Supply of B2B Passenger Transportation Services - Taxable or Exempt?
Tax Consultants in Abu Dhabi, Dubai, and any other Emirates in the UAE are appointed by businesses/individuals to ensure compliance with the VAT law in the region. In this blog, we will be discussing the taxability of the Supply of Business to Business (B2B) Transportation.
B2B supplies are the transactions between two businesses rather than between the business and individual customer.
As per Article 46 of the UAE VAT Decree-Law, the supply of local passenger transport services is exempt from VAT. Practically a provider of passenger transport service may be contractually supplying services to other businesses rather than individual customers.
In such instances, the question is whether the B2B supply of transportation service is exempt from VAT or shall it be treated as a taxable supply.
Let us understand the taxability through an illustration.
ABC LLC a company operating from Abu Dhabi, UAE provides passenger transportation services (i.e., car or bus with driver) to its clients (including individuals and companies) providing the following services:
- Transportation of the clients (individual passengers) in motorcar from one place in UAE to another place in UAE.
- Transportation of employees of the clients (in case of companies) in Bus from accommodation to offices and vice versa.
- Transportation of clients (tourists) in motorcar to beach, malls & restaurants in UAE for pleasure.
Relevant provisions of the UAE VAT Law
The first part of this Article mentions the supply of local passenger transport (whether public or private) by land, water or air shall be exempt from VAT.
Article 45 of the Executive Regulation [ER] provides that the exemption shall be available only if the local passenger transportation services are provided in a qualifying means of transport. The phrase qualifying means of transport include a motor vehicle, including a taxi, bus, railway train, tram, monorail, or similar means of transport, designed or adapted for the transport of passengers.
Further, the passenger transportation services undertaken in the context of pleasure trips shall not constitute local passenger transport that is exempt from VAT.
Therefore, a supply of passenger transportation services shall be exempt from VAT only if:
1. the transportation services are provided from one place in the UAE to another place in the UAE,
2. the transportation services are provided in a qualifying means of transport and,
3. the services are not undertaken in the context of pleasure trips (i.e., the principal objective of the trip is sightseeing, enjoyment of catering services or other forms of pleasure or entertainment.)
It is to be noted that the supply of local passenger transportation services shall be exempt from VAT based on the above-explained criteria. The current provisions of VAT law do not mandate the supplier of local passenger transport services to consider the status of the recipient to avail exemption.
Analysis
Let us analyze the taxability of the transaction scenario listed out in the illustration above:
4. Transportation of the clients (individual passengers) in motorcar from one place in UAE to another place in UAE.
Here the transportation services are provided in a motor car (qualifying means of transport) from one place in UAE to another place in UAE. Also, the transportation services were not undertaken in relation to a pleasure trip. Thus, all the conditions as provided under Article 45 of the ER are satisfied. Hence, the supply shall be exempt from VAT.
5. Transportation of employees of the clients (in case of companies) in Bus from accommodation to offices and vice versa.
Here, the transportation services are provided in a bus (qualifying means of transport) from one place in UAE to another place in UAE. Also, the transportation services were not undertaken in relation to a pleasure trip. The fact that the supplier is contractually making the supply to another business (even though the transportation services are availed by the employees) does not have any relevance while determining the supply. Hence the supply will be exempt from VAT.
6. Transportation of clients (tourists) in motorcar to beach, malls & restaurants in UAE for pleasure.
In this transaction, the transportation services are provided in a motor car (qualifying means of transport) from one place in UAE to another place in UAE. But the services are undertaken in relation to entertainment/pleasure trips. Here, the third condition as provided under Article 45 was not satisfied. Hence the supply will not be qualified as local passenger transportation services eligible for Exemption under Article 46 of the VAT Decree-Law. Therefore, the supplier shall charge VAT at a standard rate (i.e., 5%) on the value of supply.
Whether ABC LLC is eligible to claim input tax related to the above-mentioned services?
For providing the transportation services mentioned in the above scenarios ABC LLC incurs expenses that bear VAT such as fuel, vehicle maintenance, insurance, etc.
As per UAE VAT Law, a taxable person is not eligible to claim input tax paid on expenses incurred for making on exempt supplies.
Therefore, in the present case, ABC LLC is only eligible to claim input tax paid on expenses incurred for making taxable supplies (i.e., transportation of tourists in the car from the hotel to beach, malls & restaurants in UAE for pleasure).
Also, it is to be noted that if ABC LLC uses the same vehicle for both supplies (i.e., taxable and exempt), then the input tax paid shall be eligible for partial recovery. For this, the supplier is required to apply the input tax apportionment method which is mentioned in the UAE VAT Law.
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