Whether it is Value Added Tax (VAT) or Corporate Tax, the logistic service industry needs to pay special attention to the scope of tax concessions.
As per global practices, international transportation is generally zero-rated under the UAE VAT laws. The international transport of passengers or goods – whether it starts or ends in the UAE or passes through its territory - is zero-rated.
An interesting ambiguity exists for international transportation originating from a place outside the UAE. If the place of supply is outside UAE, then such transportation services should be outside the scope of UAE’s VAT. The logistics industry, however, should evaluate whether such services are zero-rated or outside the scope of the VAT regime altogether.
Transport-related services mean shipment, packaging and securing cargo, preparation of customs documents, container management, loading, unloading, storing and moving of goods, or any another closely related services. These are generally provided under following two scenarios:
- Services provided along with international transportation.
- Services provided independently without international transportation.
In my experience, many logistic companies in UAE consider transport-related services as zero-rated in both scenarios. A pertinent question remains whether such services are indeed zero-rated, especially in the second scenario?
The zero-rating apparently applies on transport-related services provided with international transportation. There are no standalone zero-rating provisions exclusively for transport-related services.
When a UAE logistic company provides both international transportation and transport-related services to a customer, it can be reasonably inferred that both should be zero-rated. However, if the UAE logistics company provides only transport-related services, these may not qualify for zero-rating per se. In such cases, the services should be standard-rated, if provided by the logistics company to another UAE entity or customer.
VAT guidance on transportation services issued by Saudi Arabia could be referred to. The guidance provides an illustration wherein person ‘X’ shifts his base from Riyadh to Beirut, and contracts a freight company to move his personal belongings. ‘X’ asks the freight company to store the goods for an extended period at its warehouse before the shipment is made.
The storage charge is ancillary to - and provided with - the international transport of goods by the freight company and should be zero-rated.
On the other hand, a friend of ‘X’ also needs some storage for his goods. He uses the same freight company to store goods, but later gets a different company to courier the goods to Beirut. In this case, the storage has been provided by a different company to the supplier of the international transportation.
The storage services are neither ancillary nor provided with an international transport of goods, and should be taxed at 5 per cent.
Penalties and tax arrears
With VAT shortly completing six years since its implementation in the UAE, logistic service providers could be at a risk of tax arrears and penalties if their current VAT positions are inconsistent with the laws. On a related note, income earned by logistics service providers in free zones is eligible for the 0 per cent corporate tax rate.
However, the preferential corporate tax rate is subject to strict conditions. The logistic service industry will have to tread very carefully to remain eligible for 0 per cent corporate tax. I ardently believe that companies should comprehensively evaluate their current tax positions to avoid penalty pitfalls either now or in the future.