Sellers may take a commercial decision to absorb VAT in order to make the price of promotional goods more attractive to potential buyers.
The UAE’s Federal Tax Authority (FTA) has clarified that “VAT-free special offers” are misleading and contrary to legislation because goods and services are not actually supplied free of value-added tax (VAT).
Numerous retailers are offering “VAT-free special offers” as promotions to entice prospective buyers to purchase goods or services within a promotional period. But instead of “VAT-free special offers”, tax experts say that such campaigns should be referred to as “VAT on us”.
The authority said VAT-registered businesses should not advertise taxable goods or services as free of VAT or sell such goods or services without accounting for five per cent 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. As a consequence, VAT is always payable on taxable supplies and the seller is not entitled to choose whether or not VAT should be imposed on a supply.
“Sellers may take a commercial decision to absorb VAT in order 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,” said the authority.
Citing an example, it said if a motor vehicle’s normal price is Dh105,000 and a special “VAT on us” promotional price is Dh100,000, the seller is regarded as providing a Dh5,000 discount to its customer.
According to Article 38 of the Decree-Law, the advertised price of taxable supplies shall include the VAT.
The FTA said the amount paid by the customer for the promotional good will, therefore, constitute the VAT inclusive consideration, regardless of whether the promotion is published as “VAT-free” or not.
Anurag Chaturvedi, managing partner at Chartered House Tax Consultancy, said VAT-registered businesses should refrain from advertising taxable goods or services as “free of -VAT”.
“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 has no option to claim it ‘VAT-free’,” said Chaturvedi.
“A tax registrant may offer discount in the form of absorbing VAT due on the supplies and offering. However, it’s mandatory to comply with display price requirements,” he added.
Deepak Agarwal, associate partner at WTS Dhruva Consultants, said: “VAT-free shopping” merely creates 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 Agarwal.
In another note, the FTA clarified that a natural person owning a number of sole establishments needs to obtain only one VAT registration for all the sole establishments and does not require separate VAT registrations for each individual establishment.
“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,” said Nils Vanhassel, counsel at Aurifer Middle East Tax.
