It is important to know the ins and outs of taxation when it comes to the auto sector
Regulatory issues around customs were always prevalent, but with VAT, things have become even more complex
The automobile sector is one of the largest and most dynamic sectors in the UAE, and with disruptors from electric vehicles to driverless cars, the country is now home to all global brands.
Currently, in the absence of original equipment manufacturers facilities, the UAE's supply chain comprises the import, sale and service of automobiles. Regulatory issues around customs were always prevalent, but with the introduction of VAT, things have become even more complex.
This article discusses some typical issues relevant to automobile dealers regarding the question of how to manage VAT compliance.
Dealers import automobiles in the UAE by filing a bill of entry at customs, either for home consumption or under import for re-export. For automobiles imported for re-export, payment of customs duty is deferred under suspension for up to six months. For automobiles that are imported but not re-exported and are rather sold in the country, the timing of disclosure of VAT under reverse charge in their VAT returns is important. Since the import values are automatically recorded in the Federal Tax Authority's (FTA) portal, dealers should be sure as to whether any adjustments should be made for every month in which the automobiles are sold in the UAE, or whether the import VAT should only be reflected after six months, when the deferred period of customs has expired.
Advance booking amounts received from customers also require careful analysis with regards to whether they qualify as a deposit (outside the VAT scope) or an advance (subject to VAT). Various factors, including the nature of the amount, its accounting treatment, and whether the amount is adjusted with the final sale price, will determine the correct VAT treatment.
For customers to finance the purchase of an automobile, the dealers issue invoices to banks, informing them of the total cost to be financed. Before the introduction of VAT, the format of invoices was not a matter of concern. Post-VAT, dealers should be mindful that they do not inadvertently issue a tax invoice to banks. Even if VAT amounts require mentioning, it is important that the invoices are clearly marked 'draft/proforma/quotation' so as to clearly distinguish them from the actual tax invoices issued to customers. Also, the amounts on invoices issued to banks and those issued to customers should be aligned.
As part of business promotion, dealers offer various freebies including free insurance, services, registration, and accessories etc, the cost of which is typically included in the sales price. All these freebies are reflected in the invoices issued to the customer. Under VAT, free supplies require thorough analysis since they may be considered as deemed supplies attracting VAT. Issues such as whether a zero value should be mentioned on the invoice for each item, or perhaps a statement that all such supplies are included in the price are unclear.
The UAE VAT law permits a zero-rating of local sales where customers make arrangements to transport the automobiles outside the country. Sufficient documentary evidence should be maintained to ensure the automobile got physically exported. In addition to customs documents, dealers may also obtain a copy of the passport and the visit visa of the overseas customer.
It has been observed that the dealer does not charge VAT upon the commitment obtained from the overseas customer to provide the supporting documents. Ensuring that the evidence is obtained in a timely manner is critical - otherwise the tax not charged upon sale of the automobile will have to be paid by the dealer without the ability to recover it since the customer would have left the country.
The sale of second-hand automobiles is common in the UAE, and the applicability of VAT under the profit margin scheme has been a challenge to implement. It has been observed that the dealers have found it difficult to track the inventory of automobiles that are eligible for the profit margin scheme and, consequently, have either ended up not charging VAT or charging VAT on the full value, even when the automobile was eligible for reduced VAT.
In order to augment sales, the overseas manufacturer closely works with the UAE dealer and enters into various arrangements for support, discounts, and reimbursements. The manufacturers support in the form of liquidation, price support and fleets, etc, are either passed on to the end customer or reduced from the purchase cost of the dealer. If the support is linked to the consideration towards sale of automobiles, it may be subject to VAT. However, where such support is applied towards reducing the purchase cost, efforts should be made to ensure that the goods are not undervalued for the purposes of payment of customs duty and import VAT.
As part of promotional activities for the manufacturer's branding, the manufacturer generally contributes to a common pool from which such marketing expenses are made by the dealer or may reimburse the costs incurred by the dealer. Consideration received by the dealer requires careful analysis. Though the service recipient is located outside the UAE because the services are actually performed in the UAE, the question of whether zero-rating benefit can be availed requires further examination. Secondly, it is critical to analyse whether recovery of such marketing spent by the dealer from the manufacturer qualifies as reimbursement subject to VAT, or an out of scope VAT transaction of pure disbursement of expenses (incurred on behalf of the overseas manufacturer).
Several of the above issues may need clarification from the FTA, whereas others can be resolved by taking adequate care with regards to documentation. It is important to be fully compliant before the FTA officially begins auditing dealers.