How New Amendment on VAT Executive Regulations Impact Exported Services?

The UAE’s latest amendment on the VAT Executive Regulations is perceived to be having an impact on the zero-rating of exported services. The amendment has gained considerable attention as it happens to be the first amendment to the VAT legislation nearly two and a half years after the introduction of VAT in the UAE.  A considerable change has been made to Article 31(2) of the VAT Executive Regulations which is about how a person qualifies for being considered as ‘outside the state’.

The new amendment has turned out to be restricting the scope of zero-rated exported services. As per the new amendment, the VAT-registered service providers now need to consider whether their foreign client has a fixed establishment in the UAE that is connected to the service and also whether the client has any presence in the UAE that is connected to the supply of the service and the duration of the presence. Earlier either one of these conditions has to be satisfied for zero-rating the export of services but now the VAT-registered services in the UAE should mandatorily consider both the conditions. Since the new amendment is likely to increase the administrative burden on the service providers, the businesses are advised to seek the assistance of the best VAT consultants in Dubai, UAE.

The Version of the Clause (2) of Article 31 Before Amendment

The original version of Clause (2) of Article 31 states: “For the purpose of paragraph (a) of Clause (1) of this Article, a person shall be considered as being ‘outside the State’ if they only have a short-term presence in the State of less than a month, or the only presence they have in the State is not effectively connected with the supply”.

Amended Version of the Clause (2) of Article 31

The fresh amendment states that,

“For the purpose of paragraph (a) of Clause 1 of this Article, a person shall be considered as being ‘outside the State’ if they only have a short-term presence in the State of less than a month and the presence is not effectively connected with the supply”.

The new amendment effectively combines the two conditions in the original version and replaces the ‘Or’ with an ‘and’. The conditions “a short-term presence in the State of less than one month” and the presence are not effectively connected with the supply” are combined. The new amendment has therefore restricted the scope of the zero-rating export of services and now both the conditions have to be met to decide if the person has been outside the UAE during the time when the services have been supplied.

Therefore, zero-rating the export of services shall not be applied if the foreign recipient of the services:

•     1, stays in the UAE for a month or more; or
•     2. stays in the UAE for less than a month but his presence in the UAE is connected with the supply

Impact of the New Amendment on the UAE Businesses

As per the new amendments, a service provider who has registered for VAT in the UAE will be forced to abstain from zero-rating the services to a foreign client who attends only one meeting in the UAE, which is connected to the services he received.

Imagine the client is in the UAE for 30 days vacationing and if he overstays here, the service provider has to consider him as ‘established in the UAE’. In this situation, the foreign client has to evaluate the cost of an additional 5% along with the cost of the service he receives.

The new amendment to the UAE VAT Executive Regulations through the Cabinet Decision No 46 of 2020 appears to be a small change technically but it would have a significant impact on the UAE businesses. The new amendment has increased the administrative burden of the businesses because they need to prove to the Federal Tax Authority (FTA) that their customers are outside the state’s new definition of Article 31 (2) of the UAE VAT Executive Regulation. The service providers in this situation are recommended to seek the professional guidance of reputed VAT consultants in Dubai, UAE.

How Jitendra Chartered Accountants Can Help?

The UAE has made the first amendment to the VAT legislation nearly two and a half years after its implementation. The new amendment narrows down the scope of the zero-rating of the export of services and added a new perspective on determining how a non-resident client qualifies to be ‘outside the state.’ The new amendment has therefore proven to be an additional administrative burden on the UAE businesses as they are now required to prove their non-resident clients are outside the state.

This is a tricky situation and the new circumstances demand the services of reputed VAT consultants in Dubai such as Jitendra Chartered Accountants (JCA). JCA is one of the most renowned VAT consultants in Dubai that boasts of a competent team of tax agents and auditors who are well-versed in UAE VAT laws and other laws. JCA offers services including VAT registration, VAT deregistration, etc. JCA helps the entrepreneurs run their businesses in the peace of mind by helping them ensuring VAT compliance.