Concept of deemed supply applies where no consideration is charged for the supply of goods or services by a taxable person.
Article 11 of Federal Decree – Law No.8 of 2017 on Value Added Tax read with Article 12 of the subject decree deals with supplies which may qualify as taxable supply and taxable person would be required to pay VAT even though no consideration is charged or paid in the transaction.
In below paras, I have tried to explain various clauses of Article 11 & 12, hope the same would be assisting the reader in developing the understanding about the concept.
The following cases shall be considered as Deemed Supply:
“1. A supply of Goods or Services, which constituted the whole assets of a Taxable Person or a part thereof, but are no longer considered to be as such, provided that the supply was made without Consideration.”
The above clause would cover all the free supplies made by a taxable person to any person including employees and customers. However, such free supplies must be made from the assets of such taxable person. It would include gifting of goods or services to any customer, employees etc.
for eg: Desert Dates LLC, Abu Dhabi gifted various goods say mobile phones to all his employees on it’s Annual Day, now on such gifts as per above clause VAT would be applicable.
“2 The transfer by a Taxable Person of Goods that constituted a part of his business assets from the State to another Implementing State, or from the Taxable Person’s business in an Implementing State to his Business in the State, except in the case where such transfer:
a. Is considered as temporary under the Customs Legislation.
b. Is made as part of another Taxable Supply of these Goods.
Via above clause, law covers self movement of assets by a taxable person from/to UAE to/from another implementing state unless such movement is temporary or made as as part of another taxable supply. For eg Dunes City Constructions LLC sets up branch office in Saudi Arabia and transfers certain machines used in construction to its branch office on permanent basis. Now under above provisions such transfers would be considered as deemed supply.
“3. A supply of Goods or Services for which Input Tax may be recovered but the Goods or Services were used, in part or whole, for purposes other than Business, and such supply shall be considered as deemed only to the extent of the use for non-business purposes.”
The above clause will capture use of business assets or services for non business purpose and personal purpose. For eg. Use of car owned by the business for private use. To elaborate more, let say Mr. Jack runs a travel business in UAE and owns 10 4X4 Land Cruiser for taking his customers for desert safari, private transfers and city tours. During off season out of 10, he uses 3 4X4 Land Cruiser for his personal purpose – taking family to various emirates, nearby countries etc. Now, such personal use of vehicles by Mr.Jack would be considered as supply and VAT would be payable.
“4. Goods and Services that a Taxable Person owns at the date of Tax Deregistration.”
The above clause is simple and straight forward that whatever business owns on the date of tax deregistration would be considered as deemed supply and tax would be payable on the same.
As per Article 37 of the subject Decree, value of deemed supply will be will be equal to the total cost incurred by the Taxable Person to make deemed supply.
Article 12 of the subject Decree envisage certain situations, wherein Article 11 does not operates.
1. If no Input Tax was recovered for the related Goods and Services
That is when credit of input tax on related goods and services not taken at the time of purchase or receipts of goods and services by a taxable person.
2. If the supply is an Exempt Supply.
Supplies exempt from VAT are given in Article 46 of the subject Decree and thus any such supply would not be considered as deemed supply. However, it is to be noted that this benefit of law is applicable only on exempt supply and not zero rated supplies mentioned in Article 45 of the subject Decree.
3.If the recovered Input Tax has been adjusted for the Goods and Services pursuant to the Capital Assets Scheme.
Under Capital Assets Scheme (‘CAS’) credit of VAT would be spread over the period use. Thus, if someone is following CAS for VAT credit, in such a case he would have claimed only proportionate amount of credit at the time of transfer and not the full credit. Thus such transfer would not be considered as deemed supply.
4. If the value of the supply of the Goods, for each Recipient of Goods within a 12-month period, does not exceed the amount specified in the Executive Regulation of this Decree-Law, and the Goods were supplied as samples or commercial gifts.
Sample or commercial gifts upto certain value per recipient would be out of the ambit of Article 11. For value, we need to wait for executive regulations. It is to be noted that such benefit is available only in case of goods and not services.
5. If the total Output Tax due for all the Deemed Supplies per Person for a 12-month period is less than the amount specified in the Executive Regulation of this Decree-Law.
This clause gives general exemption from the scope of deemed supplies, however for value, we need to wait for executive regulations.
Thus businesses needs to be very watchful of their conduct and properly declare value of deemed supplies, error in disclosure may have penal consequence.
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