VAT Basics
VAT is a tax levied on the value added at each stage of the supply chain. It is ultimately borne by the end consumer but collected by registered businesses on behalf of the government. UAE had implemented VAT on 1st April, 2018 vide Federal Decree-Law No. (8) of 2017. The standard VAT rate as per Article (3) in UAE is currently set at 5% on any supply or Import pursuant to Article (2) of this Decree-Law on the value of the supply or Import specified in the provisions of this Decree-Law.
Supply of Goods and Services
Article (5) Supply of Good, The following shall be considered a supply of Goods:
- Transfer of ownership of the Goods or the right to use them to another Person according to what is specified in the Executive Regulation of this Decree-Law.
- Entry into a contract between two parties entailing the transfer of Goods at a later time, pursuant to the conditions specified in the Executive Regulation of this Decree-Law.
Article (6) Supply of Services
A supply of Services shall be every supply that is not considered a supply of Goods, including any provision of Services specified in the Executive Regulation of this Decree-Law
Article (45) Supply of Goods and Services that is Subject to Zero Rate
Article 45 of the Law provides in relation to transport services engaged in the following activities are considered zero-rated:
Clause 2. International transport of passengers and goods which starts or ends in the State or passes through its territory, including Transport-related Services.
Clause 3. Air passenger transport in the State if it is considered an “International carriage” pursuant to Article (1) of the Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air 1929.
Clause 4. Supply of air, sea and land means of transport for the transportation of passengers and Goods as specified in the Executive Regulation of this Degree-Law.
Clause 5. Supply of Goods and Services related to the supply to the means of transport mentioned in Clause (4) of this Article and which are designed for the operation, repair, maintenance or conversion of these means of transport.
Clause 6. Supply of aircrafts or vessels designated for rescue and assistance by air or sea.
Clause 7. Supply of Goods and Services related to the transfer of Goods or passengers aboard land, air or sea means of transport pursuant to Clauses (2) (3) of this Article, designated for consumption on board; or anything consumed by means of transport, any installations or addition thereto or any other use during transportation.
Analysis of UAE VAT as applicable to transport and freight forwarding companies
Basis the above regulations, we can analyse the applicability of UAE VAT on transport and freight forwarding companies as under:
Shipping Companies
Shipping companies are commercial entities that specialize in the transportation of goods and cargo by various modes of transportation, such as sea, air, road, or rail. These companies play a crucial role in facilitating global trade and logistics by moving goods from one location to another efficiently and safely
Vat Treatment
Shipping companies play a crucial role in the transportation of goods, both domestically and internationally. The VAT treatment for shipping companies in the UAE depends on the nature of their operations.
International Transportation
The provision of overseas transportation services is typically regarded as falling outside the purview of UAE VAT. As a result, shipping companies engaged in providing services related to international transportation, such as transporting goods outside the UAE from one nation to another nation, are generally not required to charge VAT on their services.
For VAT reasons, international transportation services, such as the shipping of goods or people by air, sea, or land from UAE to outside of the UAE, are zero-rated. This means that zero rated VAT is charged on the services provided by shipping companies for international transportation.
However, it is important to note that certain conditions must be met to qualify for this exemption. The transportation must be from the UAE to a place outside the UAE or vice versa, and the goods being transported must not undergo any substantial alteration or modification during transportation.
Local Transportation and Ancillary Services
Shipping businesses are often required to impose a standard VAT rate of 5% on their services when it comes to domestic transportation inside the UAE. This covers the movement of goods within the United Arab Emirates or among the Emirates.
Additionally, shipping companies may also provide other services such as storage, packaging, and handling of goods. These ancillary services are also subject to VAT at the standard rate unless they fall within the scope of specific exemptions or zero-rating provisions.
Freight forwarding Companies
Freight forwarding companies, also known as freight forwarders or logistics providers, are companies that specialize in managing and coordinating the transportation of goods on behalf of their clients. They act as intermediaries between shippers and various transportation services to ensure the smooth movement of goods from one location to another.
Freight forwarding
The freight forwarder arranges the transportation of goods from one location to another. The freight forwarder generally arranges the entire process of shipment, right from picking up the goods from the shipper’s location, storing it, and delivering the goods to their destination.
Apart from undertaking door to door transportation, may also undertake the following:
- Door to port, port to door, and port to port transportation
- Customs documentation
- Clearance and delivery
- Insurance
- Warehousing
- Packaging, etc.
VAT Treatment
Given that there are multiple legs involved in the transportation of goods, it is essential to verify whether each of them is zero-rated. It must be established if additional fees can be characterized as transportation-related services even though international shipping via the ocean would be zero-rated. Customs duties and terminal handling charges may be considered a required part of the shipping process and are therefore zero-rated.
However, if any service fees are assessed, they might not be considered to be transportation-related services since transportation may not even be required. Instead, taxability would be decided according to the general rule.
If the transportation is handled by another freight forwarder, the freight forwarder may handle separate clearance and delivery jobs. Clearance services may count as zero-rated transportation-related services if the container transit is international. It is critical to keep in mind that the tax treatment of these separate transactions is carefully considered. For instance, if the products were imported, local transit from a port to a warehouse in the UAE might be considered zero-rated. However, if transportation is done from one warehouse in the UAE to another warehouse, it can be charged and not zero-rated.
However, Freight brokers are required to charge VAT at the standard rate on their services on transaction take place within a state, including brokerage fees and any other services provided. These services are considered taxable supplies and subject to the standard rate of 5% VAT.
It is essential for freight brokers to maintain proper records of their transactions and issue valid VAT invoices to their clients to ensure compliance with the UAE VAT regulations.
Input VAT and Reclaim
Both shipping companies and freight brokers may incur VAT on their business expenses, such as fuel, maintenance, and administrative costs. They can generally recover this input VAT by offsetting it against the output VAT they charge on their taxable supplies.
To reclaim input VAT, businesses must be registered for VAT in the UAE and meet the necessary criteria for input tax recovery. It is important to maintain accurate records and documentation to support the VAT recovery process.
Summary of applicability of UAE VAT to transport and freight forwarding companies.
| S.No. | Nature of service | Taxability |
| 1 | Local transportation of goods | 5% |
| 2 | Local transportation of passengers in qualifying means of transport for pleasure, sight-seeing, etc. | 5% |
| 3 | Local transportation of passengers in non-qualifying means of transport. | 5% |
| 4 | Transport related services for local transportation of goods | 5% |
| 5 | Inbound and outbound transportation of passengers and goods (including intra-GCC) | 0% |
| 6 | Transport related services for inbound and outbound transportation | 0% |
| 7 | Local transport which is part/for the purpose of inbound and outbound transportation | 0% |
| 8 | Local transportation of passengers in qualifying means of transport | Exempt |
| 9 | Transportation originating and terminating outside UAE | Outside Scope |
| 10 | Transport related services for cross-trade transportation | Outside Scope |
Conclusion
The UAE VAT system applies to shipping companies and freight brokers, with specific considerations for international transportation and domestic services. While international transportation services outside UAE are generally exempt from VAT, domestic transportation and related services are subject to VAT at the standard rate of 5%.
Both shipping companies and freight brokers must ensure compliance with the UAE VAT regulations, including proper invoicing, record-keeping, and VAT recovery processes. It is imperative that businesse have clear understanding as to what services are chargeable to VAT or zero rated or outside the purview of UAE VAT in order to avoid complications and penalties at a later stage. Seeking professional advice from tax experts or consultants can help businesses navigate the complexities of VAT and ensure compliance with the