UAE’s Federal Tax Authority (FTA) has explained that “VAT-free special offers” are misleading and unlawful because goods and services are not actually supplied without value-added tax (VAT).
Many retailers offer “VAT-free special offers” as promotions to encourage potential customers during the promotional span to purchase products or services. But tax specialists claim that instead of “VAT-free special offers”, such campaigns should be referred to as “VAT on us.”
The authority stated that VAT-registered businesses should not advertise taxable goods or services as free of VAT or sell such goods or services without accounting for five percent VAT, except where the supply qualifies for zero-rating.
It said the seller may, however, make a commercial decision to offer a discount equivalent to the amount of VAT. Consequently, VAT must always be paid on taxable supplies, and the seller has no right to choose whether or not to charge VAT for supply.
FTA stated, “Sellers may take a commercial decision to absorb VAT to make the price of promotional goods more attractive to potential buyers, these are commonly referred to as ‘VAT-on-us’ promotions. In these instances, the seller is regarded as granting a discount to its customer which is equal to the VAT amount imposed on the promotional goods or services”.
Citing an example, it claimed that if the regular price of a motor vehicle is $28,586 (Dh1,05,000) and the special promotional price of “VAT on us” is $27,225 (Dh1,00,000), the seller is considered to give its customer a $13,612 (Dh5,000) discount.
Under Article 38 of the Decree-Law, VAT shall be included in the advertised price of taxable supplies.
According to the FTA, the amount spent by the customer for the promotional products constitutes an inclusive VAT consideration, irrespective of whether or not the promotion is published as ‘VAT-free’.
“VAT-registered companies should refrain from ‘VAT-free’ advertisements for taxable products or services. There are no goods or services which is ‘VAT-free’ except those which qualifies for zero-rating, e.g. education, healthcare, etc. A tax registrant is obliged to impose VAT on the supplies. VAT is payable on taxable supplies and the sellers have no option to claim it ‘VAT-free’. A tax registrant may offer a discount in the form of absorbing VAT due on the supplies and offering. However, it’s mandatory to comply with display price requirements”.
Deepak Agarwal, the associate partner at WTS Dhruva Consultants, said: “VAT-free shopping” merely creates a perception in the minds of customers that there is not VAT while retailers continue to pay VAT to the FTA from the backend.
“With this clarification, the suppliers will also have to be mindful of the marketing communications and ensure tax compliance/documentation stringently,” added Mr. Agarwal.
On another note, the FTA explained that only one VAT registration for all single establishments must be obtained by a natural person owning several single establishments and does not require separate VAT registrations for each individual establishment.
Nils Vanhassel, counsel at Aurifer Middle East Tax commended, “If a natural person owns one or more sole establishments, the value of supplies made by the natural person and all its sole establishments must be aggregated to assess whether the mandatory VAT registration threshold of Dh375,000 per annum has been exceeded. Where a natural person has received separate VAT registration for different sole establishments, the FTA will review such VAT registration and inform the relevant persons of the corrective measures to be taken”.