VAT Implications for the Automotive Sector in UAE
VAT Implications for the Automotive Industry in UAE
UAE is not a car manufacturing country. They are manufactured in other countries and a network of authorized distributors sell them in the country. As per the VAT legislation, the standard VAT rate in the automotive sector is 5% and public transport services are zero-rated. But, the application and treatment are not so simple.
Several cases need special attention such as the supply of second-hand cars, export-import of cars, supplies under warranty, and many more. In this article, we will discuss all these cases and many more to understand how VAT affects businesses operating in the automotive sector.
Sale of a car within UAE through outright sale
If the sale transaction happens within UAE, the VAT rate is 5%. The date of supply is the earlier of:
- Date of transfer of the car to the customer
- Date of possession of the car by the customer
- Date of issuance of tax invoice
- Date of receipt of payment
If it is an outright sale but involves periodic payments, the date of supply changes. It becomes earlier of the:
- Date of receipt of payment
- Date of issuance of tax invoice
- Date of payment due, as mentioned in the tax invoice
But the date must not be more than one year of the date of supply of the car to the customer. Whatever the case be, the supplier must issue the tax invoice within 14 days of the date of supply. The supplier must mention this amount as output tax in VAT returns for the tax period in which the supply happens.
Sale of a Car Within UAE Through a Hire-Purchase Arrangement
A hire-purchase arrangement is different from outright sales. Here, from the VAT viewpoint, two supply transactions happen. In the first transaction, motor vehicle trader supplies to the finance company. In this transaction, there is a transfer of ownership from trader to finance company.
In the second, the finance company supplies to the customer. In this transaction, the customer hires the car from the finance company. Once all hire installments are paid, the ownership transfers to the customer.
In such a transaction, the motor vehicle trader issues a VAT invoice to the finance company by accounting for VAT on its sale price. The finance company issues two types of invoices to the customer for every month’s installments:
- Hire installments that are subject to VAT
- Interest amounts, which are exempt from VAT
Sale of a car within UAE through trade-in of an old car
The sale of a car in the UAE can also happen through the trade-in of an old car for a new car. Herein, two supply transactions take place.
First is the sale of the new car from the motor vehicle trader to the customer. The motor vehicle trader imposes VAT at a standard rate on the sale price of the new car. The second transaction is the sale of the old car from the customer to the motor vehicle trader. It is best to not net off the trade-in value of the old car against the sales price of the new car.
Sale of used or pre-owned cars
If a VAT-registered supplier is selling used or pre-owned cars, then the VAT rate is 5%. The invoicing, date of supply, and tax payment rules are the same as in the case of sales of new cars. The only difference lies in the availability of Profit Margin Scheme for VAT accounting for the supply transaction of old cars.
Suppliers have the choice to use the Profit Margin Scheme to calculate the VAT while selling used cars or calculate it on the full sales value of the car. The key rationale of this scheme is accounting for VAT on the difference between the price paid at the time of purchase of the car and the price charged to the customer at the time of sale. So, the accounting for VAT happens based on the profit earned on taxable supplies.
But this scheme can be applied only if the following conditions are satisfied:
1. The motor vehicle trader must have purchased the car only from a non-taxable person or a taxable person who used Profit Margin Scheme to calculate tax on the supply.
2. If the trader has purchased the car from a VAT-registered supplier, input tax must not have been recovered
3. The trader must have relevant documents as evidence of the car being subject to VAT previously.
4. The trader must issue a tax invoice and mention that the tax has been charged using Profit Margin Scheme. The invoice must have all relevant required information, except the VAT amount.
5. The trader must have and maintain all the prescribed records and documents, including:
- Stock book on details of each car purchased and sold under the Profit Margin Scheme
- Purchase invoices of all these cars purchased under this scheme
6. The trader must mention in its VAT return form that it has opted to account for VAT using the Profit Margin Scheme.
If any of the above conditions are not satisfied, the scheme cannot be applied. If cars were purchased prior to VAT implementation in UAE, then the trader cannot apply the profit margin scheme. If the cars are imported into UAE where the VAT upon import has been recovered, then this scheme does not apply.
Import of Cars
Import of cars is subject to 5% VAT. The price of the car includes the value of insurance, freight, and customs fees. The importer is the person who is listed as the importer responsible for importing cars for custom clearance purposes. This importer is responsible to account for import VAT. And, the accounting mechanism depends on the registration status of the importer at the time of import.
To account for VAT in the VAT return for the tax period in which the cars are imported, the importer must satisfy the below conditions:
- The importer must be registered for VAT at the time of import
- The importer must have the evidence for verification of import and VAT on it and submit the same to FTA when requested
- The importer must provide its Customs Registration Number to the FTA through the e-services portal
- The import must comply with the rules imposed by FTA related to the import
When the VAT-registered importer provides its Customs Registration Number to the FTA before the import, the release of cars will be faster after the completion of customs formalities. And, the importer’s VAT return form will have the details pre-populated in the output box. Before submitting the VAT returns, the importer must verify all the details.
If the importer is not registered at the time of import of cars, the importer needs to pay VAT to the FTA at the time of import. Only after VAT payment, the Customs department releases the cars. For this, the importer must fill out the form VAT301 and pay the applicable VAT.
If a clearing agent, freight forwarder, or a third-party local company is importing cars on behalf of a VAT-registered importer, the customs declaration form will have the importer’s TRN. This will allow the importer to account for VAT in its VAT return form.
If the importer is not VAT-registered, the clearing agent will mention its TRN number on the customs import declaration. The agent will pay VAT in this case. But, it cannot recover the import VAT as its own input tax in the VAT return since it does not own the goods. But, the agent can recover the VAT-paid amount directly from the importer. For this, the agent must issue a statement to the importer mentioning the following details:
- Name, TRN, and address of clearing agent
- Date of issue of statement
- Date of import of relevant goods
- Description of imported goods
- VAT amount paid by the agent to the FTA
This statement serves as the tax invoice for VAT purposes. The importer can use this statement to recover VAT. FTA obligates all agents to retain copies of these statements, as these will be inspected during the audit of VAT accounts.
Goods under customs duty suspension arrangements as per the GCC Common Customs Law are not treated as imported into the UAE under any of the following categories:
- Temporary admission
- Goods in transit
- Imported goods that might be re-exported by the same person
- Goods placed in a customs warehouse
If any of the above exceptions apply, then it is not considered as import, and hence, not subject to VAT. If any of these conditions are not followed, then goods are treated as import, and hence, subject to VAT from the date the goods were imported.
There are some situations as follows where import of goods into UAE is fully exempt from VAT because these are goods exempt from customs duty as well:
- Returned goods
- Personal effects and gifts accompanied by travelers
- Goods imported by internal security forces and military forces
- Used personal effects and household items transported by UAE nationals living abroad on return or ex-pats moving to live in the UAE for the first time
There are cases wherein the motor vehicle dealer imports the car and later returns it to the original manufacturer. This means the car is exported out of UAE. At the time of import, the dealer accounts for import VAT and recovers input tax in the VAT return. When the dealer returns the car, there is a negative adjustment in the VAT returns.
Export of Cars
If the cars are being exported from UAE, the default VAT rate is 5%. But these are situations where a VAT rate of 0% will be applicable on the supply only if the following conditions are satisfied:
- If the motor vehicle trader arranges the transport of sold cars from UAE to another country or appoints an agent to do so, the supply, known as direct export, can be 0% if the trader exports cars outside UAE or puts into customs suspension regime within 90 days of the date of supply and has the official and commercial evidence of the same.
- If the overseas customer arranges for the collection of cars from the trader or appoints an agent to do so, the supply, known as indirect export, can be 0% if the following conditions are met:
- The car is physically exported outside the UAE or put into a customs suspension regime within 90 days of the date of supply as per the agreement signed between the two parties
- The overseas customer gets the official and commercial evidence of export or customs suspension and provides a copy of the same to the trader
- No one uses or repairs the car during the time between supply and export or suspension regime, except the necessary preparation
- The goods must not leave UAE while being possessed by a passenger or crew member of a ship or an aircraft
The official and commercial evidence proves the occurrence of the transaction and that the car has left UAE. The evidence for export must mention the following details:
- Value of goods
- Export destination
- Mode of transport
- Route of the export movement
If there are any situations wherein obtaining the evidence or exporting within 90 days of the supply is impossible due to some valid reasons, then the exporter can apply for an exception to the FTA.
If the export is a single transaction but is supported by one or more underlying supplies, then the final supply is zero-rated. Suppose customer ‘A’ in India wants a car from a trader ‘X’ in UAE. ‘X’ purchases a car from another trader ‘Y’ based in UAE. ‘X’ does not take the delivery from ‘Y’, but ‘Y’ directly delivers it to ‘A’ in India where ‘Y’ is the agent exporting the car on behalf of ‘X’. VAT at 5% applies for the sale of the car from ‘Y’ to ‘X’. As an export transaction from ‘X’ to ‘A’, the VAT rate is 0%.
When a warranty is included in the price of the car, the supplier repairs the defects for the mentioned period free of charge. Thus, VAT is accounted for in the price of the car. So, there is no VAT obligation when the actual repair is done. The supplier can recover the input tax incurred on carrying out the repair services.
A supplier may provide an extended warranty to its customers for a specific period. This warranty is for extra charges and is not included in the price of the car. This extended warranty invites VAT at a rate of 5%. When the supplier provides the extended warranty, then it can charge VAT, but not during the actual repair services.
A distributor may also provide warranty services to customers in UAE at no extra charge. In this case, no VAT implications arise. This is because the distributor’s warranty was just a transfer of warranty services from manufacturer to end customer. That is why the VAT charges are included in the original price of the car. If the distributor incurs any costs in honoring the warranty, then the VAT treatment related to those costs is determined separately.
Lease of Cars
Generally, 5% VAT is applicable on the leasing of cars whether it is by motor vehicle dealers or car rental companies. The leased cars may be used by residents or tourists and for any duration – longer duration (yearly/monthly) or shorter duration (daily/weekly). There may be periodic payments in the case of leasing for a longer duration. In such cases, the date of supply, which must not be more than one year, is the earliest of:
- Date of issuance of tax invoice
- Date of due payment as mentioned on the tax invoice
- Date of payment receipt
Company Cars and Demo Cars
The purchase, lease, or rent of company cars is available only for company work purposes. If it is used for the personal reasons of an employee, the input tax incurred on it is blocked. With this blockage, the taxable person cannot recover input tax on related expenses including but not limited to maintenance, insurance, and servicing.
Demo cars cannot be sold at a full retail value because they are used for test drive purposes. To compensate for the lower value, the manufacturer makes a one-off payment to the motor vehicle trader. The reduction in the original sales price is considered a retrospective discount. For this, the manufacturer issues a credit note to the trader.
Any money spent by the trader on activities such as marketing is treated as consideration for a taxable supply. For such expenses, the trader must issue a tax invoice and charge VAT at the applicable rate.
There are auctions conducted for cars where traders can sell their cars. The trader may be the principal seller of the car or it may act as an auctioneer working as an agent of the seller. The VAT treatment depends on what is the role played by the trader. Following are the cases based on the role played by the trader:
(1) If the auctioneer is the principal supplier, such an arrangement is known as an undisclosed agency. Here, two supply transactions happen – one where the seller sells to the auctioneer and the second where the auctioneer sells to the end customer. If the auctioneer is registered for VAT, the VAT at 5% is accounted for (provided the conditions for zero rate VAT are applicable). If the auctioneer is not registered for VAT, evaluation of whether VAT registration is essential because of the supply must be done.
(2) If the auctioneer acts as an agent of the principal supplier, such an arrangement is called disclosed agency. In such a transaction, there is a sale happening from the principal supplier to the customer and the auctioneer is ignored. If the principal supplier is not registered for VAT and not required as well, then this transaction is outside the scope of VAT. If he/she is registered, then the VAT rate is 5%. If he/she is registered and the car is exported from UAE, the VAT rate is 0%.
The auctioneer must maintain sufficient documents as proof for the sale transaction happening between the principal supplier and the customer. These documents can include a contract between the auctioneer and the principal seller, the invoice issued by the seller to the customer, and the commission invoice issued by the auctioneer to the seller.
(3) If the auctioneer issues own tax invoices on behalf of the principal supplier, he/she must mention the name of the principal supplier along with its TRN. In that case, the principal supplier would not issue another tax invoice for the same supply. Still, the principal supplier is responsible to account for VAT and comply with VAT obligations as per the VAT law’s provisions.
(4) The auctioneer can charge a commission and/or premium to the buyer or principal supplier of the car or both for the auctioning services. If the auctioneer is registered or required to be registered, it must impose VAT on this amount and account for FTA in the VAT returns submitted to the FTA.
Promotions and Discounts
Traders often offer discounts and promotional gifts to attract customers. For free gifts, they do not get any consideration from the manufacturer. When they purchase such gifts and do not recover input tax on it, then deemed supply provisions do not apply. If they can recover input tax, then the free supply of these gifts is considered as deemed supply.
If a trader offers discounts on the car’s sales price, the trader has to pay from his/her pocket. In that case, VAT is applicable on the discounted value. The trader must mention the discount offered, as it will serve as proof of VAT.
The manufacturer may give a discount to the trader for purchasing a specific (high) number of cars. The manufacturer must mention this discount amount on the invoice. The manufacturer may also provide a contingent discount or payment to the trader on achieving a specific sales target. If this discount or payment reduces the price of the car, the manufacturer must issue a credit note. If the discount or payment by the manufacturer is because of a specific activity performed by the trader, the dealer must issue a tax invoice and charge VAT at the applicable rate as per the supply nature.
Basic instructions for car dealers
The motor vehicle traders must display and advertise VAT-inclusive prices This gives the customer a clear idea of the price payable for the car. The traders must also stipulate that their prices are inclusive of VAT.
If the car is for export or where the customer is registered for VAT, only in these cases, the advertised price can be exclusive of VAT. Also, in these cases, the trader must clearly mention that the price does not include VAT.
In the case of sales of cars to foreign governments, diplomatic bodies, or international organizations, the VAT rate is 5%. But these organizations and officials can claim refunds for VAT through the special VAT refund scheme for them as stipulated in the VAT law.
Whatever case of car sale you fall in, ensure to comply with the VAT obligations. Follow the rules, maintain the documents, and ensure to make VAT payments on time. If you have any questions on VAT or need any help in VAT compliance, you can contact UAE VAT Consultancy.
About UAE VAT Consultancy
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