VAT Case Study: Missing Docs Kill Zero-Rating Claim
UAE VAT Law prescribed 0% VAT for the goods or services exported from the UAE to outside the UAE, and certain local services are subject to being taxed at 0%. While the UAE facilitated export of goods and services with Zero-rated supplies, proper documentation and procedures and mandatory to claim eligibility and avoidance of administrative penalties and legal complications.
In this case study, let us read and understand how a Dubai-based Distribution Company lost the eligibility for 0% VAT on export of goods and ended up paying administrative penalties for non-compliance with documentation.
Company Background
➤ Company Name: NovaTech Electronics FZCO
➤ Free Zone: Dubai Airport Free Zone (DAFZA)
➤ Business Activity: Distribution of consumer electronics to overseas markets.
➤ Annual Turnover: AED 38 million
➤ VAT Registration: Active since 2019
NovaTech exports over 85% of its goods to Europe, Africa, South Asia, and the GCC. Assuming all the export of goods is eligible for 0% VAT as per Article 30 of the UAE VAT Executive Regulations, the company has been filing the goods exported under Zero-rated supplies
Objective
- Apply zero-rating correctly on exported goods
- Avoid financial exposure from underpaid VAT or FTA disputes
- Make sure that the logistics partners and internal teams maintain the required documentation to support the export of goods.
Legal Reference-Article 30 of the Executive Regulations under
UAE VAT Law:
- Zero-rating of VAT is eligible for export of goods to a place outside the implementing state (as of today, the concept of implementing state is not in practice and we consider it as the UAE) within 90 days from the date of supply or kept in under the Customs Suspension Regime. If the business wants to extend the period from 90 days, an administrative exception application is required to be submitted. READ MORE
- The supplier must retain commercial and official evidence of export. It is mandatory to retain the commercial and official evidence of export of goods from the UAE.
- Any violation of the conditions may result in the supply being treated as standard-rated at 5%.
Key documents required include:
- Customs export declaration
- Airway bill or bill of lading
- Commercial invoice
- Evidence of receipt of goods outside the UAE.
FTA Public Clarification VATP004 and VATP010 have emphasised the need for documentation and timely compliance
What Went Wrong?
NovaTech:
- The reliance on third-party freight forwarders and customs agents was heavy.
- The company was not systemised and eventually failed to record and retain certain customs export declarations while exporting.
- Immensely failed to retain the transportation documentation for the overseas delivery.
- Filed VAT return with the prejudiced mindset that all the export of goods can be classified as zero-rated supplies, and only documentation kept was internal invoices and tracking emails. During the FTA audit, the team identified that shipments worth AED 2.1 million were lacking sufficient documentation as prescribed by the UAE Federal Tax Authority
FTA Audit and Findings upon FTA's routine audit:
- NovaTech was asked to submit the list of exports on a sampling basis and provide complete documentation.
- For 10 transactions, neither the customs export declaration nor the third-party evidence of overseas delivery was missing.
- FTA concluded that in the absence of proper export documentation, these transactions are not qualified for Zero-rating.
Outcome:
- FTA reclassified these sales as standard-rated supplies
- Imposed a VAT liability amounts AED 105,000 (5% of the export, where the documents are missing AED 2.1 Million )
- As per Cabinet Decision No.75 of 2023, FTA assessed administrative penalties for violations.
- FTA requested the company to take corrective actions by submitting and processing the restructuring.
Financial and Operational Impact
- VAT underpaid: AED 105,000
- Estimated penalties and interest: AED 30,000
- Changes in the system for the reclassification of historical invoices.
- Obvious delay and extended scrutiny for future VAT refund requests.
Although clients were unaffected, due to the negligence of documentation, the business bore the full tax cost, penalty and interest.
Lessons Learned
1. While classifying a transaction as zero-rated, documentation is everything. Eligibility is not only based on the movement of goods to the UAE but also on how to prove the movement of goods.
2. While businesses are relying of third-party forwarders, oversight on the activity and obtaining the necessary documents timely is key.
3. FTA may start with a sampling audit, and the identification of discrepancies can lead to comprehensive audits.
4. Once the 90 days have passed from the date of supply and goods are not exported, the transaction is required to be reinstated to standard-rated or submit an application for administrative exceptions.
Corrective Measures Taken
NovaTech took immediate steps to rectify its internal processes:
- Implemented a compliance tracker and checklist to identify the movement of goods.
- Implemented a monthly internal audit to make sure that all commercial and official evidence is in place.
- Engaged directly with freight forwarders to receive complete documentation packages
- Updated accounting software to the extent of timely flagging of shipments without matching export evidence.
- Filed a Voluntary Disclosure with the FTA for the tax period where the mistakes happened.
Ongoing Compliance Strategy
NovaTech's updated policy includes:
- Documentation and reconciliation are made mandatory before entering any Zero-rated transactions.
- Monthly VAT health checks to pre-audit potential risks and appointed an FTA-approved Tax Agency to handle the tax matters.
How Flyingcolour Tax Consultant Can Help?
If your business exports goods and applies zero-rating, we can support you in:
- Verify the transactions and make sure the eligibility for Zero-rating.
- Establishing a robust documentation process
- Preparing for FTA audits or defending zero-rating claims
- Flagging the transaction that lack evidence to prove the zero-rating under UAE VAT law.
Disclaimer: The company names and details mentioned in this case study are fictional and have been created solely for illustrative and educational purposes. Any resemblance to real entities is purely coincidental.
To learn more about VAT Case Study: Zero-Rating Denied Due to Missing Export Documentation, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.