Dubai: The UAE Tax Authority has issued a fresh warning to consumers, and cautioned residents to be vigilant of shops that claim to offer VAT-free special discounts.
In an advisory published recently by the Federal Tax Authority (FTA), it addressed the issue of numerous retailers that offer “VAT-free special offers” in its promotions as a means to entice prospective buyers to purchase goods or services within a certain period of time.
The phrase “VAT-free special offers” is misleading and contrary to the VAT legislation, according to the FTA, since the goods or services are not actually supplied free of VAT.
“This public announcement clarifies the VAT treatment of promotions where the seller absorbs VAT on promotional goods. For purposes of this clarification, the term ‘promotional goods’ refers to goods that are sold as part of a special promotion,” said the FTA.
“VAT registered businesses should not advertise taxable goods or services as free of VAT or sell such goods or services without accounting for 5% VAT, except where the supply qualifies for zero-rating,” it pointed out.
So while promotional campaign are misleading if they state that the supply of promotional goods is VAT-free, the tax authority stressed that retailers may make a commercial decision to offer a discount equivalent to the amount of VAT. As a consequence, VAT is always payable on taxable supplies and the seller is not entitled to choose whether or not VAT should be imposed on a supply.
Retailers may take a commercial decision to absorb VAT in order to make the price of promotional goods more attractive to potential buyers, which are commonly referred to as “VAT-on-us” promotions. In these instances, the retailer is regarded as granting a discount to its customer which is equal to the VAT amount imposed on the promotional goods or services.
In its advisory, the FTA said: “Even though a business may expressly advertise prices as 'VAT-free' in respect of retail sales as part of business / marketing promotion labelling, for VAT purposes, the price charged to the customer shall include VAT. Consequently, the onus will be on the business to determine the correct amount of VAT payable. Further, businesses should comply with the rules in respect of publishing prices.”
The amount paid by the customer for the promotional good will still include the VAT, regardless of whether the promotion is advertised as VAT-free or not.
For example, if during the promotional period a vehicle is advertised for Dh100,000 VAT-free, the retailer will be required to account for Dh4,761.90 VAT (VAT = 100,000 / 21= 4,761.90) in its tax return, regardless of the wording used in the promotional campaign.