06 Nov
Does serving a notice period come under VAT’s coverage?
An employment contract between an employee and employer is outside the scope of VAT. This is a universally recognized principle and always mentioned in the VAT legislation.
Although the UAE VAT Law does not specifically define employment contracts as outside the scope of VAT, the Taxable Person Guide clarifies this. Under the UAE VAT Law, a supply must be made by a person conducting business – i.e., any regular or ongoing activity conducted with a degree of independence and continuity. Due to the requirement that a business must be an independent activity, the activities of employees are not treated as being in the course of business.
As such, employees are not liable to charge VAT on their remuneration or salary. Having said that, there are certain transactions between the employee and employer that occur outside the employment contract.
Liable for recovery
An organisation may recover from an employee: visa charges for dependents, personal mobile expenses, insurance of employee dependents, vehicle usage charges, etc. We will discuss the VAT treatment of recoveries made by organisations in lieu of employees not serving their full notice period.
When an employee resigns, in the normal course of business, the employee must serve a notice period, as may be mutually agreed in the employment contract. During the notice period, he or she should be present on all the working days.
In certain situations, the employee may not want to serve all or part of the notice period. In which case, either the employer waives off the requirement of servicing the entire notice period, or the employee may be asked to pay an amount equivalent to the salary of the unserved notice period. The question that arises is whether the money received by the organisation for the unserved notice period constitutes consideration for a ‘supply’?
Compensation
Article 119 of the Employment Law provides that if the employer or the employee has failed to serve notice to the other party for termination of the employment contract, the party obliged to serve the notice period shall pay to the other party compensation known as ‘compensation in lieu of notice’ equal to the pay for the unserved notice period. Such compensation is payable even if such failure to notice or such reduction of the period does not cause damage to the other party.
From a VAT perspective, one may be tempted to refer to the VAT Public Clarification on VAT Treatment of Compensation-type payments issued by the Federal Tax Authority (FTA). The Guide clarifies that:
- A fine or penalty may be imposed for contravening the terms of an agreement.
- Where a person has caused damage to another person, the person causing damage may be required to make a payment to compensate for such damage or loss.
The Guide provides that fines and penalties are not a consideration for any supply, and therefore outside the scope of VAT. Also, where the payment is compensation for breaching pre-existing terms of a contract, it is unlikely to be a consideration for a supply and therefore outside VAT’s scope.
If one were to closely read the provisions of UAE Employment Law, the compensation is payable even if such failure to notice or such reduction of the period does not cause damage to the other party. Therefore, one could argue that compensation in lieu of an unserved notice period is not a fine or payment in lieu of damages. It is to be seen if the FTA will refer to the provisions of employment laws to evaluate whether a payment is a fine or a payment in lieu of damages.
One may note that the UAE VAT Regulations define ‘Supply of Services’ to include cessation or surrender of a right. In the case of notice pay recovery, one may argue that the organisation is giving up its right to an employee serving the notice period, in lieu of consideration, and hence the same would be taxable at 5 per cent.
Not swayed by descriptions
In considering whether a payment is a consideration for a supply or is in the nature of penalty, it is important to ignore the labels or titles given to a payment. A description of a receipt as ‘penalty’ or ‘compensation in lieu of damages’ will not prevent the nature of the payment from being considered for a supply.
The VAT treatment of recovery of notice pay must be considered in conjunction with the rights of the employer, employee, employment contract and the local labour laws. There may not be a universal answer, and each situation must be evaluated on its own facts.
Source:https://gulfnews.com/business/analysis/does-serving-a-notice-period-come-under-vats-coverage-1.1636013253767
18 Oct
UAE’s sole establishments and family business owners have a VAT status to tackle
A number of family business owners in the UAE have multiple business interests out of which some are structured under a holding company format while others could be sole proprietorships/establishments of the family members.
Such non-company establishments are kept when the family members have businesses that are independent of the overall family business, leading to alienation of their personal interests. We look at two issues that have emerged for sole establishments in the last three plus years since VAT was introduced.
First, the separate VAT registration granted to independent sole establishments and, second, the issue of VAT grouping of such sole establishments with the llc entities of family business. At the time of the introduction of VAT, the UAE Federal Tax Authority allowed a large number of individual owners to VAT register each of their sole establishments as separate entities and given separate Tax Registration Numbers (TRNs).
Do way with multiple TRNs
The FTA later clarified that sole establishments are not independent of their owners and, consequently, there shouldn’t be separate TRNs issued to them. As part of one ownership, they are supposed to be given one TRN.
The FTA clearly mentioned that where separate TRNs have been issued to different sole establishments, the owner need not do anything on his own. Rather, the FTA will itself pick up such cases and instruct the owner to carry out the needed amendments.
It has been observed that the FTA advises owners having multiple sole establishments to retain a single TRN for all entities and de-register the rest. This is specifically seen in VAT registration amendment applications where the FTA has sought a declaration from the owner to confirm if he or she has other sole establishments.
A cumbersome process
Two points emerge from this issue. First, should owners wait for the FTA to come back and instruct them to make amendments to their VAT registrations, specifically when they know that such request would anyways come when any application for TRN amendment is filed with the FTA?
The second – and bigger – issue that would arise from getting one TRN for all the entities and de-register the rest is the hassle of informing vendors and customers of the new TRN (for all sole establishments), making amendments in the banking channels, potential non-recovery of VAT on invoices the vendors may issue using the old TRN. An elaborate way would have to be entered into to ensure no disruption of work.
The FTA in 2018 had also allowed the sole establishments to become part of the VAT group. Technically – and as clarified by the FTA in the VAT Guide – individual owners are natural persons and not legal persons, and natural persons are not allowed to be VAT grouped.
Legal vs. natural
So effectively, some of the sole establishments that are owned by individuals – and therefore to be treated as natural persons – have inadvertently become a part of the VAT group with other llc entities. It is possible that some of the sole establishments that are part of the VAT group could be non-functional and may not have any business activity.
In that case, there is a strong probability of the FTA imposing a penalty for continuing to have a non-functional entity registered for VAT. The imminent need for family business groups is to assess if any sole establishments are still part of the VAT group and, if yes, de-register and register it as an independent sole establishment.
While registering it as a sole establishment, it is important to ensure that the owner does not have any other sole establishment that could already be VAT registered. Similarly, the possibility of converting the sole establishments into llcs could also be explored to avoid having all the sole establishments under one TRN.
Source:https://gulfnews.com/business/markets/uaes-sole-establishments-and-family-business-owners-have-a-vat-status-to-tackle-1.82941024
12 Oct
Benefit from VAT refund, FTA tells Expo participants
Dubai – Participants can apply for a refund for expenses in direct connection with Expo 2020.
Official participants in Expo 2020 can claim Value Added Tax (VAT) refund for taxes paid on goods and services connected with Expo 2020 Dubai, the Federal Tax Authority (FTA) said on Monday.
In a statement, the FTA said it has facilitated speedy processing of eligible Expo participants’ requests for registration, tax refunds, and prompt response to their inquiries. It has also enabled a direct communication channel with Expo 2020 Dubai to provide full support with advanced tax solutions. The FTA also offers telephone service designed to ease procedures and give priority to the registration of international participants.
Participants can apply for a refund for expenses in direct connection with Expo 2020, for example VAT incurred on the construction, installation, alteration, dismantlement of the exhibition space for the Expo 2020 or VAT incurred on goods and services for the operation, presentation and events within the Expo site as per a Cabinet decision.
“The FTA has been cooperating with all relevant authorities to prepare for a smooth and efficient implementation of the procedures for the refund of Value Added Tax paid on goods and services connected with Expo 2020 Dubai,” explained Khalid Ali Al Bustani, director-general of the FTA.
“The FTA has established a daily direct communication channel with the Expo 2020 Bureau of International Participants to enhance coordination and ensure fast processing of applications from participants in Expo 2020 Dubai, whether in regard to VAT registration requests by the participating countries, or processing of refund requests, as well as promptly responding to their enquiries,” said Al Bustani.
The FTA’s telephone service to facilitate and expedite VAT registration procedures for international participants offers clear instructions and details about the registration requirements, delivered by the FTA Registration Department. Priority is given to VAT registration requests from international Expo participants.
Al Bustani clarified that the FTA had already completed VAT registration processes for several participating countries, and the FTA processes the requests submitted through the electronic system of the VAT refund scheme for goods and services connected with Expo 2020.
“The FTA also processes special VAT refund requests, submitted through the integrated platform office, dedicated to receiving and processing requests by participants not registered for VAT. The integrated platform office will appoint a tax agent to review the special refund requests and forward them to the FTA on expo2020@tax.gov.ae to be reviewed by FTA experts,” Al Bustani said.
“The FTA is applying the mechanism for the refund of VAT paid on goods and services connected with Expo 2020 Dubai through transparent, accurate and facilitated procedures according to best practices,” he said.
“This comes as part of its contribution to the intensive efforts of all relevant bodies in the UAE to ensure the success of this international event, which began on the 1st of October 2021 with the participation of 192 countries. Expo 2020 Dubai is an important international platform for the UAE as it brings the world together for six months and embodies its vision of international cooperation,” said Al Bustani.
The FTA has issued a comprehensive guide for Expo participants, which addresses five categories of taxes that can be refunded. The first category is VAT incurred by official participants on goods and services in direct connection with the construction, installation, alteration, decoration, and dismantlement of their exhibition space. The second category is the VAT incurred by the official participants on goods and services in direct connection with the works and activities of organizing and operating the official participant’s exhibition space, as well as any presentations and events taking place within the Expo 2020 site.
Source:https://www.khaleejtimes.com/business/benefit-from-vat-refund-fta-tells-expo-participants
07 May
Covid impact: UAE reduces penalties on VAT, excise tax
The new provisions will be applicable 60 days as from April 28, 2021.
The UAE has reduced old penalties on value-added tax (VAT) and excise tax in order to help companies and individuals better cope with the impact of the Covid-19 pandemic. According to newly-released Cabinet Decision No. 49 of 2021, tax payers who currently have penalties pending can see those reduced to 30 per cent, provided they settle them before December 31, 2021.
Going forward, late payment penalties will be reduced to four per cent per month, a substantial reduction from one per cent per day while an overall cap stays at 300 per cent.
The new provisions will be applicable 60 days as from April 28, 2021.
Thomas Vanhee, founding partner of Aurifer Middle East, said technical provisions now determine that late payment penalties should only be calculated as from 20 weekdays after submitting the voluntary disclosure.
He said the Cabinet decision constitutes a very important reduction in the penalties and provides an excellent opportunity for tax payers to get a fresh start.
Anurag Chaturvedi, managing director of Chartered House, said this is a best relief provided by the government to the pandemic-hit businesses in the UAE.
“A number of businesses in the UAE succumbed to administrative penalties on account of delay in submission of the due tax. The new regime of administrative penalties are at par with global standards. The most relieving change is maximum penalty of four per cent of unpaid tax per month compared to one per cent of unpaid tax for each day of delay as per the old provisions,” said Chaturvedi.
Link:https://www.khaleejtimes.com/news/government/covid-impact-uae-reduces-penalties-on-vat-excise-tax
