The President of the UAE, H.H. Sheikh Mohamed Bin Zayed Al Nahyan has issued the Federal Decree-Law No. (18) of 2022 also known as the “Amendment of VAT Law” to amend certain provisions of the Federal Decree-Law No. 8 of 2022 on Value Added Tax (hereinafter referred to as the “VAT Law”), which will become effective from January 1st, 2023.

The Amendment of VAT (i.e., value-added tax) Law has made changes in the definitions of tax-related items. New definitions were introduced for Relevant Charitable Activity, Pure Hydrocarbons, Tax Evasion, Tax Audit, Tax Assessment and Voluntary Disclosure activities.

In this article, we shall highlight the more significant changes and their potential implications for businesses.

Firstly, Tax evasion is defined under the Amendment of VAT Law as using illegal means to reduce the amount of VAT due, non-payment of VAT due, or claiming a VAT refund to which the taxpayer does not have the right.

In addition, the time period for the Federal Tax Authority (hereinafter referred to as “FTA”) to raise a tax audit or issue a tax assessment can now be expanded, including cases when voluntary disclosure is made by a taxable person to notify the FTA of an error or omission in their tax return, tax assessment, or tax refund application. This extension aims to give more time for the FTA to challenge VAT filings (previously, the time limit for the FTA to conduct a tax audit was up to five years from the end of the relevant tax period).

If the VAT calculated on the relevant taxable income exceeds the amount that should have been charged – for example, if it was canceled or due to a change in the nature of the income, or when the recipient of goods or services was returned and refunded – a tax credit note shall be issued within 14 days. 

The 14-day deadline for issuing tax credit note also applies to periodical business activities or where there are consecutive invoices (e.g., for maintenance contracts, continuous supply of goods or services, or telecom and internet services). Therefore, businesses that have periodical sales should review both their current contractual arrangements and their accounting system in order to ensure the issuance of relevant tax credit notes within the aforementioned statutory 14 days.

Moreover, new categories of zero-rate supplies are levied at a 0% rate of VAT, where input tax deductions on purchases are permitted (unlike exempt supplies). Therefore, in many cases, this could create a VAT refund for the excess input VAT. In case you are interested in further understanding the details as well as the list of the relevant zero-rate supplies activities, PHC Advisory is available to assist you based upon your own specific inquiry. 

The Amendment of the VAT Law also amends the concept of place of residence of agents and principals, so that the place of residence of the principal is the same as the agent. This is a significant update as, generally, the supply of goods or services by an agent in the name of (and on behalf of) a principal is treated as a supply by the principal. In the case where the principal is located in the UAE, but the agent is in a foreign jurisdiction, the place of residence of the principal would be now the foreign jurisdiction of the agent.

To summarize:

• The significant increase in the period for the FTA to raise tax audits, combined with the tightening up of the use of voluntary disclosures, should be a prompt for all taxpayers to ensure their tax affairs are in order and that any corrections are made via a voluntary disclosure within five years of the end of the relevant period. 

• The requirement to issues tax invoices within 14 days, extending invoice requirements to periodic supplies and new zero-rated supplies will require taxpayers to carefully review the changes made to ensure that they can adapt their systems and processes and they are operating in accordance with the law.

• Taxpayers operating agency arrangements shall carefully consider the impact of the changes to the residence requirements on their VAT position. In particular, it is suggested that principals shall verify the place where the agent is established or has a fixed establishment in order to correctly identify the VAT implications of their transactions.

• Businesses should assess how the Amendment of VAT Law will impact their operations, and review historical tax and reporting positions (e.g., via health checks and mock audits). 

At PHC Advisory, we are constantly updating our knowledgebase on the legal changes in the countries where our clients conduct business, and we are ready to support them in the most professional and timely way. Do not hesitate to contact us at info@phcadvisory.com for our services.