VAT Update: New VAT Treatment for Specific Electronic Devices

Implementing the Reverse Charge Mechanism for Mobile Phones, Computers, and Tablets.

Effective from October 30, 2023.

Cabinet Decision No. 91 of 2023 has introduced a unique VAT treatment for domestic supplies of certain electronic devices. This decision outlines the criteria and requirements necessary for applying VAT through the reverse charge mechanism, which comes into effect on October 30, 2023. In this article, we will examine this new VAT treatment, which carries significant implications for businesses engaged in Electronic Device transactions.

Understanding Reverse Charge Mechanism (RCM)

The recently introduced VAT treatment, known as the Reverse Charge Mechanism (RCM), fundamentally shifts the VAT obligation from the seller to the buyer. In simpler terms, it means that the buyer takes on the responsibility for VAT accounting. Meanwhile, the seller is relieved of the duty to levy VAT on sales or report it in their tax returns, provided specific conditions are met.

The new VAT treatment

In the context of the new VAT treatment, when VAT-registered suppliers sell Electronic Devices to VAT-registered buyers who have the intention to either resell these devices or use them in manufacturing, the suppliers are no longer responsible for accounting for VAT on these transactions. Instead, the VAT liability associated with these supplies falls on the buyer, who must account for it using the Reverse Charge mechanism.

In summary:

1. Sellers of Electronic Devices are not required to charge or account for VAT on these supplies, and they do not need to report any tax liability in their VAT returns.
2. Buyers bear the responsibility for all tax obligations and must account for VAT as output tax. Subsequently, they can reverse or claim it following the standard VAT claim rules and the special conditions outlined in this decision.

Scope of “Electronic Devices”

It’s important to note that this decision applies exclusively to Mobile Phones, Smartphones, Computer Devices, Tablets, and Pieces and Parts thereof. Please be aware that the Ministry of Finance will further specify the criteria for electronic device parts and components.

The term “Mobile Phones” encompasses a broad range of devices, from basic call functionality models to advanced smartphones. “Computer devices” encompass personal computers, desktops, servers, computerized engine control units for vehicles, and similar computing devices. Meanwhile, “Tablets” are defined as wireless, portable personal computers equipped with a touchscreen interface.

Exclusions from the Scope

This decision excludes the following:

1. Electronic devices beyond those mentioned above.
2. E-readers lacking additional features such as gaming or web browsing.
3. Direct or indirect exports of the specified Electronic Devices outside the UAE.

Scope Pieces and Parts of Electronic Devices

In accordance with Ministerial Decision No. 262 of 2023, it’s important to define the components and parts that are considered related to Electronic Devices. These components fall within the scope if they meet any of the following criteria:

1. Manufacturing Necessity: Pieces and Parts that are typically used in the manufacturing or production of Electronic Devices and are deemed essential for the normal operation of these devices.
2. Operational Necessity: Pieces and Parts that may not be directly used in manufacturing but are vital for the proper functioning of Electronic Devices. This category includes items like chargers, power cords, battery packs, and similar components.
3. Replacements: Components that serve as replacements for those falling under categories (1) and (2).

However, it’s essential to note that certain items are excluded from the scope of Electronic Device Components. These excluded items will follow standard VAT treatment and do not fall under the category of Electronic Device Components. These exclusions include:

1. Enhancement Components: Pieces and Parts that enhance the functionality or user experience of Electronic Devices but are not necessary for the basic operation or activation of their features.
2. SIM Cards and Similar Smart Cards: External smart cards, such as SIM cards, or those with similar purposes, do not fall under the scope of Electronic Device Components.

Intent to Resell or Use in Production

A pivotal criterion for transactions falling under the Reverse Charge Mechanism is the “intent to resell” or use in production. This means that when a buyer intends to resell electronic devices or use them in the production of other electronic devices, the responsibility for VAT payment shifts to the buyer. However, if the devices are intended for internal use or distribution among employees, they do not meet the “intent to resell” requirement.

Compliance Requirements for Suppliers

To adhere to the Reverse Charge Mechanism for Electronic Devices, suppliers must meet specific compliance requirements outlined by the Federal Tax Authority (FTA) in the UAE. Here are the key compliance requirements for suppliers:

1. VAT Registration: Suppliers must be registered for VAT in the United Arab Emirates (UAE).
2. Buyer’s Declaration: Suppliers must obtain and retain a declaration from the buyer. This declaration serves as confirmation of the buyer’s VAT registration and his intent to either resell the Electronic Devices or use them in production.
3. Verification of Buyer’s VAT Registration: Suppliers are responsible for verifying the VAT registration status of the buyer.
4. Adherence to VAT Obligations: Suppliers must fulfill all other VAT obligations as stipulated by UAE tax regulations. This includes the issuance of a Tax Invoice that contains a specific statement indicating that “The recipient (buyer) is required to account for tax pursuant to Cabinet Decision No. 91 of 2023.”

Compliance Requirements for Buyers

Buyers engaging in transactions covered by the Reverse Charge Mechanism (RCM) for Electronic Devices in the UAE must adhere to specific compliance requirements. Here are the key compliance requirements for buyers:

1. VAT Registration: Buyers must be registered for VA in the UAE.
2. Declaration to the Supplier: Buyers are responsible for providing a declaration to the supplier before the scheduled date of supply. This declaration serves as formal confirmation of the buyer’s intent, either to resell the Electronic Devices or use them in production.
3. VAT Accounting via Reverse Charge: Buyers must account for VAT using the reverse charge mechanism as mandated by UAE tax regulations. This means that the buyer becomes responsible for calculating, self-charging, and reporting the VAT amount related to the transaction, subsequently reversing it or claiming it as part of their VAT return, following the specific requirements above and the standard VAT claim rules.

Effective Date

The application of Cabinet Decision No. 91 becomes effective on October 30, 2023. Supplies of the specified Electronic Devices with a date of supply on or after October 30, 2023, shall be subject to the VAT treatment and compliance requirements outlined in the decision.

Non-Compliance Consequences

Adherence to the prescribed conditions is crucial for both buyers and sellers engaged in transactions covered by the Reverse Charge Mechanism for Electronic Devices in the UAE. Failing to meet these conditions can result in specific consequences:

1. Seller’s Responsibility: If any of the conditions are not met, particularly if the buyer fails to provide the required declaration of intent and VAT registration before the agreed supply date, the seller is obligated to charge and account for Output Tax. This means that the seller will need to include VAT on the transaction and report it as part of their VAT obligations.
2. Buyer’s Implication: On the buyer’s side, non-compliance has significant implications. If the buyer does not fulfill the necessary conditions, including the timely provision of the declaration of intent, they will be unable to recover the input VAT related to the transaction. This essentially means that the buyer will bear the cost of output VAT without the possibility of reclaiming it.

AUDIIX Insight

The new VAT approach offers Electronic Devices traders an opportunity to alleviate the burden of compliance and enhance their cash flow. It’s crucial for Electronic Devices traders to grasp and abide by the compliance prerequisites to fully leverage the advantages of this new VAT treatment and avoid any negative consequences resulting from non-compliance.

We strongly advise businesses in this sector to make necessary adjustments to their VAT processes and systems to incorporate and track the new Reverse Charge Mechanism for Electronic Devices. Additionally, implementing robust processes and control procedures is essential to ensure full compliance, which includes accurate record-keeping of buyer declarations, VAT registration, and other pertinent documents.

Useful Downloads

Declaration Template

Legislative References

• Federal Decree-Law No. 8 of 2017 on Value Added Tax and its Executive Regulations.
• Cabinet Decision No. 91 of 2023
• VAT Public Clarification VATP034

Elsir Badri,
Partner,
FCCA, MBA, CMA, UAECA, Tax Agent.