Insights

Taxation of E-Commerce Transaction under the VAT Law:-

E-commerce generally refers to supplies of goods and services over the internet or a similar electronic network, with goods and services being sourced or supplied by electronic means. There are expected to be over 2B digital buyers and $4.13T value of retail e-commerce sale in the world in 2020. By 2040, around 95% of all purchases are expected to be via ecommerce.

Growing E-commerce transactions and complexity of taxation of these transactions under the VAT Law made the Federal Tax Authority to come up with the more detailed guidance to explain the E-commerce taxation related issues and to provide more clarity to the tax payers.

Federal Tax Authority has issued E-Commerce VAT Guide “VATGEC1” which explain the following types of transactions:

• Goods purchased through an electronic platform; and
• Services supplied by electronic means.
• Supplies made through agents

1. Supply of Good by Ecommerce Company

Under the E-commerce supply, supply of goods involves purchasing goods through an electronic platform, such as a website or a marketplace.

Depending on the location of the supplier, the recipient, the goods and the delivery, the supply may take any of the following basic forms:

• A supply by a resident supplier to a recipient in the UAE “or” to a recipient outside the UAE, where goods to be delivered from either inside or outside the UAE;
• A supply by a non-resident supplier to a recipient in the UAE “or” to a recipient outside the UAE, where goods to be delivered from either inside or outside the UAE

Tax payer need to evaluate each of the above scenarios and to consider the impact of VAT on the supply of the goods to be made by him via E-commerce.

1. Local Supply of Goods

E-commerce supply of goods where the sold goods are delivered from the UAE to the UAE shall be subjected to VAT. Supplier and recipient of goods have to evaluate the below mentioned situations for the application of VAT;

• Goods are considered to be supplied in the UAE where the customer receives the ownership or the right to dispose of the goods in the UAE.
• If a supply of goods involves the goods being transferred to the recipient outside of the UAE, the place of supply of the goods is outside the UAE, even if the goods are subsequently imported into the UAE
• Goods are first imported into the UAE and then supplied to the recipient – in such situations; the supply of the goods to the recipient is treated as a local supply in the UAE with the place of supply in the UAE.

1. Export of Goods

Where a UAE based e-commerce Company is exporting the goods from the UAE, the supply may be eligible to be treated as zero-rated if the conditions mentioned in Article 30 of the Executive Regulation have been complied. The main conditions enlisted in this article are;

1. The goods are physically exported to a place outside the UAE within 90 days of the date of the supply.
2. Official and commercial evidence of export is retained by the exporter on record (supplier or the recipient) asper the nature of export (Direct or Indirect).

1. Import of Goods (Reverse Charge)

Where goods are being supplied through E-Commerce by the overseas suppliers from outside the UAE or from within the UAE, we need to evaluate the following position under the VAT law to account for the VAT on that supply;

• Article 48 (1) of VAT Decree Law “If the Taxable Person imports Concerned Goods or Concerned Services for the purposes of his Business, then he shall be treated as making a Taxable Supply to himself, and shall be responsible for all applicable Tax obligations and accounting for Due Tax in respect of these supplies.”

• Article 48 (3) of The Executive Regulation “Where a Taxable Person who has a Place of Residence in the State receives a supply of Goods or Services with a Place of Supply in the State, from a supplier who does not have a Place of Residence in the State and does not charge Tax on that supply, the supply shall be treated as being of Concerned Goods or Concerned Services subject to Clause 1 of Article 48 of the Decree-Law.”

2. Supply of Service by Ecommerce Company

For the purposes of VAT, “electronic services” mean services which are automatically delivered over the internet, an electronic network, or an electronic marketplace including.

FTA has provided special provisions for taxation of Supply of Electronic services. The supply of services must meet the below conditions to fall under the special VAT rules for electronic services:

• The service in question must be one of the services mentioned in the list of services mentioned under Article 23 (2) of Executive Regulation; and
• The service must be automatically delivered over the internet, an electronic network, or an electronic marketplace.

The first of these requirements means that a service will not be an electronic service where it is not one of the services listed under Article 23 (2) of Executive Regulation, even if the service is supplied using the internet or an electronic network e.g. legal or financial advice, transport services, or hotel accommodation booking.

The second requirement means that an electronic service should be automatically delivered over the internet, an electronic network, or an electronic marketplace with minimal or no human intervention. Thus, although a small degree of human intervention is acceptable to enable or complete a supply, this intervention should not change the nature of the delivery of a service as being essentially automated.

Place of Supply

The place of supply of electronic services determines whether or not the services are subject to VAT in the UAE. Supplies of electronic services are subjected to a special place of supply rule as mentioned in Article 31 of the Decree Law:

• In the UAE, to the extent of the use and enjoyment of the supply in the UAE; and
• Outside the UAE, to the extent of the use and enjoyment of the supply outside the UAE.

The actual use and enjoyment of electronic services should be determined on the basis of where the electronic services are consumed by the recipient, regardless of the place of contract or payment. Since the legislation is not clear about the pointers to be used to determine the place of use and enjoyment, this determination must be made on a case-by-case basis, and all of the facts must be taken in to consideration.

3. Supplies made through agents

As we know E-commerce companies are providing marketplace where suppliers supply their goods and services to the end customers. Before charging VAT one must consider the following position mentioned in the E-commerce Guide issued by the FTA;

• Where a supplier makes a supply of electronic services through an electronic marketplace, and the electronic marketplace is not acting in a capacity as an undisclosed agent, then the supply is treated as made by the principal supplier directly to the recipient of the supply.
• Where the electronic marketplace acts as an undisclosed agent for the principal supplier, there will be two supplies for VAT purposes – a supply by the principal supplier to the marketplace and the supply by the marketplace to the principal recipient.