October 30, 2023 marked the day when the UAE electronics sector switched to ‘Reverse Charge Mechanism’ on VAT for B2B supplies of devices intended for resale or further manufacture. These include smart phones, computer devices, parts accessories.
The UAE ministerial decision specifying the criteria to be followed in the determination of parts and pieces of electronic devices was also released recently. Thus, pieces and parts meeting any of the following criteria will be eligible for B2B RCM facility:
- Those used for the manufacture of the electronic devices.
- Those necessary for the operation of the electronic devices, such as chargers, power cords, battery packs, etc.
- Those pieces and parts that are a replacement for the above.
However, those that enhance the functioning of electronic devices, but are not necessary for their operations or activate their features will not be covered under the Reverse Charge Mechanism. It will also not apply on SIM cards or other external smart cards of the same nature or with the same purpose.
Mandatory, not optional
The industry needs to realise the Reverse Charge Mechanism on B2B supplies for further resale/manufacture does not appear to be optional. As per FTA’s clarification, if a VAT-registered buyer did not declare his intent of use of electronic devices, as required by the cabinet decision, the input VAT incurred on the supply is not recoverable.
VAT-registered buyers intending to resell/further manufacture should therefore ensure the VAT is not charged on supplies of electronic devices to them. Such a mandate requires that the goods be correctly classified. If a supplier charges VAT on an item otherwise classifiable as an electronic device to a reseller/manufacturer, the buyer is at a risk of losing the VAT credit.
Also, if the B2B Reverse Charge Mechanism is applied on an item that is not an electronic device, the supplier may face tax arrears and penalties.
The criteria for pieces and parts as set out in the ministerial decision as well as the scope of computer devices set out in the public clarification are quite helpful.
Items such as earphones, flash-drives, external storage devices, headphones, digital pencils, printers, webcams, protective covers etc. are unlikely to be treated as pieces and parts as they only enhance the enjoyment of using the devices. Items such as memory cards, monitors, motherboards, etc., are likely to be classified as they are generally necessary for the operation of computer devices.
Certain other items would require careful evaluation. Is a Wi-Fi dongle necessary for the operation of a computer device or activate its features? Could Open Pluggable Specification (OPS) module for adding computing capability to flat panel displays be treated as a computer device in itself? If a traditional keyboard for a computer is a P&P, would a keypad-cum-protective cover for a tablet also be such?
Could smart watches be classified as smartphones?
The industry should run through their product portfolio to ensure correct classifications. Any error could result in either the reseller/buyer losing the VAT credit or the seller risking tax arrears.
All supplies of electronic devices with a date of supply of October 30, 2023 or later, shall be subject to the VAT treatment and compliance requirements as clarified in the public clarification.
The industry needs to comply with the transitional provisions. Be it a partial advance payment received before Oct 30, 2023 but deliveries made, or invoices issued, thereafter, compliance with the date of supply rules should be comprehensive.
So also the compliance with written declarations and TRN verification, which are linked to the date of supply and the intent of the supply. The industry will benefit from a clarification whether that compliance is required periodically or for each supply.
The switch would require evaluation of multiple aspects of taxation. The industry and business owners should check if they are asking the right questions.