With the entry of more players, competition in the e-commerce industry in the UAE is becoming more intense, and VAT-related challenges are becoming more critical. Aware of the need to address VAT issues in the e-commerce industry, the Federal Tax Authority (FTA) has come up with a solution in the form of VAT guidance and organized a workshop for accredited tax agents in Dubai, UAE.
Determining VAT on e-commerce sales is challenging due to the unique nature of the transaction. We’ve gleaned insights from VAT clarification to guide you when determining VAT for e-commerce transactions in the UAE.
What is it like to have an e-commerce business in the UAE?
E-commerce, also known as “digital economy”, generally refers to the provision of goods and Compliance Services in UAE over the Internet or similar electronic networks, which are obtained electronically, such as from computers, telephones, websites, or applications programs.
The VAT treatment of online delivery of goods and services includes:
- Provide domain name, website hosting, software, and equipment remote maintenance;
- Supply and update software.
- Provide images, text, and information provided electronically, such as images, screensavers, e-books, and other digital documents and files;
- Music, movies, games, and online magazines on demand.
- the provision of advertising space on the site and any rights associated with such advertising;
- Political, cultural, artistic, sports, scientific, educational, or entertainment broadcasts, including event broadcasts;
- Live broadcast over the Internet.
- Introduction to distance education.
- Services of the same type with similar purposes and functions.
For a supply to be subject to the special VAT rules for electronic services, the supply must meet two conditions:
- The related service must be one of the services mentioned in the above list.
- Services shall be provided automatically* via the Internet, networks, or marketplaces.
There are two main conditions set out in the E-Commerce VAT Guidelines about the place of supply of electronic services:
- The place of supply of the electronic service shall be in the United Arab Emirates, provided that the supply is used and enjoyed in that country;
- Outside the United Arab Emirates, to the extent that the supply is used and enjoyed * outside the country.
VAT rates in e-commerce
The default VAT rate for the supply of taxable services in the UAE is 5%. However, the supply may be at zero interest if any zero interest rate situations fall under section 45 of the Act. Also, UAE VAT will not apply when the place of supply is abroad.
According to Section 18 of the Act, non-residents must register for tax and provide goods or services, and there is no threshold limit applicable to non-residents. This means that if a customer in the UAE buys a product/service from an online platform (social media, gaming, education, e-commerce, music, fashion, art or any other service), the non-resident should do so within the stipulated time and in compliance with local tax laws.
Rules To Follow VAT On E-Commerce In The UAE
VAT on online purchases
VAT is usually 5% on any goods or services purchased online. However, the critical condition here is that the place of supply must be in the UAE. Standard VAT rates also apply to most goods sold within the UAE, except pharmaceuticals sold through the website. In addition, imported goods are also subject to VAT in the UAE.
Value-added tax on the export of goods in the field of e-commerce
According to Article 30 of the Administrative Regulations, goods exported from the UAE under e-commerce can enjoy a zero VAT rate. However, a zero rating is subject to certain conditions. VAT treatment varies depending on which party in the contract is responsible for delivering the goods. Consider the following requirements to check whether your exports are eligible for a zero rating:
The supply may be zero-rated if the supplier is liable for arranging the transportation of the sold goods from the UAE or appoints an agent to carry out the transportation on its behalf (direct export).
If a customer from an overseas country arranges to collect goods from a supplier in the UAE and then exports the goods, the supply of goods is zero-rated. Zero rates also qualify if the customer has appointed an agent to do so on his behalf (indirect export).
In addition, exports to GCC countries are eligible for zero-rated VAT. However, businesses must obtain and retain official and commercial evidence of export. Official evidence can be a certificate issued by the relevant customs department certifying the export of goods from the UAE. Acceptable commercial evidence includes air waybill, bill of lading, consignment note, and proof of shipment.
VAT Accounting in the UAE
The FTA considers that the calculation of VAT in the UAE is the responsibility of the taxable supplier. However, in some cases, the VAT accounting responsibility may be transferred to the recipient under the “reverse charge mechanism”. The reverse charge mechanism applies to the following situations:
- If the distributors do not have a residence in the UAE.
- The supplier does not charge VAT on supplies (the supplier is not VAT registered in the UAE)
- The recipient is a taxable entity domiciled in the UAE.
- If the reverse charge mechanism applies, the recipient must pay VAT to the FTA at the applicable VAT rate.
- The agreed price of the goods will be considered VAT exclusive, which means that the recipient shall charge VAT on top of the agreed price.
Consult the best VAT consultants in Dubai for practical advice on applying reverse charge mechanisms in e-commerce supplies.
Electronic platforms as principal or agent
The tax treatment of goods and services conducted through an electronic platform, website or marketplace depends on whether the electronic marketplace acts as principal or agent. Such online marketplaces are considered suppliers of goods or services responsible for calculating VAT if the electronic platform operates as a principal.
If the online marketplace acts as an agent on behalf of another supplier, the tax treatment depends entirely on whether the online market serves as a disclosed or undisclosed agent. For further guidance, please seek advice from a registered tax agent in Dubai, UAE.
VAT rules of electronic services
The FTA defines e-commerce services as services delivered automatically over the Internet, electronic networks, or electronic marketplaces. These services include
- Domain Name and Web Hosting Services
- Software and Software Updates
- Picture, text, screen saver, e-book
- Music, Movies, and Games on Demand
- online magazine supply
- provision of advertising space on the website and any rights related to it
- Political, cultural, artistic, sporting, scientific, educational, or entertainment broadcasting
- Live over the Internet
Distance learning through online services
A service does not meet the definition of an electronic service if it is not any of the services listed in the FTA. The provision of services where the parties use the Internet solely for mutual communication or to facilitate bookings will not be termed electronic services for VAT purposes. In this regard, providing services such as legal or financial advice, transportation services, or hotel accommodations does not constitute an electronic service. Taxpayers get in-depth knowledge of e-commerce services from the best tax agency in Dubai, UAE.
VAT on e-commerce sales
Physical goods and electronic services such as video games, software, electronic subscriptions, mobile phone applications and electronic content are subject to specific rules governing how VAT is applied.
The sale and purchase of goods or services within the UAE via e-commerce are considered domestic, and the standard 5% VAT rate applies. The standard 5% VAT rate applies to purchases of goods or services from outside the UAE.
Suppose the goods or services recipient is in the UAE and registered for VAT (as a taxable person). Then, in this case, the recipient of the goods or services shall calculate the standard 5% VAT using the reverse mechanism, the taxable receipt. The supplier calculates the VAT payable, not the non-resident supplier.
If the recipient is the final consumer, it means not registered for VAT with the tax authorities; the standard 5% VAT is then collected and paid by the agency or logistics company to the authorities. The export/import agent will be responsible for UAE VAT compliance on all substances on behalf of unregistered individuals.
VAT Services in the United Arab Emirates
With the introduction of VAT in the UAE, there are a few factors for businesses to consider when it comes to tax advice. At VVAS, our team of experts can help you with company formation, registration, and consultation. For any UAE company VAT inquiries, feel free to contact us.
Need VAT advice? Hire the Best Compliance Services in UAE
The state of the UAE e-commerce industry has surpassed expectations with unprecedented growth following the boom sparked by the pandemic. As with any industry, e-commerce players must also comply with their VAT obligations. Since the Internet is a marketplace, calculating VAT rates and determining tax liability can seem challenging.
However, tax agents in Dubai, such as VVAS, assist taxpayers in fulfilling their tax obligations under the VAT regulations. VVAS provides advice on VAT registration, VAT declarations, VAT deregistration, tax invoicing, and applying for VAT clarification. VVAS’s VAT services in Dubai take taxpayers to the next level by building a solid reputation with the government and FTAs.
In conclusion, foreign eCommerce service providers who provide services to end users who are not VAT registered in the UAE may need to be VAT registered in the UAE. Taxpayers should seek advice from tax compliance professionals in the field. Question? Contact us now for further clarification.