Impact of VAT on E-commerce Transactions in UAE

E-commerce has been sustained as one of the favourable turnouts from advancement in technology all over the world. Apparently, the comfort and convenience offered by many vibrant virtual markets have highly changed the expectations and choices of the customers. Also as it can be seen, the recent pandemic situation has brought in a gradual transition of e-commerce as our preferred platform over the tangible shopping experience. There has been always substantial upkeep from the government of UAE to encourage the development of e-commerce here. Retailers and vendors in the country have been very keen and persistent to explore the business possibilities that e-commerce can offer.

If you are preparing to glean the prospects of e-commerce in UAE, it is extremely important for you to be aware of the VAT related aspects in this regard to ensure compliance with general and specific requirements stipulated by the VAT regulation in the region. Also if you have already taken on an e-commerce venture, you should know the various perspectives to be considered for the implementation of VAT in UAE and to remain prepared for tax audits.

VAT will be applicable to e-commerce transactions in UAE. The basic VAT rules over tax rates, registration, VAT filings and exemptions remain the same when compared to traditional sale and purchase deals which happen in a physical location, there are some explicit guidelines on VAT accounting treatments for e-commerce from FTA, some of which are listed below.

What is E-commerce

E-commerce refers to any transaction that involves the supply of goods or services through digital media such as internet websites, mobile applications or any other electronic network. 

Supply of Goods or Services

For VAT to be applicable to any e-commerce transaction, there shall be a taxable supply of goods or services. It is interesting to know that we inadvertently avail a lot of e-commerce services in our daily routines. Whether it be reading an online magazine, live streaming of a movie over the internet, use of distance learning applications, there are many such instances where these services fall under the regime of e-commerce.

Place of Supply

In the case of sale of goods, place of supply is determined by the location of goods when supply happens and for the supply of services, the same is decided based on the location where the use and enjoyment of the service occur.

Status of Supplier and Recipient

Residency status of supplier and registration status of the recipient also impact the VAT accounting treatments for any e-commerce transaction. 

Agency Arrangements

A lot of ecommerce transactions, especially the ones we easily refer to as ‘online shopping’ happen through the intermediary portals. Since these trades are executed at multiple levels as there is initially a supply from supplier to intermediary and then from the intermediary to the ultimate customers, the VAT accounting treatments differ based on the arrangements between the supplier, the intermediary and recipient of the supply.

VAT Accounting Treatments for E-commerce Transactions in the UAE

These can be summarized based on the nature of supply, whether it is a supply of service or is a supply of goods.

Scenario 1: Supply of service

Given below are few instances to understand the impact of above-discussed factors in determining the VAT accounting treatment in e-commerce transactions where supply is a service:

• When the place of supply is inside UAE and the supplier is UAE resident, VAT will be applicable and shall be accounted for by the supplier even if the recipient is registered or not.
• When the place of supply is inside UAE and supplier is outside UAE, VAT will be applicable and shall be accounted for by the supplier if the recipient is not registered.
• When the place of supply is inside UAE and supplier is outside UAE, VAT will be applicable and shall be accounted for by the recipient if the recipient is registered. This is where the reverse charge mechanism gets triggered.
• In case of a supply of services, when a place of supply is outside UAE, then UAE VAT will not be applicable, irrespective of the status of supplier or recipient.

Also read, Impact of VAT on UAE Free Zone Companies in 2020

Tax rate by default is 5% unless the taxable supply is specifically zero-rated in UAE VAT law.

Scenario 2: Supply of goods within the UAE (delivered from UAE to UAE)

Given below are few instances to understand the impact of above-discussed factors in determining the VAT accounting treatment in e-commerce transactions for supply goods within UAE:

• When a supplier is UAE resident and taxable person, VAT will be applicable @ 5% and shall be accounted for by the supplier irrespective of residency or registration status of the recipient.
• When a supplier is not a UAE resident and taxable person, VAT will be applicable @ 5% and shall be accounted for by the supplier if residency status of recipient is outside UAE irrespective of registration status of the recipient.
• When a supplier is not a UAE resident and taxable person, VAT will be applicable @ 5% and shall be accounted for by the recipient if the recipient is a resident and a registered taxable person. This is where the reverse charge mechanisms get triggered.
• When a supplier is not a UAE resident and taxable person, VAT will be applicable @ 5% and shall be accounted for by the supplier if the recipient is not a registered taxable person irrespective of the residency status of the recipient.

Also read, VAT Implications for the Healthcare Sector in UAE

Tax rate by default is 5% unless the taxable supply is specifically zero-rated in UAE VAT law.

Scenario 3: Supply of goods from UAE to outside UAE (Export)

Given below are few instances to understand the impact of above-discussed factors in determining the VAT accounting treatment in e-commerce transactions for supply goods from UAE to outside UAE (Export):

• When a supplier is UAE resident and taxable person, VAT will be applicable @ 0% and shall be accounted for by the supplier irrespective of residency or registration status of the recipient.
• When a supplier is not a UAE resident and taxable person, VAT will be applicable @ 0% and shall be accounted for by the supplier if residency status of recipient is outside UAE irrespective of registration status of the recipient.
• When a supplier is not a UAE resident and taxable person, VAT will be applicable @ 0% and shall be accounted for by the recipient if the recipient is a resident and a registered taxable person. This is where the reverse charge mechanisms get triggered.
• When a supplier is not a UAE resident and taxable person, VAT will be applicable @ 0% and shall be accounted for by the supplier if the recipient is not a registered taxable person irrespective of the residency status of the recipient.

You may also read, The Effect of UAE VAT Law in Real Estate Sector

Tax rate for exports are zero-rated if export conditions are met, else tax rate shall be 5%.

Scenario 4: Supply of goods from outside UAE to UAE (Import)

In the cases of import of goods, VAT on Import will be applicable. The responsibility to account for VAT on import goes to the importer. Importer is defined as the person listed as the ‘importer’ in the customs clearance documents.

Scenario 5: Supply of goods completely outside the UAE (delivered from and to outside UAE)

In such cases, UAE VAT will not be applicable, irrespective of the status of supplier or recipient.

For the businesses, to conclude on their VAT accounting, all the above scenarios shall again be further analyzed to check if any overriding specific exemption or zero-rated rule can be applied for each particular situation as exclusively listed down in the regulation.

CDA provides VAT services for your e-commerce ventures

With a dedicated team for VAT consultancy, CDA is well equipped to offer any assistance in VAT processes including VAT registration, implementation of VAT, VAT filings, VAT accounting, VAT deregistration and other VAT services relating to the Value-added tax in UAE. We extend our commitment and industry-specific experience to support your business as tax advisors. 

Feel free to contact us to attend a one-hour free consultation with our experts to clarify your queries and clear up any VAT related concerns!