VAT-registered buyers in the UAE often comes across business situations where a proposed supplier is not yet registered for VAT. Some of the buyers decide not to transact with such suppliers. The VAT law is very clear on such transactions.
VAT is imposed on taxable supplies and deemed supplies made by a ‘taxable person’. A ‘taxable person’ refers to such person who are VAT-registered or obligated to get VAT-registered . Therefore, VAT itself is not applicable on the supplies made by a supplier who is neither VAT-registered nor liable to be registered.
The responsibility of tax is on the supplier i.e. taxable person who makes the supply of goods or services. One of the limited scenarios wherein a recipient/buyer is liable to pay VAT, under reverse charge mechanism, covers import of goods or services by a VAT-registered entity.
The supplies by an unregistered supplier based in the UAE are not treated as an import of goods/services. Even the supplies from a supplier based in the mainland to a Designated Zone would not qualify as an import of goods/services.
Therefore, the recipient/buyer are generally not responsible for payment of tax on purchases from unregistered suppliers based in the UAE.
However, if it is apparent from the transaction value/volume that a supplier ought to be registered for VAT, it is prudent to maintain a communication record from the supplier regarding their registration status.
Verification of TRN
As VAT is a multi-stage taxation system, people may attempt to take undue advantage of the system to commit tax evasion.
A supplier may attempt to collect VAT by mentioning an arbitrary Tax Registration Number (TRN) on the tax invoice. Alternatively, a TRN belonging to some other supplier could be mentioned on the tax invoice.
The Federal Tax Authority (FTA) provides an effective online mechanism to verify the TRN of a supplier. The TRN could be verified on FTA’s website at https://eservices.tax.gov.ae/en-us/trn-verify. It would be beneficial to verify suppliers’ TRN periodically especially in the case of new suppliers.
Raqeeb: Whistle Blower Programme
Effective April 2022, FTA has announced the launch of ‘Raqeeb’ which is a whistle-blower program for tax violations and evasion.
Under the program, an individual could report to FTA on tax evasion cases, tax-related fraud, and violations of tax legislation. The FTA will verify the reports and grant monetary rewards to informants when certain conditions are met.
In addition to the increased in tax compliance, the whistle-blower program aims to enhance transparency and competitiveness in the field of doing business.
VAT is a multi-point transaction tax which covers the whole business ecosystem. It is important that all stakeholders of the ecosystem are VAT compliant and aware of the VAT laws.