Excise Tax in UAE – Scope Expansion

Jay Krishnan & Harish

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    In UAE, tobacco and tobacco products, Energy Drinks and Carbonated drinks are subject to Excise tax and the nation has now decided to levy excise tax on all e-cigarettes, e-liquids and sweetened drinks with effect from December 1, 2019. With this introduction a substantial change to businesses that import, manufacture or trade these products is expected. This article intends to explain the new scope of excise tax and what businesses should do.

    Healthy lifestyle has always been a top priority for the UAE government and with this initiative, control over diseases arising from the consumption of harmful goods can be expected. According to the Cabinet General Secretariat “The decision comes to support the UAE government’s efforts to enhance public health and prevent chronic diseases directly linked to sugar and tobacco consumption.”

    New Products that will be levied excise tax w.e.f. December 1, 2019

    • Electronic smoking devices and tools and
    • Sweetened drinks

    Tax for products in uae

    ELECTRONIC SMOKING DEVICES AND TOOLS

    Electronic smoking devices and tools shall include all electronic smoking devices and tools and the like, whether or not containing nicotine or tobacco. which would be classified on import under Customs HS codes:- 85437031, 85437032, 85437039

    All liquid used in electronic smoking devices and tools used in such devices even if they contain nicotine or not will be levied tax under Customs HS codes:-  38249999.

    Liquids used in electronic smoking devices and tools will be charged 100 percent tax.

    SWEETENED DRINKS

    Sweetened drinks that come under excise tax include any product to which a source of sugar or sweetener is added and is produced either as:

    • A ready to drink beverage or
    • Concentrates, powders, gel, extracts or any other similar product that can be made into a sweetened drink

    Source of sugar includes white sugar, soft white sugar, powdered sugar, soft brown sugar and glucose syrup. Whereas sweeteners include saccharin and its salts, aspartame, sorbitol, and neotame.

    Sweetened drinks that are excluded from Excise Tax

    • Ready to drink beverages that contain at least 75% milk or its substitutes
    • Baby formula, follow up formula or baby food
    • Handling of Foods for Special Medical Purposes
    • consumed for special dietary needs
    • Beverages which include alcohol

    What Business Needs to do

    The Federal Decree-Law No. 7 of 2017 on Excise Tax stipulates that businesses/ persons that are engaged in any of the below activities must register for tax;

    • Importing of excise goods;
    • Production of excise goods;
    • Releasing goods from an excise tax designated zone;
    • Stockpilers of excise goods, in certain cases; and
    • Warehouse keepers, in certain cases.

    Hence accordingly Importers, producers, stockpilers warehouse keepers, etc. of electronic smoking devices, liquids used in such devices and sweetened drinks need to register for excise tax system as soon as possible. Failure in registering within the specified time period can lead to fines and various other obstacles.

    Stockpilers are that businesses that holds excise stock on which duty is not paid and it’s available for free circulation in UAE and intends to be sold in UAE and holds “Excess excise goods”. FTA has a prescribed method to calculate excess excise goods and their valuation. Most of the supermarkets and retailers may fall under this category.

    A step-by-step guide for businesses concerned

    • Classification of Goods – Identify the Excise Goods
    • Identify the primary conditions for registration as an Excise Tax Taxable Person and if applicable, as a Tax Warehouse and Tax Warehouse Keeper
    • Identify the tax trigger points and the tax liability for flow/transaction after going through the supply chain flows/transactions with regard to the Excise Goods
    • If there is any additional excise tax during the transitional period, this must be calculated.
    • Evaluate the pricing impact across the supply chain
    • Valuation for Excise tax
    • ERP and process readiness

    Harish E
    Manager, Tax
    harish@hlbhamt.com

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    Recent updates in UAE

    Jay Krishnan, Partner

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    HLB HAMT - Accounting Firm in UAE
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    Mobile:- +971 55 160 1291
    Email:- dubai@hlbhamt.com

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      World Logistics Passport

      The world logistic passport is the recent initiative by the government of UAE, which is a part of the implementation of the first phase of the Dubai Silk Road strategy. It offers certain operational and financial advantages to businesses, specifically the ones into shipping.

      The passport aids in connecting government bodies, such as Dubai Customs and Dubai Trade, with logistics service providers like DP World and Dnata, and it also eases the process of commercial transactions among different authority bodies in the city.

      With the passport, Dubai’s products, services and integrated transportation systems will witness a rise in its demand. It will also enhance the roles played by Dubai customs in trade, regional as well as global.

      According to Sheikh Ahmed bin Saeed Al Maktoum, President of Dubai Civil Aviation Authority, said, “Dubai’s sophisticated logistics services will further enhance its value offering for investors and businesses by saving time and effort and reducing their operational costs. This is a powerful tool that will eventually lead to increased revenues. We are keen to offer investors and businesses new advantages in conducting global trade.”

      Nine initiatives and 33 projects will be included in the strategy. This will be in collaboration with authorities that include Emirates airlines, Dubai Airports, Dubai South, Dubai Free Zones (DFZ) Council, Dubai Maritime City Authority, Dubai Roads and Transport Authority, DP World, Dubai Municipality and Jebel Ali Free Zone.

      Virtual License

      With the recently launched virtual scheme, residency in Dubai is no more mandatory for you to obtain a license. The first of its kind, virtual license is granted to individuals who don’t stay in Dubai, at a cost of Dh850 per year. For two-year visa one will have to pay Dh1,508, and Dh2,161 for three years.

      Nationals of countries that have double taxation avoidance agreement with UAE can avail virtual license. According to the Dubai Virtual Commercial City, “Dubai Government authorities are working on a simplified visa process for the holders of virtual company licence. A virtual company licence doesn’t automatically guarantee a business bank account in the UAE and it will at the discretion of the commercial banks. However, we can facilitate access to account opening process.”

      Virtual companies can conduct selected professional activities that include services related to printing and advertising; computer programming, consultancy and related activities; and design activities.

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      Start the conversation

      Regulation of the submission of reports by multi-national companies in UAE

      Jay Krishnan & Sumesh Krishna

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      HLB HAMT - Accounting Firm in UAE
      Phone:- +971 4 327 7775
      Mobile:- +971 50 677 5860
      Email:- dubai@hlbhamt.com

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        INTRODUCTION

        The United Arab Emirates (UAE) has introduced Country-by-Country (CbC) Reporting (CbCR) requirements, that will be applicable to businesses that have a legal entity or branch in the country and are members of a multinational enterprise (MNE) group with consolidated annual turnover of more than AED 3.15 billion.

        DEFINITIONS

        MNE Group: Any Group that;

        1. Includes two or more enterprises the tax residence for which is in different jurisdictions or includes an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction.
        2. and having total consolidated group revenue equal to or more than AED 3,150,000,000 (three billion one hundred fifty million dirham) during the Fiscal Year immediately preceding the Reporting Fiscal Year as reflected in its Consolidated Financial Statements for such preceding Fiscal Year.

        Constituent Entity: means any of the following;

        1. Any separate business unit of an MNE Group that is included in the Consolidated Financial Statements of the MNE Group for financial reporting preparation purposes or would be so included if equity interests in such business unit of an MNE Group were traded on a public securities exchange.
        2. Any business unit that is excluded from the MNE Group’s Consolidated Financial Statements solely on size or materiality grounds.
        3. Any permanent establishment of any separate business unit of the MNE Group, provided the business unit prepares a separate financial statement for such permanent establishment for financial reporting preparation, regulatory, tax reporting, or internal management control purposes.

        Filing Regulations

        Entities that come under the new rule will have to take necessary actions to meet the requirements and review the impact of these rules on the MNE group’s reporting and notification requirements in other countries. The CbC report aims to make it easier for tax authorities to assess high-level risks related to transfer pricing and BEPS for MNE groups.

        The Ministerial Resolution No. 32 of 2019 which introduces CbCR rules for MNE groups operating in the UAE, was introduced by the country on 30th April 2019.

        The CbC reports include;

        • Financial information related to the amount of revenues
        • Profits/losses before income tax
        • Income tax paid
        • Income tax accrued
        • Stated capital
        • Accumulated earnings
        • Number of employees
        • Tangible assets other than non-cash or cash-equivalent assets,
        • Details about business activities conducted and other disclosures and explanations provided by the MNE, with respect to each jurisdiction in which the MNE operates

        A Constituent Entity which is not the Ultimate Parent Entity of an MNE Group shall file Report with the Competent Authority with respect to the Reporting Fiscal Year of an MNE Group of which it is a Constituent Entity, on or before the date specified, if such Entity is resident for tax purposes in the State and one of the following conditions in respect thereof applies:

        1. The Ultimate Parent Entity of the MNE Group is not obligated to file a Report in its jurisdiction of tax residence.
        2. The jurisdiction in which the Ultimate Parent Entity is resident for tax purposes has a current International Agreement to which the State is a party but does not have a Qualifying Competent Authority Agreement in effect to which the State is a party for filing the Report for the Reporting Fiscal Year.
        3. There has been a Systemic Failure of the jurisdiction of tax residence of the Ultimate Parent Entity that has been notified by the Competent Authority to the Constituent Entity resident for tax purposes in the State.

        Penalties

        An administrative penalty shall be imposed on the Reporting Entity which fails to comply with the obligations set out in this Resolution as follows:

        1. Where a Reporting Entity fails to retain the documentation and information required to be collected in the course of meeting its reporting obligations under this Resolution for a minimum period of five (5) years after the date of reporting to the Competent Authority, the Reporting Entity shall be subject to a penalty of one hundred thousand dirham (AED 100,000);
        2. Where a Reporting Entity fails to provide the Competent Authority with any information requested in accordance with this Resolution, the Reporting Entity shall be subject to a penalty of one hundred thousand dirham (AED 100,000).
        3. One million dirhams (AED 1,000,000); and ten thousand dirham (AED 10,000) for every day during which the failure continues to a maximum of two hundred and fifty thousand dirhams (AED 250,000). where a Reporting Entity fails to report the information required to be reported under this Resolution on the required Reporting Date or fails to notify the Competent Authority on or before the required reporting date of the intention to file a Report in respect of a certain accounting period.
        4. The Reporting Entity shall be subject to a minimum penalty of fifty thousand dirhams (AED 50,000) and a maximum penalty of five hundred thousand dirhams (AED 500,000) if the Reporting Entity fails to report the information required to be reported under this Resolution in a complete and accurate manner.

        Deadline

        The CbC report must be submitted within 12 months of the end of the reporting period. Accordingly, for the financial years commencing on 1 January 2019, the CbC report must be submitted by 31 December 2020.

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        Leading Industries in the UAE

        John Varghese, Managing Partner

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        HLB HAMT - Accounting Firm in UAE
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        Mobile:- +971 55 160 1291
        Email:- dubai@hlbhamt.com

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          The UAE has the most diversified economy in the GCC. The country was reliant on oil and gas for centuries; but of late the government has started giving equal prominence to all the sectors. The move has helped the government in increasing its revenue and has led to an impressive development in sectors that include tourism, retail, manufacturing etc. Some of the leading industries in the UAE, that has been contributing immensely to the economy of the country include;

          Retail

          The retail industry has been witnessing a massive growth in the UAE, specifically Dubai. With numerous global retail players having established their base in the country, the industry is expected to thrive in the coming years.

          According to reports, the value of retail sales in Dubai alone is expected to reach $43.8bn by the year 2020 and a growth of 5.6 percent is expected in the time period 2018-2021.

          Dubai hosts some of the biggest shopping festivals in the world, that helps in boosting the local sales of retailers.

          Hospitality

          Hospitality is another fast-growing sector in the UAE, that has experienced envious growth over the past decade. Dubai attracts visitors from across the globe and is one of the most visited cities, with 15.93 million international overnight visitors in 2018.

          The UAE hospitality market is expected to reach $7.6 billion within a span of 3 years at a five-year CAGR of 8.5 per cent. International tourist visits will increase to 25.5 million at a five-year CAGR of 4.3 percent.

           

          Healthcare

          UAE is home to a highly-developed healthcare system, that aims to become one among the best in the world by 2021. The UAE government’s various initiatives to promote the sector coupled with latest technologies that are being embraced, has helped the healthcare sector evolve rapidly.

          A growth of 60 percent is expected in the healthcare industry between the time period 2016- 2021, that will be worth over AED 103 billion.

          The highly specialised doctors along with events such as Arab Health Exhibition, that brings together healthcare companies, technology, and products, has helped the industry gain global recognition.

          Manufacturing

          Manufacturing is the second largest contributor to the economy of the country. It accounts for 80 percent of Dubai’s non-oil trade and 53 percent of the country’s total non-oil exports. Some of the primary sub-sectors of the industry are processed food and beverages, plastics and rubber, electrical machinery and equipment, chemicals and chemical products, minerals and mineral products, publishing and printing, pearls, precious stones and metals.

          Organizations that plan to set up a manufacturing plant in Dubai are bestowed with a range of lucrative facilities.

          Construction

          Construction sector is an inevitable part of UAE economy, that has been flourishing leaps and bounds. The use of robots, unmanned aerial vehicles (UAV) and “intelligent” tools and equipment has helped in the automation of various tasks at construction sites and this has been a contributing factor to the thriving industry.

          During the time period 2014-2018, residential construction accounted for the largest construction market in the UAE and it is expected to retain its position in the coming years. More than 15,000 projects worth $791 billion are at various stages across the UAE.

          Media

          Dubai, a hub for public relations companies, advertising firms, print, production and broadcast facilities, was recently named as the Capital of Arab Media for 2020 by the Arab Information Ministers Council.

          According to His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, “Media outlets are not mere channels to cover events and disseminate information. Media is a partner in achieving development goals, setting their direction and driving their impact. It is a role that comes with great responsibility.”

          The sector experienced an unprecedented rise in 2019, when compared to the previous year.

          Setting up business in UAE for any of these sectors are relatively easy and all you must do is seek the help of a reputed business consultant.

          Get in touch

          Whatever your question our team will point you in the right direction

          Start the conversation

          UAE Economic Substance Regulations

          Jay Krishnan & Sumesh Krishna

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          HLB HAMT - Accounting Firm in UAE
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          Mobile:- +971 50 677 5860
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            The UAE Cabinet recently issued the Cabinet of Ministers Resolution No.31 of 2019, which requires all in-scope UAE entities to maintain an economic substance. This will be applicable to onshore and free zone companies that engage in certain “Relevant Activities”.

            Ever since the introduction of economic substance regulations in UAE, people have been raising queries about numerous things related to it. Here we have listed below a set of questions and answers about economic substance regulations in UAE.

            1. Why has the UAE introduced Economic Substance Regulations?
              The UAE was added to the European Union list of non-cooperative tax jurisdictions by the European Commission and this was the reason behind the issuance of the economic substance regulations. Economic Substance regulations are similar to the economic substance requirements that were recently implemented in jurisdictions that include the Cayman Islands and Jersey.The purpose of the Economic Substance Regulations is to ensure that UAE entities that undertake certain activities does not artificially attract profits.
            2. What is the first reportable Financial Year?
              The Regulations apply to financial years starting on or after 1 January 2019. For a UAE entity with 1 January 2019 – 31 December 2019 financial year, the first assessable period would be the same time period and for an entity with 1 April 2019 – 31 March 2020 financial year, the first assessable period would be 1 April 2019 – 31 March 2020.
            3. Our company is in the shipping business. Should we file ESR notification?
              Yes
              UAE Economic substance regulation will be applicable to companies that engage in any of the below mentioned “Relevant Activities”;

              • Banking Businesses
              • Insurance Businesses
              • Investment Fund Management Businesses
              • Lease-Finance Businesses
              • Headquarter Businesses
              • Shipping Businesses
              • Holding Company Businesses
              • Intellectual Property Businesses
              • Distribution and Service Centre Businesses
            4. What are the requirements to meet economic substance test?
              A Licensee meets the Economic Substance Test in relation to a Relevant Activity in the following cases:

              1. If the Licensee conducts State Core Income-Generating Activity in the State.
              2. If the Licensee is directed and managed in the State in relation to that activity, provided the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level.
              3. Having regard to the level of Relevant Activity, if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third-party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
              4. If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third-party service providers whose activities, employees, expenditure and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
              5. If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third-party service providers in the State, for the activities of the Licensee;
              6. In the case of State Core, Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.
            5. Do the Regulations only apply to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder?
              No, Economic substance requirements will be applicable to all entities that engage in relevant activities irrespective of the fact whether they belong to a foreign multinational group or not.In the case of a UAE based Distribution Business, Service Centre Business, Headquarter Business or High-Risk IP Business, the regulations will be imposed if the organization transacts with foreign group entities.
            6. Mine is an offshore company. Should I file ESR notification?
              Yes, offshore companies that undertake relevant activities are subject to economic substance regulations.
            7. Who is exempt from the Regulations?
              Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority need not comply with the economic substance regulations.
            8. Our company hasn’t undertaken any relevant activity during the financial period. Do we still need to file ESR notification?
              Licensees that do not involve in a relevant activity during a financial period do not have to meet the economic substance test and will be exempted from the process of notifying the regulatory authority and submitting an economic substance return.
            9. Our company hasn’t generated any income from the relevant activity. Should we file ESR notification?
              In cases like these, the licensee need not file an economic substance return for the relevant financial period but will have to submit a notification with the regulatory authority.
            10. If all income from the Relevant Activity is earned from outside the UAE, is the Licensee exempt from the Economic Substance Regulations?
              No, the Licensee is not exempt from the Economic Substance Regulations.
            11. Will economic substance be assessed on a Licensee by Licensee basis, or can Licensees that are part of the same group elect to be assessed on a ‘consolidated’ basis?
              No, each Licensee must comply with the Economic Substance Regulations and demonstrate economic substance individually.
            12. What are the deadlines for filing Economic substance regulation notification for UAE free zones?
                 Free Zone AuthorityDeadline
                 Abu Dhabi Media Zone Authority30th June
                 ADGM30th June
                 Ajman FZ30th June
                 DAFZA15th June
                 DIFC30th June
                 DMCC30th June
                 Dubai Aviation City Corporation7th June
                 Dubai Development Authority25th June
                 Dubai Healthcare City7th June
                 Dubai World Trade Centre30th June
                 Fujairah Free Zone15th June
                 Hamriyah Free Zone Authority30th June
                 International Free Zone Authorities30th June
                 KIZAD20th June
                 Ministry of Economy30th June
                 RAK EZ30th June
                 RAK ICC30th June
                 SAIF30th June
                 Umm Al Quwain Free Trade Zone30th June
            13. When is the last date to file ESR notification for mainland companies?
              30th June
            14. What if I don’t file the ESR notification before the deadline?
              Failure to comply with the ESR (including providing inaccurate or incomplete information) may result in a fine of between AED 10,000 and AED 50,000 in any fiscal year. The fines increase to between AED 50,000 and AED 300,000 for the subsequent fiscal year.
            15. My company is going into liquidation. Should we file ESR notification?

              All licensees in liquidation should file a notification.DIFC has confirmed that organizations operating in the free zone that has been dissolved, struck-off or liquidated before the deadline for submission of the Notification need not file ESR notification.

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