VAT Guidance on Automotive Sector UAE
FTA has recently uploaded VAT Guidance on Automotive Sector. Considering the VAT complexity in the automotive sector all parties connected directly or indirectly to supply must aware about their positions and realize the impacts of VAT on Automotive sector.
Automotive sector can be categorized into the following business activities.
1. Sale of Cars within UAE
i. Outright Sale of cars: When the customer has either cash resource available or has borrowed funds from a financial institution to purchase the vehicle outright. It is chargeable at 5%. FTA has mentioned in detailed in which circumstances the date of supply is triggered
ii. Hire Purchase Agreements: When two supplies take place. Firstly, the motor vehicle trader to finance company and then by the finance company to the customer. Full ownership of the vehicle is only passed to the hirer upon fully payment of the hire installments. Motor vehicle trader needs to account for VAT on supply. The Finance company then issues the tax invoice to customer with 2 components which are Hire installments which are subject to VAT and the interest which are exempt. To be noted there won’t be VAT implication of early terminate of the agreement and reversal of possession of car from customer to finance company.
iii. Trade In Cars: When old car is traded in for new one, Two supplies take place. When the motor vehicle trades new car, VAT calculated shouldn’t net off against trade in value of old car.
iv. Price Display: The display price should always be inclusive of vat unless and until if the customer is Tax registered or if the supply car is for export.
v. Supply of vehicle to foreign government, international organization, diplomatic bodies and missions: All supplies is subject to 5% VAT however they can seek for refunds under special scheme.
2. Sale of used/pre-owned cars.
Sale of used/pre owned cars are subject to 5% VAT provided the sale is made by a VAT Registered supplier. Profit margin scheme is a scheme wherein the VAT Registered supplier can account for VAT based on the difference between what was paid during the purchase and what was charged to customer. Care to be taken that the conditions to be met to apply the above said scheme.
3. Lease of Cars
Motor Vehicle dealers or Motor rental companies can lease vehicles from daily to even yearly basis. Leasing cars is subject to 5% VAT.
4. Export of Cars.
i. Direct Export: If the trader is responsible for transport of sold car, the supply can be zero rated upon meeting certain conditions mentioned in guide like The place of supply as well as proper documentation.
ii. Indirect Export: If the overseas customer is responsible for transport of bought car, the supply can be zero rated upon meeting certain conditions.
5. Import of Cars.
The VAT treatment of Import of cars depends on the registration status of the importer at the time of import. The importer needs to register itself with the customs of state so as to avoid paying vat on import. Importer should ensure that the VAT Return reflects correct vat payable on import. In some cases for e.g. When the importer wasn’t registered at the time of import, then the importer needs to pay VAT to the FTA in-order to release the car.
6. Warranty Claims
i. Warranty Services Inclusive in price of Car: Where the cost of warranty i.e. repairing any defects is included in the Cost of Car during the supply. In this case the supplier isn’t liable to charge VAT on the warranty repair services.
ii. Warranty Services supplied for an extra charge: If the supplier of the car provide the warranty services as a separate cost (e.g: Extended Warranty), then the supply should be taxable at 5%.
When Motor vehicle traders may make sale through Auction wherein the goods are sold to the highest bidder. Chances are the Motor Vehicle trader/Auctioneer acts as an agent on behalf of person selling the car.
i. Auctioneer acts as the principal supplier: Two supplies takes place i.e between the Seller and Auctioneer; and between the Auctioneer and end customer. In both cases VAT 5% applicable with regards to the registration status of the auctioneer.
ii. Auctioneer acts as an agent of the principal supplier: When Auctioneer isn’t the owner and only provides the marketplace and assistance to the seller. In this case the Auctioneer isn’t involved directly in the sale and therefore the VAT applicability is only between the principal seller and end customer based on the registration status of the principal seller.
8. Promotions and Discounts
i. Free Promotional Gifts: When the motor vehicle trader offer free gifts with the supply of car without any consideration received for the gifts. It will be deemed supply
ii. Discounts: If the Motor vehicle trader funds the discount and customers benefit from reduction in price then the vat applicability is on the discounted value.
9. Company Cars and Demo Cars
i. Purchase, Rent or Lease of company car: If the car is made available for personal uses then the Input VAT Recovery on Purchase, Rent or Lease of car is blocked in full and all associated cost like insurances, maintenance cannot also be recovered.
ii. Demo Cars: When the Manufacturer of a motor vehicle sells it unit to Motor Vehicle trader to be used as demo or test drive purposes at a discounted rate than the retail rate, The original manufacturer should issue a credit note for the difference/discounted value. However VAT is applicable if the sale to motor vehicle trader is for other specific activities such as marketing services.
This blog focuses on the gist of the whole guide only. Please refer to the detailed guide shared by the FTA for comprehensive information.
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