Who pays VAT - the business or the customer?

3. Explaining VAT 3.1. Chapter summary The purpose of this chapter is to give a brief overview of the principles which govern VAT as a tax, in order to provide a foundation for the information given in further chapters. 3.2. What is VAT? VAT is a transaction-based indirect tax. Occasionally it is referred to as a type of general consumption tax. In a country which has VAT, it is imposed on most supplies of goods and services that are bought and sold. VAT is charged and collected at each stage of the supply chain by businesses which meet the requirements to be registered for VAT (see Chapter 4 for further details). Final consumers generally bear the VAT cost while businesses collect and account for the tax. 3.3. How does VAT work? Businesses that are registered, or required to register, for VAT (known as ‘taxable persons’) charge VAT to their customers on supplies of goods or services made in the course of business. Taxable persons are then required to collect the VAT which they have charged to their customers and, on a periodic basis, pay this over to the FTA, accompanied by the submission of a tax return. More details of tax return filing and payment deadlines can be found in Chapter 11. VAT which businesses charge to their customers is also known as ‘output tax’. Businesses will also be charged VAT by their suppliers when they acquire goods and services. In general terms, taxable persons are able to recover the VAT they are charged by their suppliers, subject to certain conditions. VAT which is incurred on expenses is also known as ‘input tax’. Where the conditions to allow recovery of input tax are met, the taxable person is able to deduct the input tax recoverable from the value of output tax it is due to pay. This results in the net VAT payable to the FTA in each tax return period. Persons which are not entitled to register for VAT are not able to recover any VAT they incur, except in certain specified cases. As a result, incurred VAT becomes a cost to the final consumer. 8 VAT Guide | Taxable Person | VATG001

Article (44) Tax Deduction Principle 1. The Taxable Person may deduct from the Tax Due and Payable by him in a Member State the value of Deductible Tax borne in the same State in the course of making Taxable Supplies. 2. The right to make a deduction arises when a Deductible Tax is due pursuant to this Agreement. 3. A Customer who is obligated to pay Tax pursuant to the reverse charge mechanism may deduct Deductible Tax related thereto provided that he has declared the Tax Due under Article 41 (2) of this Agreement. 4. Each Member State shall determine the terms and provisions for Tax deduction.

Article (41) Customer Obligated to Pay Tax According to the Reverse Charge Mechanism 1. If the place of supply for Goods or Services is in a Member State where the Supplier is not a resident, then the Taxable Customer residing in that Member State shall be obligated to pay the Tax Due. 2. Tax Due under subsection 1 of this Article shall be paid pursuant to a tax return or independently as determined by each Member State.

import VAT prepopulated in its VAT return and make corrections in box 7 of the VAT return, if necessary. VAT incurred on imports is treated as input tax of the importer, and the importer may be able to recover it in box 10 of its VAT return, if eligible under the normal VAT recovery rules. Where the importer is entitled to recover the input tax in full, VAT will not represent a cost to the business. Payment at the time of import In situations where the conditions for deferring the payment of import VAT are not met – for example, the importer is not registered for VAT at the time of import – the importer would need to pay VAT to the FTA before the cars can be released to it by the relevant Customs department. This process requires the importer to use the FTA’s e-Services portal to complete the VAT301 – Import Declaration Form for VAT Payment and to make the payment of applicable VAT. Please refer to the VAT Import Declaration User Guide for detailed guidance regarding accounting for import VAT by non-registered importers. 6.3. Import with the assistance of an import clearing agent Often, the task of importing goods (including cars) into the UAE and fulfilling all importation formalities is delegated to a clearing agent. For example, the task of clearing the goods through Customs may be undertaken by a specialised clearing agent, a freight forwarder responsible for delivering the goods to the purchaser, or a third-party local company. Where a clearing agent or equivalent business is importing goods on behalf of a VATregistered importer, the clearing agent should declare the importer’s TRN on the customs import declaration. This will allow the importer to account for the import VAT in its VAT return as described in section 6.2. On the other hand, where a clearing agent is importing goods on behalf of a nonregistered importer, the agent should declare its C/O TRN on the customs import declaration and should be responsible for the payment of VAT in respect of the import in its VAT return. It should be noted that since the clearing agent or equivalent business is not the owner of the goods, but simply facilitates the import of those goods into the UAE, it should not recover the import VAT as its own input tax in the VAT return, and doing so would expose the clearing agent or equivalent business to an assessment for over-recovered Automotive Sector | VAT Guide | VATGAM1 18