In general practice, there are two entities, the seller who invoices (transfers the title of the goods) and sells the goods to the purchaser who is also the recipient of the goods.
In a bill-to-ship-to model, there are three entities, the seller, the purchaser, and the recipient of goods. This arrangement is often driven by various factors such as supply chain optimization, distribution efficiency, or strategic partnerships. A bill-to-ship-to model can have the following two scenarios:
In the first, the seller issues an invoice to the purchaser in the UAE and the title of the goods is transferred to the purchaser within in the UAE. At the behest of the purchaser, the seller sends the goods outside the UAE to a separate entity (recipient of goods).
Mistakenly, the supplier may qualify it as an export at 0 per cent VAT, more so where the customs documentation shows the seller as the exporter. However, the contractual relationship in this transaction is between the seller and the purchaser and, subsequently, between the purchaser and the recipient of the goods leading to two distinct supplies.
The first leg is a domestic supply from the seller to the purchaser which should be taxable at 5 per cent. Unlike a few other jurisdictions, relevance is not provided on the actual movement of the goods.
The subsequent leg is the supply of goods from the purchaser to the actual recipient (who is outside the UAE). This should qualify as an export subject to correct documentation such as the seller is acting as an agent on behalf of the purchaser to send the goods outside the UAE.
In the absence of proper documentation both supplies could be subject to 5 per cent VAT even though the goods have physically moved outside the UAE.
The second scenario captures the situation where the seller issues an invoice to a purchaser outside the UAE. However, the goods are sent to/consumed by a recipient of goods in the UAE. As per the VAT definition, exports are when goods are departing the UAE to a person whose place of establishment or fixed establishment is outside the UAE.
Although the title of the goods is transferred to an entity outside the UAE, the goods are not physically moving outside the UAE. Therefore, such transactions should be subject to 5 per cent VAT.
A classic example is the components replaced by domestic dealers for which warranty is provided by international brand. The customer approaches the dealer and gets the component replaced without paying anything.
The dealer thereafter issues an invoice to an entity outside the UAE with VAT, which will become a cost unless a refund under the business visitor scheme is explored.
Businesses often neglect the VAT impact on such transactions that require careful consideration and proactive management. By understanding the VAT implications, businesses can navigate this model successfully while mitigating risks and ensuring compliance.
