of the supply. It is easy to identify the transaction and its taxability in normal trade or sale to customers. But practically there are occasions where a business may supply goods or services at free of cost or as gifts or for personal consumption. When such supplies are made, we need to check for deemed supply provisions in the UAE VAT Law. In the UAE VAT, deemed supplies cover a broader range of transaction namely:
- Supply of goods or services at free of cost (like free samples/ gifts)
- Consumption of business assets for personal use
- Unsold taxable goods lying in the stock of business at the time of deregistration from VAT or when he stops making taxable supplies.
If the deemed supply provisions will be attracted and the registrant shall pay tax at the applicable rate. At the same time, the VAT law also provides certain exemptions by which supply may not be considered as deemed supply.
Exemption to deemed supplies
According to the VAT Law in the UAE, the supply will not be considered as deemed supply in the following instances:
- If the supplier has not recovered the Input tax paid for the relevant goods or services, which are supplied at free of cost.
- Where the supply is an exempted supply as per the UAE VAT Law.
- Where the refunded Input Tax on Goods and Services is amended according to the Capital Assets Scheme.
- Where the value of the Goods for each recipient, within a 12-month period, does not exceed AED 500 and the supply is used as samples or commercial gifts.
- Where the total of Output Tax payable on the Deemed Supplies made in a 12-month period is less than AED 2,000.
Let us discuss these cases with the help of some practical example. ABC LLC is a cosmetic trading company having retailed outlets across the UAE. The company has made the following transaction during the twelve months period ended on 31st July 2020.
- On August 13, 2019, the company distributed free samples costing AED 475/unit to its 200 regular customers.
- On Sep 30, 2019, a complimentary gift worth AED 490/- is given to Ms Nadia for purchases over AED 5,000/-.
- On December 31, 2019, Ms Nadia is gifted with AED 1,000/- a worth gift for shopping over AED 10,000/- in the year 2019.
- On January 20, 2020, the company conducted a lucky draw and gifted a jewellery worth AED 30,000/- to the winner.
- On May 22, 2020, the company distributed Ramadan gifts costing AED 510/- to 25 customers.
Let us analyze the tax impact and applicability of deemed supply provisions in the above example.
- As per the UAE VAT Law, the supply of free samples shall be considered as a deemed supply. However, if the value of the free samples distributed to each recipient during a 12-month period does not exceed AED 500/- then, such supplies may not be treated as deemed supply. On August 2019, the company distributed free samples worth AED 475/- per recipient. Since the value of free sample/gift supplies to each such recipients during the last twelve months does not exceed AED 500/-, they will be exempted from the deemed supply as per Article 5(1)(d) of the Executive Regulation.
- On Sep 30, 2019, the company gifted a kit of beauty solutions to Ms Nadia the cost of which is AED 490/-. The company did not gift or distribute any free samples to Ms Nadia, during the last twelve months ended on 30th September 2019. As the value of free sample/gift supplies to Ms Nadia for the last twelve months does not exceed AED 500/-, it will be exempted from the deemed supply.
- On December 31, 2019, the company distributed gift costing AED1,000/- to Ms. Nadia for making a purchase over AED 10,000/- in the year 2019. Ms. Nadia had been given a gift of value AED 490 on Sep 2019. Therefore, the total value of gift/free samples given to Ms. Nadia during the twelve months period exceeded AED 500/-. So, the benefit of exemption to deemed supply as provided under Article 5(1)(d) of the Executive regulation cannot be availed.
- The value of the gift distributed on Lucky draw conducted on January 20, 2020, was AED 30,000/. As the value exceeded AED 500/- the benefit of exemption from deemed supply under the provisions of Article 5(1)(d) of the Executive Regulation cannot be taken. Now the company need to check if the provisions of Article 5(1)(e) of the Executive Regulation will be applicable to exempt the transaction from the deemed supply. The total tax payable on all deemed supplies made in last 12month period exceeds AED 2,000/- and hence the benefit of exemption from the deemed supply as provided under Article 5(1) (e) of the Executive regulation cannot be availed by the company.
- On May 22, 2020, the company again distributed gift costing AED 510/- each to its regular customers on the occasion of Holy Ramadan. Since the value of gift distributed per recipient exceeded AED 500/-, the benefit of exemption under Article 5(1)(d) of the Executive Regulation cannot be availed. Hence the supply will become taxable.
Hope the above example helps to understand the applicability of deemed supply provision and when the exemption of deemed supply can be applied. It should be understood that the default rule will be to consider a transaction as a taxable supply unless an exemption applies. So, if conditions for exemption are not satisfied, then the supplier should charge VAT on the transaction including for the supplies made as gifts or sample.
Emirates Chartered Accountants Group is a Registered Tax Agent with the Federal Tax Authority (FTA) as Emirates International Chartered Accountants Group providing exclusive Tax Agency Service to businesses in the UAE. Our Tax Professionals are highly qualified and well versed with the UAE Tax Law with the practical implementation of VAT in UAE and Bahrain. We understand that every business is different from the other. Hence, each of our services is tailored as per your business needs.
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