We have seen a number of recent examples where businesses are facing material exposures to tax assessments and penalties arising from the incorrect application of the DZ rules, either in relation to their own supplies or as a result of the VAT treatment applied by vendors.
In our experience, many businesses struggle to apply DZ rules to the practical
examples they face in their business on a day to day business. As a result, businesses are being required to make adjustments to supplies previously treated as out of scope of VAT, in order to charge VAT at 5% to their customers. Such corrections can attract significant penalties which increase over time and can be up to 350% of the original tax due.
In addition, the recent Public Clarification VATP012 on Importation of goods by agents on behalf of VAT registered persons, raises some important points about the eligibility to recover VAT paid on import. In certain cases, this will lead to businesses being required to make adjustments to the value of import VAT automatically populated in Box 6 of the VAT return. In many cases, businesses appear not to have fully considered the implications of the Public Clarification on their current business and reporting practices.
If you are a business involved in supply chains which include movements of goods within, between, to and from DZ’s there is a risk that VAT rules may be applied incorrectly in many cases, including:
Where supply chains involve goods which are also subject to Excise Tax, further
complications can arise.
Ajman Free Zone
Which Free Zones should be considered as Designated Zones?
Free Zone = Designated Zone, only if
Transfers of goods into Designated Zone from outside the UAE: UAE VAT would not be applicable (Outside the scope of UAE VAT).Transfers of goods into Designated Zone from mainland UAE: These supplies are treated as local supplies, it is not considered to be an export of goods from the UAE. Accordingly, the standard rate i.e. 5% would be applicable.
Transfers between Designated Zones: Transfer of goods between two Designated Zones will be treated as outside the scope of VAT, subject to the previous two conditions being met.
Movement of goods from Designated Zones to Mainland: It will be out of scope supply for supplier located in Designated Zone & it will be considered as an import of goods for mainland buyer. Mainland buyer has to book VAT liability on Reverse Charge Mechamism basis.
Consumption or loss of goods into Designated Zone: Goods which are located in a Designated Zone on which the owner has not paid VAT will be treated as imported into the UAE where the goods are consumed by the owner, unless the goods are incorporated into, attached to or otherwise form part of or are used in the production of another good located in a Designated Zone and that other good is not itself consumed; or the goods are unaccounted for.
Supply of Water & Energy from Designated zone to Mainland or within Designated Zone: Standard rate i.e. 5% VAT will be applicable.
Sales/Lease of Real Estate in Designated Zone: Supplies of real estate (Sales/Lease) made within Designated Zones are outside the scope of VAT. Raw materials purchased within a Designated Zone for the purpose of constructing real estate in the Designated Zone are also outside the scope of VAT.
Services Related to Real Estate in Designated Zone: Supplies of services related to real estate will be taxable at standard rate i.e. 5% even if supplied within a Designated Zone.
Supply of goods within/between Designated Zones