16 May
UAE Corporate Tax: Will all ‘director’s fees’ be exempt from tax?
Business owners need to check whether no tax on director’s fees applies in all matters
Taxation on an individual’s earnings from company directorship services is once again in the spotlight. On May 13, the UAE’s Federal Tax Authority issued an updated public clarification on the VAT implications from ‘performing the function of director’.
With effect from January 1, 2023, the functions of a member of a board of directors are not considered as a supply of services for VAT purposes. So, VAT was thereafter not applicable on the fee received by such individuals for directorship services. The new update replaces the earlier clarification on the matter to expand the scope of the VAT exclusion.
As per the clarification, the exclusion from VAT extends to services performed as a member of a committee derived from the same board of directors on which the individual serves as a director. As a result, the fee/remuneration for the services to the board of directors – and any committee derived from it – will not be subjected to VAT. The clarification has brought much-needed tax relief to many individuals and senior management personnel.
Critical issues
The relief provided by the recent clarification is an opportunity for business owners to review the tax implications – both VAT and corporate tax – on their earnings.
The VAT exclusion applies only on services performed in the formal capacity as a director on a board of directors. Many individual business owners withdraw funds from their business – often labelled as ‘director’s fee’ – without constituting a board of directors for the company. One needs to examine if such owners could still be considered as ‘directors’ and the fee drawn be excluded from VAT in the absence of a board of directors.
While referring to freelance services rendered by an individual who is not a director, the clarification intriguingly refers to ‘third-party’ individuals. Whether an owner-director could still be excluded from VAT without being a member of a board of directors remains a moot question.
Other services provided by an individual – and activities that qualify as a supply of goods/services such as renting of commercial property – may still be subject to VAT upon meeting the conditions for taxable supplies as stated in the VAT laws.
The fee paid to non-resident directors such as those of multinational companies would neither attract VAT under the reverse charge mechanism (RCM) nor mandate such overseas individuals to register for the UAE VAT regime.
There has been no change in the explanation of transitional provisions in the updated clarification to determine the taxability of services performed prior to January 1, 2023.
Corporate tax on individuals
While VAT is applicable on a supply of goods or services for consideration, the supply should be by a person conducting business in the UAE. This is one of the vital elements for being subject to VAT.
Corporate tax applies on persons conducting business or business activity in the UAE. The expression ‘business’ has been defined similarly under VAT as well as the corporate tax laws.
The recent guide on taxation of natural persons under the corporate tax law states that, generally, director fees will not be considered as a business or business activity, and therefore would not be subject to corporate tax. The VAT amendment states that the performance of a director’s function shall not be considered to be a supply of services, which would inherently mean that the individual is otherwise conducting a business.
The position under VAT and corporate tax laws needs to be harmonised. Will the exclusion from corporate tax apply only if an individual is a member of board of directors? In the absence of a formal board of directors, will the funds drawn as director’s fees be subjected to corporate tax in the individual’s hands or be treated as dividends for the company?
If director’s fee will not be considered as a business, can a legal person who provides directorship services – by delegating a natural person to act as director – be subject to VAT?
These are just some of the pertinent questions that business owners need to ask to optimise the VAT and corporate tax implications on their remunerations.
07 May
UAE Corporate Tax: ‘Black points’ to be issued to tax agents for wrong advice from July 1
Dubai: The operations of registered ‘tax agents’ in the UAE have been tightened up further, with recent guidelines issued on penalties that will be imposed on wrongful advice to clients on their corporate tax obligations. The penalties – in the form of ‘black points’ – will come into effect July 1.
This is on top of the requirements mandated for those who wish to be practicing tax agents in the UAE.
“The Federal Tax Authority (FTA) is raising the bar by introducing a code of conduct for tax agents that are in line with international standards,” said Jeet Gianchandani, Chairman of the consultancy JCA. “These black points will be applied to tax agents – individual or a business – for various acts of misconduct and negligence.
“This includes wrong advice to clients, and which might result in financial costs for them. The new FTA standards will make tax agents update their knowledge continuously.”
How FTA’s new ‘black points’ will be applied
- If a violation is committed by an agent who does not work for that corporate entity, black points shall be applied to the individual.
- If a violation is committed by an agent who works for the client, black points shall be applied to both the individual and the corporate client.
- If a violation is committed by a representative of a corporate tax agent – and such violation is related to or affecting the client – black points shall be applied to both the individual tax agent appointed to represent the client and the tax agency.
- If the violation is committed by a representative working for a tax agency – and such violation is not relating to or affecting the client represented by the agency – black points shall be applied only to the individual tax agent.
These black points will be applied to tax agents – individual or a business – for various acts of misconduct and negligence.
More responsibilites on tax agents
Getting to be a registered tax agent in the UAE already requires individuals to put in a set number of hours, etc. “Nowadays, many professional institutes have made it mandatory for their members to attend educational conferences or seminars to score a minimum number of hours, known as CPE (continuous practice education) hours,” said Gianchandani. “CAs (chartered accounts) have to score 60 hours in a year – and the UAE Ministry of Economy requires 30 hours of training in a year.”
“Clearly, not any Tom, Dick or Harry can become a tax agent.”
Who qualifies to be a tax agent?
Tax agents are an intrinsic part of the unfolding corporate tax regime in the UAE. As per the FTA, they will represent clients before the authority and will oversee the filing of their annual tax returns.
In fact, it is prohibited to practice as a tax agent without completing the registration and receiving an accreditation from the FTA.
- A Bachelor’s or Master’s degree in tax, accounting or law from a recognised educational institution. Or a tax certification from an internationally known tax institution if the Bachelor’s degree is in any other field.
- Recent professional experience of at least three years in either tax, accounting or law.
- Language proficiency document for both Arabic and English, written and spoken.
Penalties on tax agents also come into effect for other acts of omission or commission.
Now, if a tax agent is found to have shared info about the client – or for that matter, any tax payer – with a third-party without their explicit consent in writing, they will face a point deduction of 100 points. (The exception is when agents have a reason to disclose under a ‘legal, professional or regulatory obligation’.)
And 200 points will be docked if tax agents promote, design or jointly design ‘aggressive tax planning’ and which is marketed to a number of taxpayers. If this is done with an ‘intention’ to breach any law or which would jeopardise the ‘integrity of the tax system or result in a loss of revenuedue to the FTA’.
27 Nov
How European VAT decisions could impact UAE businesses
Written agreement concerning the supply of goods or services, between two VAT-registered persons, could be regarded as a tax invoice for recovering input credit
The European Court of Justice (ECJ) is amongst the leading judicial authorities whose decisions are accepted as authoritative precedents by the tax authorities across the globe. In this week’s tax conversation, let us discuss important ECJ decisions to get global tax insights. I must caution that one has to examine the context and facts of each case to determine if the ECJ’s jurisprudence will also be applicable in the GCC region.
1. A written contract in place of a tax invoice
In Raiffeisn Leasing case, the ECJ held that a written agreement concerning the supply of goods or services, between two VAT-registered persons, could be regarded as a tax invoice for recovering input credit. The contract should contain all the information necessary for the tax authorities to determine that the material conditions for the right to recover VAT credit have been satisfied.
2. Transaction between head office and branch in different countries
In FCE bank case, the ECJ held that transactions between head office and its branches situated in different countries are not to be regarded as a supply for VAT purposes because the head office and its branches form a single legal entity.
However, in subsequent decisions, the ECJ held that if the head office or the branch are a part of a VAT group, the transactions should be recognised as a taxable supply. For VAT purposes, a VAT group should be recognised as a separate taxable person which supersedes the individuality of the group members.
As UAE is an attractive investment and economic destination for multinational companies, the tax compliance of branch operations must be ensured.
3. Place of supply for educational services
In Srf konsulterna AB case, a company based in Sweden provided accounting and management courses in the form of seminars for a price. For the seminars held outside Sweden, the issue arose whether VAT is payable in Sweden or in the country where the seminars were physically held.
Services in respect of admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events is generally the place where those events actually take place. The ECJ held that the ‘services in respect of admission to events’ include a service in the form of a five-day course on accountancy and management.
With the increase in online courses/events being supplied by suppliers based outside UAE to the people based in the UAE, the ECJ decision could have significant implications on the overseas service providers.
4. Issue of shares by a company
Should the issue of shares by a company be treated as an exempt supply? If yes, the companies would not be able to recover input tax credit on the costs relating to the IPO, share issue, listing and other related costs.
With the ever increasing IPOs activities in the UAE, the aforesaid question gains significant importance.
However, in subsequent decisions, the ECJ held that if the head office or the branch are a part of a VAT group, the transactions should be recognised as a taxable supply. For VAT purposes, a VAT group should be recognised as a separate taxable person which supersedes the individuality of the group members.
As UAE is an attractive investment and economic destination for multinational companies, the tax compliance of branch operations must be ensured.
5. Place of supply of an actor’s services
Though not a decision by ECJ, a UK Tribunal decision holds a special importance. My work experience in the United Kingdom started with the review of this tribunal’s decision on the European taxation.
In Saffron Burrows case, the UK Tribunal examined the place of supply of services by film actors and the VAT implications thereon. The Tribunal held that that the acting services should be treated as supplied in the country where performed, and not at the place of residence of the actor.
Accordingly, if a movie actor based in India or USA performs an acting assignment in the UAE, the actor may be required to pay UAE VAT on his/her acting fee.
Concluding remarks
Taxation is far more intriguing and complex than otherwise perceived in general. It is important that the business owners and their finance teams should ensure that their tax positions are well tested and supported by judicial precedents.
Source:https://www.khaleejtimes.com/business/how-european-vat-decisions-could-impact-uae-businesses
06 Nov
UAE VAT law: Next 5 important changes business owners should know
A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios
Last week, we discussed the top eight changes in the VAT laws that business owners should know about. Year 2023 will see many more changes in the tax laws and the tax procedures. Considering the significant impact on businesses, we discuss the next five important changes in depth.
14-day time limit for tax credit notes and loss of input credit
A supplier is allowed to claim back, from the FTA, the excess output tax charged on a tax invoice in prescribed scenarios e.g. discounts, sales return, sales cancellation etc. The supplier needs to issue a tax credit note to the buyer/recipient and the buyer/recipient is obliged to reverse the proportionate input tax credit recovered on the original invoice.
Effective January 1, 2023, the supplier could claim back the output tax only if the tax credit note is issued within 14 days from the date when the prescribed scenario took place. Once the 14 days period is lapsed, VAT could become a cost in the value chain. The seller would lose the right to claim back excess output tax paid. The buyer would anyway be able to recover only such input credit as is proportionate to the net amount paid to the supplier.
Globally, the VAT laws often allow to issue credit notes without any VAT adjustment if the seller and buyer are not engaged in any exempt supplies.
2. Issuing tax invoices even if VAT is not charged
Since 2018, any person who receives an amount as VAT pursuant to any document issued by him was rightly obliged to pay the amount to the FTA even if it is not due. The provision has been updated to include that any person issuing a tax invoice in respect of an amount, must pay such amount to the FTA.
Due to ERP restrictions or accounting controls, companies often title their invoices as ‘tax invoices’ even if no VAT is charged on one or more items therein. The updated provision creates an ambiguity on the tax liability in such cases. A clarification from the FTA would help the business community.
3. Invoices for the import of goods
Last week, it was highlighted that the taxpayers will need to receive and retain invoices for any import of service on which reverse charge is applicable. The obligation to receive and retain invoices and import documents will equally apply for the import of goods.
It appears that some taxpayers do not verify the correctness of the import VAT payable under reverse charge that automatically appears in their VAT returns and recovers input credit of the complete amount without verification. The FTA wants a taxpayer to ensure that the credit is recovered only for the verified imports undertaken by the taxpayer.
4. Mandatory voluntary disclosure even if no additional tax payable
The tax procedures are also being amended effective 01/03/2023. Taxpayers would be required to submit a voluntary disclosure to correct an error or omission even if such error or omission does not result in any change in net tax due reported in the original VAT return.
This amendment could cover situations where a taxpayer omitted to report zero-rated supplies, exempt supplies or import of goods/services under reverse charge. Once a voluntary disclosure is submitted, penalties could also apply for the errors in the original VAT returns.
5. Reduction in the maximum amount of administrative penalties
Since 2018, the maximum amount of administrative penalties, e.g. for delay in payment of tax, was restricted to 300% of the tax amount. Effective 01/03/2023, the maximum amount of administrative penalties would be restricted to 200% of the tax amount. However, the minimum threshold of Dh500 for penalties would be removed thereby allowing the FTA to impose penalties less than Dh500 as well.
Concluding Remarks
We alerted in an earlier column about the 4Rs principles for effective tax management: (i) Ready to comply; (ii) React for advice; (iii) Reveal to optimise; and (iv) revolutionise to maximise. Business owners should take note of the upcoming VAT changes and proactively take corrective actions.
Source:https://www.khaleejtimes.com/business/uae-vat-next-5-important-changes-you-should-know
