The introduction of these new rules governing the supply of electronic devices within the UAE is a consequence of the increased level of fraudulent behavior identified by the Tax Authority in respect of these goods. We have especially seen instances where suppliers of electronic devices have created fictitious sale documentation to leverage the corresponding input tax recovery deduction permitted as a result thereof. The same basket of electronic goods is being used to support multiple sale transactions by various suppliers. As a result of the identification of the fraud by the Tax Authority and Customs Authority, the sale of electronic devices are being scrutinized in more detail and now the tax burden for accurate VAT accounting and reporting has been shifted.
The term "Electronic Devices" specifically includes “mobile phones, smartphones, computer devices, tablets, their parts and components / spare parts.” It is expected that the Minister of Finance will release a decision to specify the criteria for determining which items are considered “parts related to Electronic Devices.” This is of critical importance for supplies of electronic devices to better understand the ambit of the new domestic VAT reverse charge rules and to which items it applies.
According to the Cabinet Decision, when a VAT-registered supplier provides electronic devices to a VAT-registered recipient in the UAE, who intends to either resell them or use them in the production or manufacturing of electronic devices, the following rules will apply:
1. The supplier will not be responsible for charging or accounting for VAT on the supply, nor for reporting this in their tax return.
2. The recipient of the Electronic Devices must self-account for VAT on the value of the supplied Electronic Devices under the reverse charge. They will be responsible for all VAT obligations arising from such a supply.
These new rules will not apply to zero-rated exports of electronic devices as this is not viewed as domestic supplies.
The conditions set under the Cabinet Decision for applying the domestic VAT reverse charge mechanism are as follows:
1. The recipient of Electronic Devices must provide a written declaration, indicating the purpose of the supply they are receiving (whether it is for resale or manufacturing) and confirming their VAT registration; and
2. The supplier of the Electronic Devices should retain these customer declarations and verify the VAT registration status of the recipient via FTA approved methods.
We note that as of today, no additional clarity has been released by the Minister of Finance and without any public consultation process, there remains uncertainty for domestic suppliers of electronic devices as to which products the domestic VAT reverse charge mechanism applies. With little more than two weeks to go before the Cabinet Decision becomes effective, we urge domestic suppliers of electronic devices to undertake an assessment of its product listing and determine whether it falls within the “Electronic devices”. Where applicable, working assumptions should be made where a product does not easily fall within the definition. For example, Smart Watches may be capable of being used independently with an e-SIM and may have all other attributes of a Smart Phone and the question arises, whether or not it would be reasonable to conclude that Smart Watches fall within the domestic VAT reverse charge mechanism.
To speak with us in relation to any of the proposed changes to UAE VAT, or any tax matters or issues more generally, please contact one of the team members above.
