VATGAM 1 - VAT Guide on Automotive Sector

Introduction

The FTA has released its first VAT Guide for the automotive sector. In the absence of original equipment manufacturers

in the UAE, the supply chain of automobile sector comprises import, sale, and service of automobiles.

With such a supply chain model, a variety of transactions undertaken by Automobile dealers in the UAE have VAT as

well as Customs implications. Clarifying taxability on an array of transactions was a challenge faced by the sector.

The FTA in this guide has clarified VAT treatment on various transactions i.e., export and import of cars, supplies under

warranty, hire-purchase, leases, promotional schemes, sale of used/ pre-owned cars, etc.

In this alert, we have summarized key points as discussed in the Guide that have an impact on businesses in the

automotive sector, along with our analysis.

Key points of the Guide

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Sale of

cars within

the UAE

VAT at 5% is required to be paid as per the

date of supply provisions.

 Outright sales:

- Date of supply as per Article 25 or Article

26 of the Decree-Law is required to be

followed. Furthermore, a tax invoice

should be issued and delivered within 14

days of the date of supply.

- Disbursement - Any amount charged as

disbursement (such as government fee,)

shall be, separately and clearly identified

on the tax invoice without VAT.

 Timeline to issue tax invoice: Article 67 of

the Decree-Law states that the tax invoice

should be issued within 14 days of the date of

supply, as per Article 25 of the Decree-Law.

However, the provision was silent in respect

of when to issue a tax invoice in cases where

Article 26 was applicable. The Guide provides

clarity that the 14-day time limit will apply to

Article 26 equally.

 Applicability of Article 26 of the Decree-

Law on finance companies pertaining to

hire purchase arrangements: We

understand that many finance companies, on

VAT Alert

Date: 06 July 2021

WTS Dhruva Alert on Automotive Sector

VATGAM 1 - VAT Guide on Automotive

Sector

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 Hire-purchase arrangements: There are

two separate supplies. First, the supply by

motor vehicle trader to the finance company

(taxable at 5%) and the second supply by

the finance company to the customer.

Supply by the finance company includes two

components i.e., hire purchase instalments

(subject to VAT) and interest, if charged

separately (exempt from VAT), otherwise it

would be taxable at 5%. Finance companies

often issue consecutive/ periodical invoices

to which the date of supply as per Article 26

of the Decree-Law is applicable. Thus, there

may be a case where the Company has

transferred the possession of the car to at

the beginning, but it is not liable to pay VAT

on the full value upfront (unless the entire

amount is received).

Repossession of Car - No supply takes

place when the finance company

repossesses a car. However, when the

finance company further supplies the car to

another customer, the normal VAT

implications arise.

 Trade-ins: Two separate supplies take

place: sale of the new car to the customer

and sale of the old car by customer to the

trader.

The trader is not allowed to net off the value

of old car against the sales price of new car

for the purpose of VAT. This is true even

though the value agreed for purchase of old

car by the trader is higher than the market

value.

a conservative basis, have adopted a position

to pay VAT on the full value upfront,

irrespective of the applicability of Article 26, as

this is treated on a par with permitting the use

of car. The Guide reaffirms that VAT needs to

be accounted for as and when tax invoices are

issued and not on passing the possession of

the car (subject to any advance payments).

 Clarity on trade-ins: Many suppliers charged

VAT only on the net value of car (sale of new

car and purchase of old car), considering it as

a single supply. However, in terms of the

Guide, the said treatment is incorrect and may

have voluntary disclosure (‘VD’) and penalty

implications.

Moreover, it is important for the customer to

evaluate whether their sale of the old car to

the motor vehicle dealer is in the course of his

business, whether the VAT registration

threshold has been crossed, and whether

he/she is liable to charge VAT.

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 Price display: The price displayed by the

dealers should be VAT inclusive. However,

this is subject to two exceptions i.e., where

supply is for export and where the customer

is registered.

Sale of

used/ pre-

owned

cars

Profit margin scheme can be applied on the

sale of used cars. The FTA has reiterated the

rationale, conditions, and requirements for

application of profit margin scheme. It is in line

with the Executive Regulations and VAT

Public Clarification VATP002 on ‘Profit margin

scheme – eligible goods’ issued by the FTA.

Furthermore, the Guide also provides two

instances in which some businesses have

applied the scheme incorrectly:

 Applicability of profit margin scheme to

cars purchased prior to VAT

implementation – The profit margin

scheme shall not apply in cases where cars

have not been subject to VAT previously.

 Cars imported where VAT paid upon

import has been recovered – The sale of

imported cars in UAE is ineligible for the

profit margin scheme, as VAT is generally

recovered at the time of import of cars.

The FTA has highlighted two important non-

compliances in the application and use of the

profit margin scheme by businesses. To take

advantage of the profit margin scheme,

businesses should ensure that:

 VAT was previously charged on the sale value

of the car.

 The profit margin scheme shall not apply on

the import and subsequent sale of cars within

the UAE, if input tax was recovered at the time

of import.

The FTA has further emphasized the

importance of adequate documentation to

substantiate the claim of sales under the profit

margin scheme.

Incorrect application of the profit margin scheme

would lead to short payment of taxes and entail

penalties; therefore, it is imperative that

businesses ensure proper understanding and

compliance before opting for such a scheme.

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Lease of

cars

Lease of cars is taxable at 5%. VAT should be

charged and paid as per applicable date of

supply provisions (Article 25 or Article 26 of

Decree-Law).

Value of supply in case of lease of cars is the

consideration less the tax amount. Certain

suppliers have not charged or considered

VAT on the entire sum received, treating

some of the amounts received (out of the

entire sum) as disbursement (i.e., without

VAT).

Example - a vehicle trader leased a car to a

customer. The Salik Account was in the name

of the trader. The customer used salik, which

was ultimately deducted from the trader’s salik

account. As part of service and as per the

contractual terms, the vehicle trader

recharged salik cost to the customer. Such a

recharge of cost shall be subject to VAT and

would be included in the value of supply.

In terms of the VAT Law and Regulations,

disbursement would generally be outside the

scope of VAT and reimbursement/ recharges

would attract VAT.

Several businesses made an error in classifying

the transaction either as disbursement or

reimbursement. The FTA has provided the

following clarity in respect of such an evaluation

 what are the contractual terms?

 who is incurring the cost (salik account is in

the name of vehicle trader, as per the

illustration provided)?

 whether it is a cost incurred for provision of

services?

 whether it is recharged to the customer?

Similar to Salik, there are various additional

charges recovered by car rental companies,

such as refundable deposits, service charges,

additional insurance, penalties etc. Such

charges may or may not be subject to VAT.

Hence, businesses should take an informed

view on the applicability of VAT on such

charges.

Export of

cars

The FTA provided the conditions for direct

and indirect export of cars, and also

highlighted the importance of export

documentation (official and commercial

evidence) to justify any export of goods. The

vehicle trader may seek an exception in cases

where any of the evidence is missing.

FTA has re-emphasized the option of

obtaining an exception for non-fulfilment of

stipulated conditions.

Multiple sale of cars resulting in single

export: Where a single export is backed by

Clarity on indirect export:

 It is relevant to note that for a transaction to be

considered as an indirect export, the customer

should be an overseas customer.

 Many businesses have erred in interpreting

the indirect export provisions.

 It is important to analyze the transactions

where the customer is in the UAE and

automobiles are eventually exported outside

the UAE. In such a case, the transaction

between the automobile dealer and the

customer in the UAE may be subject to VAT

at 5%, since the customer is based in UAE

and not overseas.

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two or more underlying supplies, only the final

supply is treated as zero-rated.

 Businesses should note that if the relevant

export documents to justify export is missing,

then the transaction shall be subject to VAT at

5%.

Import of

cars

The FTA has provided the conditions for

import and its accounting, deferred payment,

import using clearing agent and import VAT

suspension and exemption. The same is in

line with Decree-Law and previous Guides

issued by the FTA.

In addition to the above, the FTA has clarified

the disclosure requirement under the VAT

return in the case of Purchase returns after

import, as follows:

 At the time of import –

- Accounting import VAT under Box 6 of the

VAT return.

- Recovering VAT under Box 10 of the VAT

return.

 At the time of purchase return –

- A negative adjustment should be made

under Box 7 and Box 10 of the VAT return.

We would like to refer to VAT Returns User

Guide issued by the FTA in May 2018, which

states regarding Box 7 that:

“You should use this box only if the information

that is prepopulated in Box 6 regarding goods

imported into the UAE is incomplete or

incorrect.”

Based on the above, there was a common

notion within the industry that Box 7 on

“Adjustments” can only be used in cases where

any adjustment is in relation to Box 6 of the

same tax period. Accordingly, businesses took

the position that any purchase return shall be

treated as export of goods outside the UAE, and

accordingly it should be disclosed under Box 4:

Zero-rated supplies (subject to the availability of

appropriate official and commercial evidence).

However, the FTA in the guide has clarified that

Box 7 can be used in respect of other tax

periods as well, for purchase return-related

transactions. Hence, businesses are required to

perform a negative adjustment under Box 7 and

Box 10, instead of disclosing the transaction as

zero-rated supplies under Box 4 of the VAT

return.

Additionally, an important point pertaining to an

exception from import VAT has been provided,

i.e., if any conditions for VAT suspension are

subsequently violated, goods can be treated as

being imported into the UAE and VAT shall

become due on the import from the date the

goods were originally imported.

Warranty

Services

Warranty is provided to the customer at the

time of sale of the car. The price of the

manufacturer’s warranty is included in the price

VAT treatment for warranty services should be

determined on the basis of whether the cost of

warranty is included in the price of the car, or

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of the car, and any extended warranty may be

sold separately.

The VAT treatment under both cases shall be

as follows:

 The warranty is included in the price of the

car at the time of the sale:

- No VAT implication would arise for the

actual repair services, as VAT has already

been accounted for in the original value of

the car (which includes the cost of the

warranty)

- Input tax incurred on carrying out warranty

repair services will be recovered

 Extended warranty for a consideration:

- An extended warranty should be subject to

VAT at 5%.

- No VAT Implication on the actual repair

services.

Reimbursement of repair costs by

distributors from manufacturers

There are two separate supplies in this

arrangement, from a VAT perspective:

 Warranty services provided by the

distributor to the customer - No VAT

implication would arise for the warranty

services as the cost of warranty service is

factored into the price of the car.

 Supply made under a warranty

arrangement on behalf of the

manufacturer - Any recovery shall be

subject to VAT at a standard rate of 5%,

any additional amount is recovered from the

customer.

Actual repairs services provided during the

warranty period shall have no VAT implication in

both the cases.

Reimbursement of expenses from the overseas

manufacturer during the warranty period shall

be considered a separate supply and subject to

VAT at 5% as the condition prescribed for

exports of services are not met (services are

provided in connection with goods in the UAE).

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being services in connection with goods

physically located in the UAE.

Auctions

The Auctioneer may either act as owner/

principal seller of the car or may act as an

agent on behalf of another person selling the

car.

The VAT treatment under each case shall be

as follows:

 Auctioneer acting as the principal

supplier (as Undisclosed Agent):

In such cases, there would be two supplies

from a VAT perspective:

- Between the seller and the auctioneer –

Subject to VAT at 5%

- Between the auctioneer and the end

customer – Subject to VAT at 5% or 0% (if

car is exported outside UAE and subject to

meeting the export condition)

 Auctioneer acting as an agent on behalf

of the supplier (as Disclosed Agent):

The supply would take place directly

between the owner and customer subject to

VAT at standard rate of 5 % or 0% (subject

to meeting export condition)

 Commission/ Premium charged by the

Auctioneer – would be subject to VAT at 5%.

The explanation of the VAT treatment on this

transaction is as per Article 9 of the VAT Law.

Additionally, the FTA has also elaborated on

the VAT implications on principal – agent

model in the E-commerce Guide issued by the

FTA in August 2020.

It is important that such arrangements are

clearly documented in the agreement between

the principal and the auctioneer (agent) clearly

providing the responsibilities of each party.

Promotion

s and

Discounts

 Free promotional gifts - Free promotional

gifts given as a part of promotional offers may

be classified as deemed supply provided

input VAT has been recovered on the

purchase of such gifts.

 Discounts - Discounts given by traders to the

Customer: VAT would apply on the

discounted price. The discount offered

should be clearly stated on the tax invoice.

There are various arrangements entered

between the original manufacturer, dealers and

customers depending on the type of automobile,

nature of promotions, market requirements etc.

Not all such arrangements should be subject to

VAT. For e.g., one can contest that any free

supplies that are given along with principal

supplies may not be considered as deemed

supplies.

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 Various discounts received by dealers from

the manufacturer:

 Bulk discount/ volume discount –

Discount given on the purchase of

specified number of units. Such a

discount should be clearly reflected in

the invoice.

 Contingent discount or payment i.e.,

discount or payment received by the

dealer on achieving a sales target – the

VAT implication should be determined

considering that either the stated

discount leads to a reduction in the price

of cars or is given on performance of a

specific activity.

Where the discounts lead to a reduction

in the price of cars, a credit note should

be issued to reduce the value. If the

payment/ discount is given to perform a

specific activity, it should be a

consideration for separate supply. The

dealer would be required to issue a tax

invoice and charge VAT at the applicable

rate.

Therefore, such arrangements warrant special

attention, as they result in either a consideration

being paid by manufacturer to dealers, or a

reduction in the cost of products purchased by

the dealer.

In our experience, one must investigate the

contract and the main intention of such

arrangements to bifurcate between cost

reduction vis-a-vis the payment of a

consideration to identify the correct VAT

treatment.

Additionally, such arrangements may have an

impact on Customs Duty paid at the time of

import of such products, which would need to be

analyzed separately. To elaborate on the

reduction of import price, should the customs

duty paid while importing such goods be

reduced or not

Company

cars

Input VAT should not be recovered on

expenses, such as maintenance, insurance,

servicing etc. on the purchase, rent or lease of

a company car available for personal use.

Input tax can be recovered in the event that a

car is taken home by an employee, provided

the vehicle is only available for emergency

purposes or the nature of the job and use of the

vehicle is such that it requires the employee to

keep the vehicle.

The FTA has given an important clarification

that an employee merely taking a car to their

home shall not be construed as the car being

made available or put to personal use. It may

be dependent on the nature of the job (e.g., area

sales manager), which may require the

employee to keep the vehicle with the

employee.

This is a good window of opportunity for logistics

and e-commerce companies to explore

discussions with the FTA and reclaim VAT on

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their delivery vans, which until now they have

not recovered.

It is important to consider how to convince the

FTA in cases where employees take cars to

their homes.

Demo

Cars

Demo cars are available in showrooms for

demonstration/ test drive purposes.

Manufacturers provide discount/ payment in

respect of demo cars to compensate the trader

for the lower retail value. The following two

arrangements have been provided:

 Payment made by the manufacturer is a

genuine reduction of the original sales

price - Such a payment will be considered as

a retrospective discount. The original

manufacturer should issue a credit note to

reduce the original sales price.

 Payment pertains to considerations to

perform a specific activity (such as

marketing services) - The payment will be

treated as a consideration for a taxable

supply. A tax invoice should be issued with

an applicable rate of VAT.

Any one-off payment given by the manufacturer

to the dealer to compensate for loss in relation

to demo cars should be identified, whether the

payment is in relation to a reduction in the price

of a car or relation to any specific activity, such

as marketing services. VAT treatment in such

cases should be determined accordingly.

Key Takeaway for Businesses:

In light of the clarification above, businesses should critically evaluate the following:

 Erstwhile tax positions.

 The supporting documents/ information (contracts, invoices etc.), based on which such tax

positions have been adopted.

 The manner in which the transactions/arrangements have been documented/described in the

agreements

 Internal checklist/ tax policy framework for such transactions

 Potential tax exposure and the way forward in terms of filing VDs, approaching FTA for further

clarifications, etc.

This information contained herein is in summary form and is therefore intended for general guidance only. This publication is not intended to address the circumstances of

any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

This publication is not a substitute for detailed research and opinion. Before acting on any matters contained herein, reference should be made to subject matter experts

and professional judgment needs to be exercised. WTS Dhruva Consultants will not accept any responsibility for loss occasioned to any person acting or refraining from

action as a result of any material in this publication.

WTS Dhruva Consultants

UAE

WTS Dhruva Consultants

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Dhruva Advisors

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KEY CONTACTS

Dinesh Kanabar

Chief Executive Officer

dinesh.kanabar@dhruvaadvisors.com

Tel: +91 9820020647

Nimish Goel

Partner

nimish.goel@dhruvaadvisors.com

Tel: +971 50106 6531

Deepak Agarwal

Associate Partner

Deepak.agarwal@dhruvaadvisors.com

Tel: +971 58282 3753

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