AURIFER
UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

20180714 by Matthew Kalman
The United Arab Emirates has clarified the application of value-added tax to accommodation provided by employers. VAT Public Clarification VATP003, published by the Federal Tax Authority, distinguishes between residential accommodation, which is zero-rated on first supply and afterward exempt, and standard-rated service accommodation. “The clarification is important for the numerous companies in the UAE which have an extensive labor force and provide housing to their employees. This is customary for laborers in the construction sector,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai.

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers
20180714 by Matthew Kalman
The United Arab Emirates has clarified the application of value-added tax to accommodation provided by employers. VAT Public Clarification VATP003, published by the Federal Tax Authority, distinguishes between residential accommodation, which is zero-rated on first supply and afterward exempt, and standard-rated service accommodation. “The clarification is important for the numerous companies in the UAE which have an extensive labor force and provide housing to their employees. This is customary for laborers in the construction sector,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai.

Where employers supply “incidental” services such as cleaning communal areas, garbage collection, access to a pool or gym within the building, and basic building maintenance, the accommodation will be zero rated. The supply of additional services including telephone or internet, laundry, catering, pest control, room cleaning and fresh bed linen will be considered “serviced accommodation” and subject to value-added tax. There will be implications for recovering tax on expenses, Vanhee said by email July 5. “No input VAT is deductible with respect to the business offering exempt residential rent, contrary to a business offering taxed serviced property,” he said. 

The clarification also addresses whether the accommodation is “a single composite supply” of either type, or “a mixed supply with separate component parts.” “Where a single composite supply is made, the entire consideration for the supply shall be subject to the VAT treatment of the principal component,” the circular says. “Where a mixed supply is made, each component part must be valued and the correct VAT treatment applied to each component part.” “This is an area that often causes problems for business as, in the case of a single composite supply, the entire consideration is subject to the VAT treatment of the principal component, whereas in a mixed supply, each component must be valued and a VAT treatment applied to it,” A big 4 said in a circular emailed to clients July 3. “One criteria that the FTA will consider to be crucial is that a single composite supply must have all components supplied by a single supplier. If the components come from multiple suppliers, it will not be treated as a single composite supply, and the tax treatment of each component must be individually evaluated.” 

‘Scores of Clarifications’

The treatment of mixed supplies “has been an area of some complexity in the U.K., and it deserves a Public Clarification of its own,” said a tax and public policy partner at a law firm in London, by email July 5. He expects “scores of Public Clarifications to emerge” as the UAE fine-tunes its VAT regulations, he said. More details may be required on this subject, Vanhee said. “The clarification does not discuss any cases in which the building is located in a Designated Zone,” which is not subject to VAT, he said. Suppliers could face “considerable fines” if they don't treat the accommodation supplies correctly, said a partner at a law firm in Dubai. “Each provider will still need to make an individual assessment of the correct approach to take, but they will now be better informed as to the way in which the FTA will review the treatment that has been selected,” he said by email July 5. However, what isn't clear is the impact the new clarification will have on providers that have previously taken an alternative interpretation to that provided by the FTA with this new clarification. “The providers will need to assess whether or not this will mean that any previously filed VAT returns will need to be re-submitted and VAT claimed from customers where it was not previously the case,” he said.

Reproduced with permission. Published July 6, 2018.  Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.
BEPS MLI enters into force today

BEPS MLI enters into force today

20180701 by Thomas Vanhee & Laurent Bertin
Tax avoidance and profit shifting have resulted in an estimated annual loss of USD 100 to 240 billion of tax revenue worldwide, effectively 4-10% of global corporate tax revenue. The Base Erosion and Profit Shifting initiative was endorsed by the OECD and the G20 and aims to address and tackle the shortcomings of the international tax system.

BEPS MLI enters into force today

BEPS inclusive framework’s Multilateral Instrument finally reaches the required ratifications

BEPS MLI enters into force today
20180701 by Thomas Vanhee & Laurent Bertin
Tax avoidance and profit shifting have resulted in an estimated annual loss of USD 100 to 240 billion of tax revenue worldwide, effectively 4-10% of global corporate tax revenue. 

The Base Erosion and Profit Shifting initiative was endorsed by the OECD and the G20 and aims to address and tackle the shortcomings of the international tax system.

In order to achieve more quickly the objectives of the BEPS project, in November 2016 the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (also known as "MLI") was adopted by over 100 jurisdictions.

The MLI is aimed at bridging the gap between international tax rules and the anti-BEPS measures. It simplifies the previously cumbersome process of renegotiation and amending tax treaties by allowing the MLI to supersede any existing treaties.
 
Once a bilateral tax treaty has been listed under the MLI, it does not need to be renegotiated for the MLI to have effect, thus avoiding any need for bilateral negotiations. The MLI notably contains a general anti-avoidance principle and specific provisions tackling the circumvention of treaty limitations or treaty shopping.  

The MLI will have a worldwide tax impact as its signatories include jurisdictions from all continents. On 29 June 2018 82 jurisdictions had signed the MLI, with a further 6 expressing their intent to sign. The current signatories have listed over 2,500 treaties, already leading up to over 1,200 matched treaties.

The MLI has now achieved the minimum number of ratifications to enter into force. As of today 1 July 2018, the MLI has entered into force in the ratifying countries. As from today, any jurisdiction ratifying the MLI will see it applying as from the date chosen for its entry into force. This will notably be the case on 1 October 2018 in the United Kingdom which ratified the MLI on 29 June 2018.

Direct impact on the GCC

The BEPS Inclusive Framework (“IF") obliges committed countries to ratify the MLI or to meet its objectives. Being a member of the IF, the UAE, KSA and Bahrain have been working on modifying their tax policies. No GCC State however has ratified the MLI but they are expected to do so in the short run.

With the date of ratification yet undetermined, the consequences for GCC companies might seem far from their concern. However, examining each tax treaty with ratifying and non-ratifying countries and planning for necessary changes to be made is necessary to avoid its adverse effects. 

Leading up to the ratification of the MLI, businesses need to estimate costs of compliance, consider possible restructuring in order to continue benefiting from the double tax treaties and assess impacts on future cash flow. 

Indirect impact on the GCC

The jurisdictions ratifying the MLI are more likely to scrutinize the treaties and their benefits to ensure there is no abuse, even if the treaty is not covered by the MLI. Therefore, even in absence of ratification of the MLI by any GCC state, the application of its tax treaties might be altered by countries with whom treaties are signed and have ratified the MLI. 

Companies within the GCC with subsidiaries or parents in jurisdictions ratifying the MLI should assess all transactions to and from these countries in the light of the tax treaties impacted by the MLI. 
The UAE and Bahrain part of the BEPS Inclusive Framework

The UAE and Bahrain part of the BEPS Inclusive Framework

20180523 by Laurent Bertin and Thomas Vanhee
Confirming their role as pioneers in building a sophisticated and efficient tax network, the UAE and Bahrain took strong steps forward to join international efforts against base erosion and profit shifting practices (known as BEPS). Indeed, both of these countries has joined the BEPS Inclusive Framework, on 11 May and 16 2018 respectively, becoming the 115th and 116th country part of this initiative.

The UAE and Bahrain part of the BEPS Inclusive Framework

The UAE and Bahrain part of the BEPS Inclusive Framework
20180523 by Laurent Bertin and Thomas Vanhee
Confirming their role as pioneers in building a sophisticated and efficient tax network, the UAE and Bahrain took strong steps forward to join international efforts against base erosion and profit shifting practices (known as BEPS).

Indeed, both of these countries has joined the BEPS Inclusive Framework, on 11 May and 16 2018 respectively, becoming the 115th and 116th country part of this initiative. 

The BEPS programme, started in 2013, was developed by 44 countries including all OECD (34) and G20 Members. It has three main objectives: 
- Reinstating the coherence of corporate income taxation from an international perspective
- putting the substance of the economic activities at the core of international taxation, and
- ensure transparency in the global economy. 

It resulted in the publication of 15 action plans in October 2015, known as the BEPS package.

Out of the 15 action plans, in January 2016 the OECD has prioritised 4 key priority measures. These measures are known as the BEPS Minimum Standards. They constitute the BEPS Inclusive Framework. 

The Inclusive Framework Members have committed to implement these actions quickly, and agreed to be subject to peer review to guarantee their effective implementation.

Accordingly, it is now highly likely that the UAE and Bahrain will, in the coming months, strengthen their tax compliance legislation in order to reach rapidly these four requirements, which aim at: 
  • Fighting harmful tax practices (BEPS Action 5), 
  • Preventing tax treaty abuse, including treaty shopping (BEPS Action 6), 
  • Improving transparency with Country-by-Country Reporting (BEPS Action 13), 
  • Enhancing the effectiveness of dispute resolution (BEPS Action 14).
Therefore, UAE and Bahraini Companies have to anticipate the increasing amount of administrative and tax requirements implied by these new concepts and obligations in the region. They must be ready to disclose several financial and business sensitive information to the Tax Authorities, much like their counterparts in the countries which have already adopted the measures. It is expected that both the UAE and Bahrain will be adopting the necessary legislative measures in the coming few months.  

Get in touch for a discussion on the assessment of the impact of these measures in the UAE and Bahrain. 
UAE Exempts Wholesale Gold and Diamond Trade From VAT

UAE Exempts Wholesale Gold and Diamond Trade From VAT

20180516 by by Matthew Kalman (Bloomberg)
Jewelry executives in the United Arab Emirates hope their industry will recover from plummeting sales, helped by a partial government U-turn involving value-added tax on businesses that account for about a quarter of all Dubai's non-oil foreign trade.

UAE Exempts Wholesale Gold and Diamond Trade From VAT

UAE Exempts Wholesale Gold and Diamond Trade From VAT
20180516 by by Matthew Kalman (Bloomberg)
The UAE cabinet “adopted a law to introduce the VAT Reversed Charge mechanism for
investors in gold, diamond and precious metals,” the official news agency WAM announced May 1.

Under the reverse charge mechanism, VAT on wholesale transactions is recorded in business accounts without any actual payment. This is intended to ease cash flow without affecting the retail purchaser's final tax liability.

“The law includes investments in precious metals such as gold, silver and platinum, used in trade in accordance with internationally accepted standards with a purity of 99 percent or more,” WAM said.

The introduction of VAT caused wholesale gold sales to slump by half in the first
quarter of 2018, leaving trading spaces vacant in Dubai's historic jewelry souk for the
first time in years. Jewelry executives were among the few groups in the country to warn publicly last year about the negative impact it would have on their business.

VAT was introduced in the UAE and Saudi Arabia on Jan. 1, with the four remaining Gulf Cooperation Council countries expected to follow by Jan. 1, 2019.

“A lot of companies didn't sell for the first 20 days after the VAT came in,” Chandu Siroya, vice chairman of the Dubai Gold and Jewelry Group told an industry conference in April.

Key Sector

Business leaders who have lobbied the government to mitigate the impact of VAT said they were awaiting the text of the legislation, which wasn't published. “The industry needs to read the actual law before being able to comment,” said a spokesperson for the Dubai Multi Commodities Center (DMCC).

The gold, diamond, and precious metals sector is one of the most important sectors for the economic diversification that is expected to bring significant growth in the coming months, according to WAM.

The UAE is the world's third-largest diamond wholesale market after Antwerp and Mumbai, according to the Dubai Diamond Exchange. Diamonds and gold in 2017 made up nearly a quarter of Dubai's total non-oil foreign trade of 1.3 trillion dirhams ($353.9 billion), according to government figures.

Dubai's gold trade in 2017 was 159 billion dirhams and its diamond trade 105 billion dirhams, according to government figures. Femand for gold in the UAE fell in 2017 to a 20-year low, according to World Gold Council data.

No Tax Savings?

The tax change will make it easier for businesses but it won't affect the sale price of diamonds, said Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai.

“This is not going to be a tax saving for anyone,” Vanhee said May 3. “You're going to have less consequences in terms of cash flow for the sellers.”

Retail customers taking their purchasers abroad will be able to recover the tax when the government finalizes the mechanism for tourists to reclaim VAT at the airport, Vanhee said.
The government is also considering adding the Almas (“Diamond”) Tower in Dubai, which houses the DMCC, to its list of tax-free designated zones.

Reproduced with permission. Published May 4, 2018. Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com