Latest Updates on Goods Supplied in a Designated Zone, and Connected Shipping or Delivery Services
The Federal Tax Authority of UAE has recently amended the provisions of Article 51(5) and 51 (7) of the Executive Regulations to the VAT Decree-Law. Article 51(5) of the Executive Regulation determines the place of supply of goods supplied within the Designated Zone for consumption and Article 51(7) prescribes the tax treatment specifically related to supply of shipping or delivery services in respect of goods supplied from UAE Designated Zone. These amendments were made via Cabinet Decision No. 88 of 2021 which was effective from 30th October 2021. A public clarification was also released by the Authority to guide the application of said provisions.
Taxability of supplies made within Designated Zone
Article 51(1) of the Executive Regulation provides that the Designated Zones shall be treated as being outside UAE. Accordingly, the supply of goods made within a designated zone shall be treated as outside the UAE and hence outside the scope of UAE VAT. However, Article 51(6) specifically explains that the supply of services provided in the Designated Zone shall be considered as being provided in the UAE and hence taxable.
Article 51(5) of the Executive Regulation before the amendment
As per the erstwhile provisions of Article 51(5) of the ER, the goods supplied within the Designated Zones which were bought by the recipient for consumption were considered as supplied in the UAE. Hence, such supply of goods was subject to UAE VAT at the applicable rate. Here the consumption includes any utilization, application, employment, deployment, or exploitation of the goods and does not include resale of the purchased goods.
However, as per the exception provided in the erstwhile provisions of Article 51(5) if the goods are incorporated into, attached to, become part of or used in the production of another good in the same designated zone, and that such other good is not consumed, then the place of supply of such transaction would still be considered as occurred outside the UAE and hence such supply would be outside the scope of VAT.
Accordingly, before affecting the amendments to Article 51(5), where the goods supplied in a designated zone were moved from the designated zone to a place within the UAE, the VAT registered recipient would incur VAT on the purchase of the goods and then again on import of the same goods from the Designated Zone which led to double taxation.
Article 51(5) of the Executive Regulation post amendment
Therefore, the provisions of Article 51(5) are amended by the Federal Tax Authority by adding two additional exceptions. As per the amended provisions of Article 51(5), in instances where the goods sold are consumed by the recipient, the Designated Zone supplier can still consider a supply as out of scope of VAT if he has obtained and retained evidence that
- The goods were delivered to a place outside the UAE; or
- VAT was paid on the importation of those goods into the UAE mainland
The evidence shall include:
- Customs evidence proving that the goods were moved from the designated zone to a place outside the country or as the case may be the import documents issued by the local Emirate Customs Department in respect of the goods entering the UAE, and
- Supporting commercial or official evidence proving the delivery of the goods to a place outside the UAE or as the case may be the evidence that the VAT was paid on such supply in case of the importation of goods to the mainland.
Let us understand the application of amendment with a practical example:
ABC Middle East FZC, located in Jabal Ali Designated Free Zone has entered a contract with XYZ LLC, located in Dubai mainland, for the sales of office furniture for an amount of AED 50,000/-. As per the contract, the furniture will be made available for delivery at the warehouse of the supplier in DZ and the recipient will have to take the delivery of the furniture from the warehouse. The recipient intends to use the furniture in its office hence will be consumed.
Here as per the erstwhile provisions of Article 51(5) of the Executive Regulation, since the recipient intends to consume the goods, the supplier would have to charge VAT at the standard rate. At the same time, while clearing the goods to the UAE mainland, the recipient would have to pay import VAT under reverse charge provisions. Hence the VAT would have been charged twice on the same supply leading to double taxation.
As per the amended provisions of Article 51(5), if the supplier has obtained and retained commercial and official evidence that the goods imported to the mainland and VAT are paid on import, then the underlying supply will be outside the scope of VAT. Hence not taxable.
Place of supply of services place of supply of shipping or delivery services in respect of goods supplied from Designated Zone in the UAE
Before introducing an amendment to Article 55(7) of the Executive Regulation, the Place of all services provided in DZ was considered as offered in UAE and hence taxable. Now the authority has introduced an exception to the place of supply provision related to the supply of shipping/ delivery services in respect of goods sold directly from DZ. As per Article 55(6) of the Executive Regulation, the place of supply of shipping or delivery services in respect of goods supplied directly from DZ will be outside UAE if all of the following requirements are met:
The shipping or delivery service is supplied by the same supplier of the goods
- The supplier of such goods is a non-resident, and not registered for VAT in the UAE
- Sales electronic a via sold are goods The− platform; and
- The supplier of the goods is not the person owning the electronic sales platform.
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