A weekly column where readers get their queries answered on Value Added Tax (VAT), Economic Substance Regulations (ESR), Customs and other GCC taxes. This week, queries relating to valuation of supplies by registered taxpayers are answered.
Question #1: My company (letâs call it, âCompany Xâ) has purchased 10,000 T-shirts at Dh10 (excluding VAT) per piece and recovered input tax (VAT incurred on purchases) of Dh5,000 (5% X 10 X 10,000). However, to liquidate inventory, the company has offered âBuy One Get One Freeâ Scheme at the rate of Dh12 (excluding VAT). My total output tax (VAT charged on sales) is Dh3,000 (5% X 12 X 5,000).
Do the T-shirts supplied free of cost (FOC) under the scheme amount to a âDeemed Supplyâ?
Under the âBuy One Get One Freeâ scheme, the actual price paid by the customer is treated as the consideration for both the items, meaning the supplier is considered to have received a reduced price for the two items. The supplier is not selling one item for the full price and providing the other as free of cost (FOC).
(For VAT, âconsiderationâ means all that is received or expected to be received for the supply of goods.)
Therefore, additional T-shirts given under the scheme will not be treated as a âdeemed supplyâ that is a supply without consideration. Correct valuation helps the businesses to optimise the VAT costs.
The Federal Tax Authority (FTA) has also clarified as follows:
Question #2: âCompany DGâ is a retailer of electronics goods. During the Dubai Shopping Festival (DSF), a laptop manufacturer (letâs call it, âCompany MSâ) offers a price-support (subsidy) of Dh1,000 per laptop sold by âCompany DGâ.
Accordingly, the âCompany DGâ offers a discount of Dh1,000 on the normal selling price of Dh4,500 (excluding VAT). âCompany DGâ sells the laptop at Dh3,500 (excluding VAT) to the customer. At the end of DSF, âCompany DGâ recovers the price-support (subsidy) from âCompany MSâ on the basis of total sales quantity.
On what value should âCompany DGâ calculate VAT, Dh4,500 or Dh3,500?
For VAT, âconsiderationâ means all that is received or expected to be received for the supply of goods. The Íþ¿Íµç¾º VAT law does not specify that the consideration should flow from the buyer alone. As per the European and global VAT principals also, âconsiderationâ could include payments made by the buyer as well as by third parties.
Further, a discount can be reduced for calculating VAT if: (a) the customer has benefited from the reduction in price; and (b) the supplier has funded the discount.
Though the receiving customer has benefited from the discount of Dh1,000, the supplier that is âCompany DGâ has not funded the said discount. The discount was financed/funded by âCompany MSâ.
Accordingly, âCompany DGâ should calculate VAT on Dh4,500 and not on Dh3,500. Errors in the calculation and payment of VAT could result in penalties up to 300 per cent of the tax amount.
Question #3: My company (letâs call it âCompany Dâ) runs a restaurant. During COVID-19, there is an increase in our sales through an e-commerce delivery platform (letâs call it âCompany Zoâ). For a typical customer order of Dh250, âCompany Zoâ collects the payment from the customer and pays only Dh200 to âCompany Dâ. Should âCompany Dâ treat Dh250 or Dh200 as its sales value?
In a typical e-commerce transaction like this, âCompany Zoâ acts as a disclosed agent of âCompany Dâ for booking customersâ orders, collecting money and delivering the goods.
Supply of goods through a disclosed agent is still considered to be a supply by the main supplier to the customer. The main supplier i.e. âCompany Dâ will be treated as supplying the goods for Dh250. âCompany Dâ should issue a tax invoice accordingly.
Dh50 retained by âCompany Zoâ represents the delivery fee/commission for a separate supply of services from âCompany Zoâ to âCompany Dâ. âCompany Zoâ should issue a tax invoice for Dh50 to âCompany Dâ. Errors in the calculation and payment of VAT could result in penalties up to 300 per cent of the tax amount.
Question #4: âCompany Fâ is in the business of supplying manpower to its clients. The manpower is employed on the visa of the same company, who charges a fixed service fee (letâs say, Dh500) per person from its clients. âCompany Fâ also recovers the salary costs of the manpower (letâs say, Dh5,000) from the clients. Is it correct for âCompany Fâ to charge VAT only on Dh500 which represents the actual value of its services?
âCompany Fâ should charge VAT on Dh5,500 and not just on Dh500. For VAT, âconsiderationâ means all that is received or expected to be received for the supply of goods.
Even though Dh5,000 represents the cost of manpower incurred only because of the clients, the costs were incurred by âCompany Fâ as the main seller (Principal). This is essentially because the manpower is employed on Company Fâs visa. Accordingly, the recovery of the salary costs of Dh5,000 will be treated as a âreimbursementâ and not a âdisbursementâ.
Reimbursement of expenses are taxable under VAT in addition to the value of services provided to the clients/customers. Errors in the calculation and payment of VAT could result in penalties up to 300 per cent of the tax amount.
- Selected queries on a particular topic are being answered by a team from AskPankaj Tax Consultants. You can send your tax queries on YourMoney@gulfnews.com. The answers are for general guidance and does not constitute as legal advice.
Pankaj S. Jain, is the Managing Director of AskPankaj Tax Consultants and Tax Agency.