Whether to apply zero-rating to the export of services and how to do so, has been a recurring concern amongst businesses in the UAE, especially to those providing consultancy services. Federal Law no. 8 of 2017 on Value Added Tax (“VAT Law”) and Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law no. 8 of 2017 on Value Added Tax (“Executive Regulations”) have clearly defined the services which are zero-rated and those that are exempt.
Service providers and consultants alike however often find themselves puzzled when dealing with clients situated outside the GCC, and whether to charge VAT since the services are being provided by a supplier based in the UAE, or whether to zero-rate the service, considering it as an export of service. Art. 29 of the VAT Law stipulates that the place of supply of services shall be where the supplier has their place of residence. Art. 31 of the Executive Regulations specifies conditions on zero-rating the export of services. The question then becomes which article to apply for clients based outside of the GCC.
The VAT rules on zero-rated export services are quite specific and must be read together with the place of supply rules in order to clearly understand the exact VAT treatment of the service. It is crucial however to determine the exact nature of the services being provided, and what the services are in relation to.
Below we will highlight the place of supply rules and the provisions regarding the export of services.
1. General Place of Supply Rules for Services
The general rule for place of supply of services is as follows:
PLACE OF SUPPLY
|Business to customer (non-registered customer)||Where the supplier has their place of residence|
|Business to Business||Where the recipient is based|
2. Special Cases of Place of Supply
As an exception to the general place of supply rules, there are special cases listed under Art. 30 of the VAT Law which stipulates a different place of supply for the following situations:
PLACE OF SUPPLY
|Where the recipients are VAT registered in another implementing state||Place of residence of the recipient of services|
|Where the provider of services is not resident in the UAE, and recipient is a VAT registered business in the UAE||UAE|
|Services related to goods, such as installation of goods||Place where the services are performed|
|Restaurant, hotels, catering services||Place where the services are performed|
|Real estate services||Place where the real estate is located|
|Cultural, artistic, sporting, educational or similar services||Place where the services are performed|
|Telecommunications and electronic services||Place where the services are actually used and enjoyed by the recipient|
|Transportation services||Place where the transport begins|
|Supplying a means of transport to a person not registered for VAT in the GCC||Where the goods are put at the disposal of the recipient|
3. General Rules for Export of Services
Art. 31 of the Executive Regulations stipulates that the supply of services shall be zero-rated if all of the following conditions are met:
- Services are supplied to a recipient who does not have a place of residence in an “implementing state” (GCC states) and who is outside the UAE at the time the services are performed and
- Services are not supplied directly in connection with:
- Real estate situated in the UAE or any improvement
- Moveable personal assets situated in the UAE at the time the services are performed.
In addition, services shall also be zero-rated where:
- Services are actually performed outside the implementing states or are the arranging of services that are actually performed outside the implementing states
- Supply consists of facilitation of outbound tour packages
The term “Outside the UAE” shall include:
- Short-term presence in the UAE, for a period of less than one month, OR:
- The presence is not effectively connected with the supply
4. Exceptions to Applying Zero-Rating to the Export of Services
Art. 31 of the Executive Regulations stipulates that as an exception to the general rule of zero-rating the export of services, a supply of services shall not be zero-rated if the supply is made under an agreement that is entered into whether directly or indirectly with a non-resident recipient if all the following conditions are met:
- The performance of the services is (or reasonably foreseeable that the performance of the service will be) received in the UAE by another person, including but not limited to an employee, or a director of the non-resident recipient of services; and
- It is reasonably foreseeable at the time the agreement is entered into that the recipient in the UAE will receive the services in the course of making supplies where input tax is not recoverable in full (ie; making exempt or partially exempt supplies)
Unfortunately, there is not much guidance on these two exceptions. Whether it would be reasonably foreseeable that the services will be received in the UAE by another person may not be so clear. Things to consider include whether or not the non-resident recipient has a branch in the UAE where the services may be received. However, this must be read in conjunction with whether or not that person in the UAE is in the course of making supplies where input tax is not recoverable. This ultimately narrows the pool down to certain industries providing exempt or partially exempt supplies.
5. To Zero-Rate or Not?
The VAT treatment of services being provided to recipients outside the UAE is a mystery for some service providers, as it is unclear whether to apply the general place of supply rule, or to zero-rate the service. When providing services to clients or customers situated outside the implementing states, consider the following:
- Place of supply: consider the nature of the services provided, and whether they fit into any of the special cases. Is it a service related to real estate, catering, transportation, etc.?
- If the services fall under any of the special cases, the place of supply rules are clear. Furthermore, the VAT Law and the Executive Regulations stipulate further guidance on the special cases, and when or if they may be zero-rated or exempt. For example, there are specific provisions for zero-rating the exported telecommunications services or the international transportation services for passengers and goods (Art. 31-41 Executive Regulations)
- If the services provided do not fit into any of the special cases, then the general provisions of the place of supply rules apply. However, when your client or customer is situated outside the implementing states, then you may consider whether to zero-rate the services, in accordance with Art. 31 of the Executive Regulations. If you are actually providing these services outside the GCC, for example, if you are travelling abroad to consult with your client, then you may be able to zero-rate the services. Otherwise, you may conduct the following process guide:
6. Practical Implementation
Since the nature of services is essential in determining the VAT treatment, it is important to dissect the types of services being provided and what the services are in relation to. Under such context, it then becomes very important to define “services” and “consultancy/advice” in the agreements between businesses and clients. The exact location of where the services will be provided must also be mentioned in the agreements. The more details provided the better, in order to assist the business as well as the Federal Tax Authority (FTA) in determining the place of supply.
Due to the complications involved in assessing whether or not to zero-rate the export of services, many consultancies across the UAE have been standard-rating all their services, without clearly looking into the question of zero-rating it in fear of being penalized by the FTA. While it is difficult to assess the accuracy or the appropriateness of this approach, it is always advisable to seek legal advice, or further clarity from the FTA itself if the nature of the services involves more than one component or if the situation is not as clear.