Public Clarification No. 40 on amendments to the VAT Executive Regulation

• The FTA has clarified its position on scenarios involving subcontracting arrangements by including. It mentions that the ‘Single Supplier’ condition to qualify as a single composite supply shall not be compromised even where the supplier subcontracts some of the components to a third party, as long as he remains contractually responsible for the total supply including these sub-contracted components to the recipient.
• The FTA has also clarified that a single composite supply shall not exist where the supplier charges a single price for all the components but the price for each component is separately identified (where the tax invoice or underlying contract reflects the price of each component separately).

Registrants are encouraged to review their existing composite supplies arrangements and, align the contractual arrangements with the actual business  practice, and ensure the effective coordination between the different stakeholders of their organizations.

• According to the New Executive Regulation, for the purpose of calculating the profit margin, the purchase price shall include, in addition to the price of the goods, any other cost and fee incurred for purchasing the goods.

In this regard, the FTA has clarified that such costs and fees could include customs duties, shipping, handling, wrapping, and installation costs charged or re-charged by the seller of the goods. However, as an exception, such costs and fees shall not be included in the purchase price where input VAT was charged on these costs and the seller has full input VAT recovery entitlements.

Registrants making supplies under the profit margin scheme are recommended to review the purchase cost base considering the aforementioned factors as this will have an impact on the VAT inclusive margins.

• The FTA has clarified that the amended documentary requirements to be retained by taxpayers to substantiate the zero rating of direct / /indirect export of goods apply only from the effective date of 15 November 2024. Therefore, the amendment will not have retrospective effect and any supplies made before 15 November 2024 remain subject to the documentary evidence required under the old Executive Regulation, prior to the amendment.
• It is also clarified that the FTA may decide to reject documents that do not sufficiently prove that the goods have exited the UAE, including cases where the text is not legible, or the required particulars cannot be determined based on the documents submitted.

Registrants exporting goods outside UAE are recommended tothey receive and retain all the required supporting documents in clear formatsformat. Additionally, business should ensure that for the periods prior to the amendments (before 15 November 2024)), all the relevant supporting documents are available, including exit certificates.

• According to the New Executive Regulation, for the purpose of zero-rating exported services, a non-resident person shall be regarded as ‘outside the UAE’ at the time the services are performed if they only have a presence in the UAE of less than 30 days and the presence is not effectively connected with the supply. In this context, it is clarified that the 30 days shall be calculated within a rolling 12-month period.

• The FTA has clarified its position on scenarios involving subcontracting arrangements where it is clarified that; the zero-rating of international transportation of goods shall not be compromised if the supplier subcontracts a part of the transport service but remains contractually liable for both the domestic and international transport of the goods.
• Additionally, it is clarified that services provided in respect of the transportation services of passengers or goods shall not qualify for the zero-rating if such services are provided during the course of transport to a person other than the recipient of the transportation services, e.g. if sub-contracted by another provider for the domestic leg only.

• It has been clarified that where a ship, boat, or floating structure is used for commercial purposes other than the transport of goods or passengers (e.g. a ship used for commercial fishing, a drilling ship or dredger), they it shall not constitute a means of transport and the supply would not qualify for the zero-rating.

• It is clarified that where the funds are not licensed by a competent authority in the UAE, the supply of the fund management services would not qualify for the exemption and would be subject to VAT.

• The FTA has clarified that businesses are entitled to recover input VAT incurred on medical insurance provided to employees and employees’ families (up to 1 spouse & and 3 children younger than 18 years of age) as well as medical insurance top ups, regardless of whether there is a legal obligation to provide the medical insurance or not.
• It is also clarified that the amendment is effective from 15 November 2024 and the previously incurred expenses can be apportioned to claim the input tax for the period after 15 November 2024.

Registrants are recommended to review their medical insurance policies and pro-rate the input VAT amount to recover the portion relating to the period from 15 November 2024 onwards, provided these costs are incurred to make taxable supplies, and the relevant supporting documents are retained.

• The FTA has clarified that although the method of calculating the residual recoverable tax has been amended in the New Executive Regulation, stating that the percentage of recoverable tax shall be calculated with the ‘sum of input tax for the tax period’ as the denominator, the simplified formula calculation referred to in the Input Tax Apportionment VAT Guide (“VATGIT1”) should still be used.                                 
• Additionally, in relation to the introduction of a specified recovery percentage based on the recovery percentage of the preceding tax year, the FTA has clarified the basis for determining such a percentage (which is always subject to the FTA’s approval). Further conditions are that the application to use the specified recovery percentage can only be made where the taxpayer has been registered for VAT for at least a 1 tax year, and the approval will be valid for 4 years where the method can’not be changed for at least 2 years following the approval.

• The FTA has clarified that full tax invoices shall be issued by taxpayers for imported services subject to the reverse charge mechanism unless an administrative exception was is approved by the FTA.

It has not been clarified whether this requirement shall also apply where an invoice from the non-resident suppliers is available., h However, registrants are recommended to they either issue self-tax invoices for imported services or apply for administrative exception as suggested by the FTA.