UAE Taxes: Your queries on VAT valuation answered!

VAT 2 — Picture used for illustrative purposes only Image Credit: Gulf News

Highlights

A weekly column where readers get their queries answered on Value Added Tax (VAT), Economic Substance Regulations (ESR), Customs and other GCC taxes. This week, queries relating to valuation of supplies by registered taxpayers are answered.

Question #1: My company (let’s call it, ‘Company X’) has purchased 10,000 T-shirts at Dh10 (excluding VAT) per piece and recovered input tax (VAT incurred on purchases) of Dh5,000 (5% X 10 X 10,000). However, to liquidate inventory, the company has offered ‘Buy One Get One Free’ Scheme at the rate of Dh12 (excluding VAT). My total output tax (VAT charged on sales) is Dh3,000 (5% X 12 X 5,000).

Do the T-shirts supplied free of cost (FOC) under the scheme amount to a ‘Deemed Supply’?

Under the ‘Buy One Get One Free’ scheme, the actual price paid by the customer is treated as the consideration for both the items, meaning the supplier is considered to have received a reduced price for the two items. The supplier is not selling one item for the full price and providing the other as free of cost (FOC).

(For VAT, ‘consideration’ means all that is received or expected to be received for the supply of goods.)

What is a 'Deemed Supply'?

Amongst other scenarios, ‘Deemed Supply’ includes a supply of goods free of cost, if input tax was recovered upon purchase of such goods. ‘Deemed Supply’ also includes use of business goods for non-business purposes and the goods owned by a VAT-registered person at the date of de-registration.

Therefore, additional T-shirts given under the scheme will not be treated as a ‘deemed supply’ that is a supply without consideration. Correct valuation helps the businesses to optimise the VAT costs.

The Federal Tax Authority (FTA) has also clarified as follows:

Discount VAT Image Credit: Federal Tax Authority

Question #2: ‘Company DG’ is a retailer of electronics goods. During the Dubai Shopping Festival (DSF), a laptop manufacturer (let’s call it, ‘Company MS’) offers a price-support (subsidy) of Dh1,000 per laptop sold by ‘Company DG’.

Accordingly, the ‘Company DG’ offers a discount of Dh1,000 on the normal selling price of Dh4,500 (excluding VAT). ‘Company DG’ sells the laptop at Dh3,500 (excluding VAT) to the customer. At the end of DSF, ‘Company DG’ recovers the price-support (subsidy) from ‘Company MS’ on the basis of total sales quantity.

On what value should ‘Company DG’ calculate VAT, Dh4,500 or Dh3,500?

For VAT, ‘consideration’ means all that is received or expected to be received for the supply of goods. The UAE VAT law does not specify that the consideration should flow from the buyer alone. As per the European and global VAT principals also, ‘consideration’ could include payments made by the buyer as well as by third parties.

Further, a discount can be reduced for calculating VAT if: (a) the customer has benefited from the reduction in price; and (b) the supplier has funded the discount.

Are all ‘price support schemes’, and the VAT implications thereon, same?

A ‘price support scheme’ is essentially aimed to support the distributors/retailers to promote the sales or liquidate inventory by providing discounts and/or subsidies. Being a transaction-based tax, the VAT implication on different ‘price support schemes’ differs based on the nature of the ‘price support’ arrangement between the contracting parties.

Though the receiving customer has benefited from the discount of Dh1,000, the supplier that is ‘Company DG’ has not funded the said discount. The discount was financed/funded by ‘Company MS’.

Accordingly, ‘Company DG’ should calculate VAT on Dh4,500 and not on Dh3,500. Errors in the calculation and payment of VAT could result in penalties up to 300 per cent of the tax amount.

Question #3: My company (let’s call it ‘Company D’) runs a restaurant. During COVID-19, there is an increase in our sales through an e-commerce delivery platform (let’s call it ‘Company Zo’). For a typical customer order of Dh250, ‘Company Zo’ collects the payment from the customer and pays only Dh200 to ‘Company D’. Should ‘Company D’ treat Dh250 or Dh200 as its sales value?

In a typical e-commerce transaction like this, ‘Company Zo’ acts as a disclosed agent of ‘Company D’ for booking customers’ orders, collecting money and delivering the goods.

Supply of goods through a disclosed agent is still considered to be a supply by the main supplier to the customer. The main supplier i.e. ‘Company D’ will be treated as supplying the goods for Dh250. ‘Company D’ should issue a tax invoice accordingly.

Who is a ‘Disclosed Agent’ and ‘Undisclosed Agent’?

A ‘disclosed agent’ is an agent which acts on behalf and in the name of the main supplier. An ‘undisclosed agent’ is an agent acting in its own name, where the customer has no knowledge, and cannot be reasonably expected to have knowledge that the agent is acting on behalf of the main supplier.

Dh50 retained by ‘Company Zo’ represents the delivery fee/commission for a separate supply of services from ‘Company Zo’ to ‘Company D’. ‘Company Zo’ should issue a tax invoice for Dh50 to ‘Company D’. Errors in the calculation and payment of VAT could result in penalties up to 300 per cent of the tax amount.

Question #4: ‘Company F’ is in the business of supplying manpower to its clients. The manpower is employed on the visa of the same company, who charges a fixed service fee (let’s say, Dh500) per person from its clients. ‘Company F’ also recovers the salary costs of the manpower (let’s say, Dh5,000) from the clients. Is it correct for ‘Company F’ to charge VAT only on Dh500 which represents the actual value of its services?

‘Company F’ should charge VAT on Dh5,500 and not just on Dh500. For VAT, ‘consideration’ means all that is received or expected to be received for the supply of goods.

What is the difference between ‘reimbursement’ and ‘disbursement’?

The term “reimbursement” refers to a part of consideration for the supply and is, therefore, subject to VAT. The term “disbursement” refers to the recovery of payments made by a supplier on behalf of another person such as a customer. While a disbursement of expenses is out of scope of VAT, reimbursement of expenses falls within the scope of VAT.

Even though Dh5,000 represents the cost of manpower incurred only because of the clients, the costs were incurred by ‘Company F’ as the main seller (Principal). This is essentially because the manpower is employed on Company F’s visa. Accordingly, the recovery of the salary costs of Dh5,000 will be treated as a ‘reimbursement’ and not a ‘disbursement’.

Reimbursement of expenses are taxable under VAT in addition to the value of services provided to the clients/customers. Errors in the calculation and payment of VAT could result in penalties up to 300 per cent of the tax amount.

- Selected queries on a particular topic are being answered by a team from AskPankaj Tax Consultants. You can send your tax queries on YourMoney@gulfnews.com. The answers are for general guidance and does not constitute as legal advice.