UAE VAT: Real Estate Supplies in the UAE
The real estate industry in GCC, specifically UAE, plays a vital role in the contribution of the economy. Not only is it a vital component of economical growth in the country, it supports a large number of livelihoods and provides necessary infrastructure, commercial and residential spaces which are crucial for the development of the country. Real estate is generally considered to be property consisting of land or buildings which include :
- An area of land over which rights or interests or services can be created.
- Any building, structure or engineering work permanently attached to the land
- Any fixture or equipment which makes up a permanent part of the land or is permanently attached to the building, structure or engineering work.
Under UAE VAT, a supply of real estate is treated as a supply of goods, i.e, it includes a transfer of ownership and right to use of the real estate to another person. For example :
- Sale of a residential building,
- Lease of commercial property,
- Sale of charitable building etc.
Law update – Bounced Cheques in UAE
A new Federal Degree Law regarding bounced cheques has been implemented by the cabinet. This law will come into force in the UAE in the beginning of 2022. The aim behind the new provision is better and faster ways of cheque collection while criminalization of cheque related defaults has been redefined. The below cases will be treated as criminal offences :
- Offences of cheque falsification
- Fraud use of cheques (Eg: asking the bank to not process the payment)
- Withdrawing money before the cheque date,
- Deliberately tampering the cheque to prevent encashment.
Apart from the cases mentioned above, laws for criminalization of cheque without balance in the account, now stands cancelled.
Another mechanism in place is the partial payment of the cheque. After deducting any amount that is already available with the beneficiary. The law now tries to avoid criminal charges and allows reconciliation. The defaulter can now make partial payment of cheque amount only to lapse any criminal charges. However, such Natural Persons would have to face certain penalties such as :
- Withdrawal of cheque book
- Prevention of delivery of new cheque book for a maximum period of 5 years.
- Suspension of professional or commercial activities.
Penalties for Legal Persons would include :
- Suspension of Commercial License for 6 months.
- Cancellation of license or liquidation in case of repeated offences.
The law also discusses cases of death or legal incapacity of one or more Joint Bank account holders. In such cases :
- The remaining joint account holders shall notify the bank within 10 days from the date of death or legal incapacity.
- The bank shall immediately suspend the withdrawal up to the share limit of the legally incapacitated person.
- No withdrawals can be made from his share till a successor has been designated.
The aim of the government is to facilitate litigation and speed up adjudication of cases related to cheques. The government is in the process of implementing best international practices, to make the UAE economy more competitive, and to have a better and fair judicial system.
Blockchains Impact on Business supply chain
Blockchain technology is an open distributed ledger that can record transactions of two parties securely and efficiently. When we create a document or data and share it with a group of people, this document is distributed to the implied users at the same time. It is not copied and sent to the users individually. Any changes made by the users of this data is completely transparent. It is a promising technology and promises the reduction in risks or frauds and brings in transparency within the system.
A supply chain is a network between a company and its suppliers to produce and distribute their product to the buyers. Here we will discuss briefly about how The Blockchain technology has affected the supply chain in businesses :
- Blockchain facilitates recording the quantity and transfer of products as they change hands between supply chain nodes. Tracking change orders, buy orders, shipment notifications, trade documents and receipts from the blockchain ledger.
- As blockchain allows real-time tracking of a product within the supply chain without the involvement of intermediaries, the cost of moving items can be reduced
- It eliminates or reduces the middlemen from the process thus reducing extra costs, counterfeits or frauds and decrease the chances of product duplicity.
- Blockchain helps organizations understand their supply chain and engage consumers with real, verifiable, and immutable data
- Transparency builds trust by capturing key data points, such as certifications and claims, and then provides open access to this data publicly.
- Ultimately, blockchain can increase the efficiency and transparency of supply chains and improve everything from monitoring the sourcing of raw materials to delivery.
Ultimate Beneficial Owner (UBO)
Cabinet Resolution No. (58) of 2020
This blog explains few major points in the Cabinet Resolution of Ultimate Beneficial Owner in the UAE.
Who is this law applicable to?
The new regulation passed by the cabinet is applicable to all the companies in Mainland and Free Zones, however this provision shall not apply to companies-
- which are wholly owned by the Local or Federal Government, or
- any-other companies wholly – owned by such companies, and
- the Financial Free Zones.
Registration of Legal Persons
All companies must submit the Real Beneficiary Register and the Partners & Shareholders Register to the company’s respective regulatory authorities before 27th October,2020.
How do we identify a beneficial owner? –
- Owns or has ultimate control, whether directly through a chain of ownership or control or by other means of control such as the right to appoint or dismiss the majority of its Directors, 25% or more of the shares or 25% or more of the voting rights in the Legal Person.
- The Beneficial Owner may be traced through any number of Legal Persons or arrangements of whatsoever kind.
- If two or more natural persons jointly own or control a ratio of capital in the Legal Person, all of them shall be deemed as jointly owners or controllers of such ratio.
- If no natural person is identified as an ultimate Beneficial Owner, or there is reasonable doubt that any natural person identified as an ultimate Beneficial Owner is the true Beneficial Owner in the Legal Person; then the natural person who controls the Legal Person by other means of control shall be deemed as the Beneficial Owner.
- Where no natural person is identified in accordance with point – 4 then the natural person who holds the position of a higher management official shall be deemed as the Beneficial Owner.
The Registrar should include the following information of the Real Beneficiary:
- Full name, nationality, date, and place of birth.
- Residential address or the address which the notices shall be sent on it, by virtue of this Decision.
- Number of passport or identity card, the country of issuance, date of issuance and expiry.
- Basis and date on which the person became a Beneficial Owner of the Legal Person.
- Date on which the person ceased to be a Beneficial Owner of the Legal Person.
The Register of Partners and Shareholders shall include:
1) Number of shares held by each of them along with their categories and associated voting rights.
2) Date on which such partner or shareholder acquire that capacity in the Legal Person.
3) In case of natural partners or shareholders: the full name as it appears on the identity card or the passport, nationality, address, place of birth, name and address of employer and a true copy of the valid passport or ID.
4) In case of corporate partners or shareholders: the data stated in Clause (1) of Article hereof.
- The Legal Person must update and record any change to the Register within (15) fifteen days of becoming aware of such change.
Apportionment of Input Tax – UAE VAT
This blog provides information on Input Tax Apportionment relevant to any taxable person who makes taxable supplies. In conducting business activities, a taxable person may incur expenses that are subject to VAT (Input VAT credit). This can be recovered by them, subject to certain conditions. This is to ensure that VAT will not be a cost to such a taxable person. Under Article 54(1) of the VAT Decree-Law, a business can recover input tax incurred on goods and services that are used or are intended to be used, for making taxable supplies. Accordingly, where purchases are for exempt supplies or non-business activities, then the input tax is not recoverable.
Input tax which is incurred in respect of purchases which are used partly for making supplies that allow for VAT recovery and partly for making supplies for which VAT is not recoverable is known as “Residual Input Tax”, and it must be apportioned between those supplies. Recovery will be restricted to the proportion relating to supplies that allow for VAT recovery. The percentage of VAT paid on purchases attributing to supplies for which VAT cannot be recovered needs to be calculated. Applying this percentage on the total VAT paid will help us find out the Input VAT credit we cannot claim from the FTA.
The FTA accepts, however, that the standard method of apportionment may not be appropriate in every situation. Each business is different, and the standard method of apportionment may give rise to outcomes that might not be reflective of the actual use of goods or services by the business. As a consequence, the FTA is introducing a number of alternative methods of input tax apportionment to be used where the standard method does not provide an outcome that is reflective of the actual use of the acquired goods or services.
The special input tax apportionment methods which are available to taxable persons are:
- Outputs based method;
- Transaction count method;
- Floorspace method; and
- Sectoral method.
To be eligible to apply for the special method of input tax apportionment, all of the following conditions must be met:
- The applicant has been registered for VAT for at least 6 months;
- The applicant makes both taxable supplies and exempt supplies; and
- The standard method of input tax apportionment does not give a fair and reasonable result to input tax recovery.
Submissions will be accepted where they are submitted by the applicant himself or on behalf of the applicant by either the appointed tax agent or the appointed legal representative.
Understanding Out of Scope Supplies – UAE VAT
Out of Scope Supplies are supplies that do not come under the VAT provisions of UAE. Although Out of Scope, exempt and zero-rated supplies does not increase the VAT liability of a supplier, exempt and zero-rated supplies of goods and services come within the bracket of VAT provisions of UAE.
More about Out of Scope supplies….
If an overseas supplier or a non-registered entity supplies goods to an overseas person, these supplies will be considered out-of-scope for VAT in the UAE.
For example, a local trader A sells goods to local company B. The goods are shipped directly from Company A’s factory in Singapore to Company B’s branch in London through 3rd port shipment. The goods do not pass through the UAE, so the sale of these goods is an out-of-scope supply.
There are two basic kinds of out-of-scope supply:
(i) When goods are purchased from an overseas supplier and sold to an overseas customer, without being brought into the UAE, it is considered Out-of-scope of VAT.
(ii) import to free zone and export from freezone,
(iii) purchase and sale within the free zones of goods, when place of supply is not in UAE
The following are the examples of Out of Scope supplies:
- Supplies from a non-registered entity,
- Certain government activities,
- Goods or services provided to a different department within the same business,
- Supplies not made in the course or furtherance of a business,
- Transfer of business as a going concern etc.
Note : A supplier whose business is involved only in goods that are qualified as Out of Scope, are not required to register with the FTA. In such a case, Input Tax Credit on the purchases made or expenses incurred to supply these goods has to be added to the cost of the purchase/expense as he cannot claim that amount.
VAT Treatment of Labour Accommodation in UAE – Residential versus Serviced Property
Labour accommodations across UAE are places of residence provided by employers to the labourers of their business. This accommodation could include several additional services like pest control, garbage collection, security etc. in addition to being just a housing facility. Based on the nature of these additional services we can classify labour accommodations into –
- Residential building, therefore exempt from VAT (in case of first supply zero-rated)
- Serviced accommodation considered as a standard rated supply.
Distinction of these two types of accommodation needs to be understood carefully to analyse the VAT liability correctly. The extent of these services along with accommodation helps determine the nature of supply.
A labour accommodation would be considered as a residential building if :
- If it is the principal place of residence of the employees.
- The building is fixed on the ground (as opposed to a port-a-cabin construction)
- The building has been constructed lawfully
- It is not similar to a hotel, motel, bed and breakfast facility etc or a service apartment for which services in addition to supply of accommodation is provided.
A labour accommodation would also be considered as a residential building if, along with residence, additional services which is ancillary to the main supply are available and not provided for an additional fee like cleaning of communal areas, pest control, utilities like electricity and water etc.
However the following services would create a VAT liability as the residence would qualify as a serviced accommodation.
- Telephone and internet access
- Cleaning of rooms, other than communal areas
- Laundry service
- Maintenance other than general upkeep of the property
In case the suppliers of labour accommodation are making mixed supplies (components of both residential and service) each component must be valued and a VAT treatment should be applied.
IMPORTANCE OF ACCOUNTING
Every business requires its own performance examination, data, records, analysis etc which is why accounting is an integral part of every business. Accounting gives the management information regarding the financial performance (Statement of Comprehensive Income) and financial position (Statement of Financial Position) which is integral for the stakeholder to understand the health of the business. Accounting has basically 2 methods – Single entry and double entry. Double entry is the most widely used method whereas single entry is for very small scale businessmen where accounting merely means income less expenses.
Some of the areas accounting helps a business in are as follows:
- Planning and formulating strategies in the future based on past and current performances
- It helps in coordinating various business factors such as inventory procurement
- Brings better control of resources into the business
- It a medium of communicating the state of affairs of the business, in terms of numbers
- It helps in formulating budgets
- The accountant is the position to give valuable advice
- Comparison becomes easier
- Ensuring Law of land is adequately followed
The IASB (International Accounting Standards Board) is an independent, private-sector body that develops and approves IFRS (International Financial Reporting Standards) that provides certain principles for accounting. They specify how a business should maintain its books of records to ensure consistency, transparency, and comparability. It was established to create a common accounting language.
An Auditor’s opinion is presented in the audit report. This opinion is established after the independent examination of the financial statements of the entity, after acquiring sufficient and appropriate audit evidence and conducting audit procedures. An Audit opinion can be of 3 types:
Audit evidence – Bank Confirmations
With the ever-increasing complexity of the business, the importance and relevance of audits have increased over the years. Auditing is the independent examination of the financial statements of a company irrespective of its size or legal form, profit-oriented or not, in order to express a true and fair opinion thereon.