Financial Services Tax & Legal Update - December 2022 - PwC Middle East

Amendments to the UAE VAT Law, UAE VAT Executive Regulations and New Tax Procedures Law has been issued

In brief

Amendments to the UAE VAT Law

On 26 September 2022, the President of the UAE, H.H. Sheikh Mohamed Bin Zayed Al Nahyan issued the Federal Decree-Law No.18 2022 amending some provisions of the Federal Decree-Law No. 8 2017 on Value Added Tax (the VAT Law). The amendments will take effect from 1 January 2023.

Amendments to the UAE VAT Executive Regulations

On 21 October 2022, the United Arab Emirates (UAE) Cabinet issued Cabinet Decision No. 99 of 2022 amending the provisions of articles 3 and 72 of the UAE VAT Executive Regulations. The amendments are effective from 01 January 2023.

The amendment under Article 3 stipulates that the functions of a member of a board of directors are no longer considered a supply of services. Whereas Article 72 requires taxable persons making taxable supplies through electronic commerce to keep records of the transaction to prove the Emirate in which the supply is received.

New Tax Procedures Law (‘TPL’) has been issued

On 30 September 2022, the President of the UAE, H.H. Sheikh Mohamed Bin Zayed Al Nahyan issued Federal Decree-Law No. 28 of 2022 on Tax Procedures (the new TPL) which revokes Federal Decree-Law No. 7 of 2017 on Tax Procedures as amended by Federal Decree-Law No. 28 of 2021 (the current TPL). The new TPL will be effective as of 1 March 2023.

In detail

Following are the relevant amendments and provisions of the new TPL for the financial services sector:

Amendments to the UAE VAT Law

1. Supplies outside the scope of VAT - A new clause has been added to Article 7 that states the Executive Regulations may stipulate any other supplies (other than the supply of vouchers and the transfer of a business) that are explicitly considered outside the scope of VAT.
2. Exception from VAT registration - Article 15 regarding the exception to register will apply to registered persons in addition to non-registered persons.
3. Date of supply in special cases - Article 26(1) determining the date of supply in special cases includes the date on which one year has passed from the date on which the goods or services are provided, as one of the events to determine the date of supply. 
4. Place of residence of a principal - Article 33 defines the place of residence of a principal to be the place of residence of the agent. Under the current VAT Law, it was stated that the place of residence of the agent shall be the place of residence of the principal.
5. Value of supply - Article 36 concerning the specific anti-avoidance rule related to the value of supply or import of goods and services between in case of related party transactions will now override Article 37 (value of deemed supply).
6. Recovery of input VAT - Two new clauses have been added to Article 55 regarding the recovery of input VAT which specify the requirements for the taxable person to recover VAT paid or declared on the import of goods or services.
7. Output VAT adjustment - The output VAT adjustment stipulated in Article 61(1) now covers a scenario where the taxable person applies an incorrect tax treatment. In such cases, the taxable person should now issue a tax credit note to adjust the output tax.
8. Timeline to issue a tax credit note - Article 62(2) regarding the mechanism for output VAT adjustment now attaches a condition that the taxable person must issue a tax credit note within 14 days from the date on which any of the instances provided in Article 61(1) occurs.

9. Payment of tax - Article 65(4) makes it mandatory for the taxable person to pay the VAT to the Federal Tax Authority (FTA) in cases where such a person issues a tax invoice stating VAT on it or receives an amount as VAT.

10. Timeline to issue a tax invoice - Article 67(1) specified the date of issuance of tax invoice under Article 26 (date of continuous supply) to be 14 days from the date of the supply.

Introduction of new Article on statute of limitations

In addition to the above amendments, a new article (Article 79 bis) was added to the VAT Law. This article is similar to the one that was recently added to the Excise Tax Decree-Law concerning the statute of limitation. The new article on statute of limitations covers the following:

• The statute of limitation of 5 years will not apply to cases where the FTA has issued a notice to audit the taxable person, provided such an audit is completed within 4 years from the date of issuance of the notice.
• In the case where the taxable person files a voluntary disclosure in the 5th year from the end of the relevant tax period, the statute of limitation will be extended by one year. 
• A voluntary disclosure cannot be filed by the taxable person after the lapse of 5 years from the end of the relevant tax period.

The article also mentions that such extended periods can further be amended by virtue of a separate Cabinet Decision.

Amendments to the UAE VAT Executive Regulations

• VAT treatment of functions performed by members of a board of directors - Article 3 of the VAT Executive Regulations introduced a new clause (No.2) stipulating that the functions of a member of a board of directors, performed by a natural person appointed as such, for any government entity or private sector establishment, are no longer considered a supply of services for VAT purposes.

This change in the VAT treatment of functions of a member of a board of directors is effective from 01 January 2023.

The FTA issued Public Clarification VATP031 clarifying certain aspects of the amendment in more detail. The Public Clarification clarified that for the provision of directors’ services not to be considered as a supply of services for VAT purposes according to the amended Executive Regulations, the following conditions must be met:

• The services are provided by a natural person - This amendment does not extend to a legal person, whether private or public, who may delegate in its own name a natural person to act as Director.
• The person is appointed as a director on a Board of any government entity or private sector establishment - Other services provided by the member are considered to be supplies of services for VAT purposes and may be taxable.

The Public Clarification lists transitional rules for the change in the VAT treatment of functions performed by members of a board of directors for the period both prior to and from 01 January 2023.

New Tax Procedures Law

1. Definitions - The new TPL amended some of the existing definitions in the current TPL (e.g. Tax Law, Business, Legal Representative, Tax Auditor, etc.) and introduced new definitions for Business Day, Tax Residency Certificate and Tax Resident.
2. Voluntary disclosures - A new clause (No. 5) was added to Article 10 stipulating that taxpayers are now required to submit a voluntary disclosure to correct an error or report an omission even in cases where the error or omission does not result in a difference in the tax due.
3. Tax audit - A new clause (No. 2) has been added to Article 16 on the period for the Authority to notify the taxpayer of the initiation of tax audit procedures. The new period is now 10 business days (initial period was 5 business days).
4. Notification period - The Authority shall now notify the concerned person of the tax assessment within 10 business days from the date of issuance (initial period was 5 business days).
5. Maximum limit of administrative penalties imposed by the Authority - Article 24 on administrative penalties assessment has now capped the administrative penalties that may be imposed in a tax assessment to (2) times the tax amount (initial limit was set to 3 times). Also, the minimum value of administrative penalties that can be imposed of AED 500 has been removed.
6. Objection to the Committee - Article 32 on the requirements for submitting an objection to the Tax Disputes Resolution Committee (TDRC) has been amended to include a clause stating that the Cabinet may issue a decision adjusting the required amount of payable tax that should be paid to the Authority prior to submitting the objection application.
7. Extension of timelines - A new Article (No. 35) has been added whereby a person submitting tax assessment review request, reconsideration and objection applications as well as the Authority and TDRC reviewing relevant applications, can now be granted the right to request for an extension of the standard timelines of (40) business days subject to meeting certain conditions as stipulated in the Executive Regulations. If the person is not granted the extension, the decision issued by the Authority or the TDRC would be considered as final and can not be further appealed.
8. Statute of limitation - Article 46 of the existing TPL has been amended to reflect the new statute of limitations provisions introduced in the UAE VAT Law
9. Tax Assessment Review Request - Introduction of a new layer to the tax dispute process.

Key takeaway

Taxable persons are required to review amendments made to the VAT Decree-Law and ensure implementation readiness by the effective date of 1 January 2023. This would imply a change in the timeline of issuance of a tax invoice/tax credit note and the procedures of keeping books and records for a longer period.

Taxable persons are required to review the new Decree-Law to understand and assess the impact on their business and activities and to ensure implementation readiness by the effective date of 1 March 2023.

VAT and Real Estate Transaction Tax (‘RETT’) exception in case of disposal of real estate property

In brief

The Zakat, Tax and Customs Authority (‘ZATCA’) issued a circular during October 2022 explaining the VAT and Real Estate Transaction Tax (‘RETT’) exception in case of disposal of real estate property involving temporary transfer of ownership for financing purposes. The circular has been issued in Arabic language at the moment and can be accessed here

In detail

Through the circular, ZATCA explained the following:

• VAT treatment where ‘temporary transfer’ is done on a property for using it as a collateral for security purposes against provision of a finance.
• Application of exception from RETT in the case referred to above.

What is a real estate mortgage?

Mortgage of real estate refers to a temporary transfer of real estate for the purpose of using it as credit or security in return for obtaining finance. This in fact represents a legal right in which the “borrower” provides the property in favor of the “financier” for a specified period (usually covering the financing period).

The "financier" is one of the approved financial institutions such as banks, finance companies etc.

The VAT treatment of real estate mortgage

As the process of transferring ownership of real estate is ‘temporary’ with no intention to permanently transfer the ownership, such a transfer is not considered a supply of goods for tax purposes and accordingly would be out of scope for VAT purposes.

The RETT treatment of real estate mortgage

The process of transferring a property temporarily by its owner as a security for financing purposes (i.e. where the property is used as a collateral to get the required finance without permanent transfer) is amongst the exclusions contained in the RETT regulations.

Important considerations

Where the transfer of property is being made on a permanent basis, the exception available from VAT and RETT purposes will stand rescinded and the disposer of the property needs to assess the related VAT and RETT implications keeping in mind the date of disposal of real estate properties.

PwC newsalert on this matter can be accessed here

Key takeaway

Financial Institutions and other taxpayers engaged in the business of extending real estate financing which include a mortgage finance are recommended to assess how this guidance will impact their transactions in terms of discharging VAT and RETT obligations. Taxpayers who might want to take a corrective action can benefit from the relief under tax amnesty, where applicable, before 30 November 2022.