Profit Margin Scheme in UAE: All You Need to Know

July 11, 2021 | |

The Profit Margin Scheme is the mechanism whereby the Federal Tax Authority (FTA) in UAE allows a taxable person to calculate Value Added Tax (VAT) on the Profit Margin earned on eligible taxable supplies, instead of their sales value. The term Profit Margin is defined as the difference between the purchase price of an item and the selling price of the same. The scheme is introduced inorder to avoid double taxation on goods whose taxes are already paid (second-hand goods and the like). Hence, the FTA regulations demand that Profit Margin Scheme is only applicable to those goods which have been already subjected to VAT before the supply in question, which means that only certain supplies are eligiblefor the scheme. Consequently, the FTA issued a public clarification (VATP002) on the goods eligible for Profit Margin Scheme for VAT in UAE.

According to guidelines issued by FTA on the Profit Margin Scheme for VAT in UAE, the goods that come under the scheme include:

  • Second-hand good suitable for further use as it is.
  • Second-hand goodsuitable for further use after repair.
  • Antiques or goods that are over 50 years old.
  • Collector’s items like coins, stamps, and other pieces of scientific, historical, or archeological interest.

Thus a UAE VAT registered business can apply for Profit Margin Scheme on the eligible supplies mentioned if,

  1. The goods are purchased from either a person who is not registered for VAT in UAE or a taxable person who has already supplied it under the Profit Marg Scheme.
  2. The taxable person made a supply whereby the input tax was not

A taxable person will not be allowed to apply the profit margin scheme if a tax invoice or any other document mentioning an amount of VAT chargeable in respect of the supply is issued.

However, the good which would ordinarily be eligible to be included within the scheme but was purchased during a period in which they would not have been subjected to VAT, are not eligible for the Profit Margin Scheme on VAT on UAE. Suppliers should be confident about the eligibility of goods while applying for the scheme, which can be identified by:

  • Evidence showing the date in which the good was first manufactured, sold, or brought in to use.
  • Evidence showing whether the supplier has paid VAT on their original purchase.

Thus calculated,

  • If a good was purchased in 2017 or earlier, and the original purchase not subjected to VAT, the good is not eligible to be sold under the Profit Margin Scheme but must be sold under the full price.
  • If the good was purchased in 2018 or later, from a supplier who did not charge VAT on the supply whereby the good might been purchased in a period before the effective date of VAT, the good is not eligible to be sold under the Profit Margin Scheme but must be sold under full price unless any evidence shows that the good had been subjected to VAT on an earlier supply.
  • If the good was purchased in 2018 or later, from a supplier who has purchased it after the effective date of VAT, the good is eligible to be sold under Profit Margin Scheme where the evidence shows that the good had been subjected to VAT on an earlier supply.
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