In this article, we will learn about the tax treatment that applies to the supply of Electronic Services provided via the Internet or similar electronic networks, and how VAT is calculated in terms of such supplies.
What are Electronic Services?
The term Electronic Services is defined in the Executive Regulations for VAT (the “Executive Regulations”) and bears reference to services that are provided automatically via the Internet, an electronic network, or an electronic marketplace, including:
- Supplying domains and hosting websites, and maintaining programs and equipment remotely;
- Supplying and updating the software;
- Supplying screensavers, electronic books, pictures, texts, information, documents and digital files electronically;
- Supply of music, movies and games;
- Online magazine supply;
- Supply of advertising space on a website;
- Supplying broadcast programs related to politics, culture, art, sports, science, education, entertainment, and event broadcasting;
- Live broadcast over the Internet;
- Providing remote study services;
- Equivalent services with the same function.
The supply will only be considered Electronic Services if the following requirements are met:
- If the service under consideration is one of those listed above;
- If the service is provided automatically via the Internet, network, or electronic marketplace with minimal or no human intervention.
As mentioned previously, the supply of Electronic Services may take place via an online electronic market. An Electronic Market Place is defined in the Executive Regulations as a distribution service that takes place through electronic means, such as a website, a portal on the Internet, a store or a distribution platform, provided the following requirements are met:
- Suppliers are allowed to supply Electronic Services to recipients;
- That the supplies are made through electronic means.
Place of Supply of Electronic Services
The Place of Supply in respect of Electronic Services is determined as follows:
- Within the UAE, to the extent that the use and enjoyment thereof is within the UAE;
- Outside the UAE, to the extent that the use and enjoyment thereof are outside the UAE.
The term “extent” implies that a single supply can be divided for the purposes of the place of supply rules, whereby a portion of the supply is treated as if taking place within the UAE and the other portion is treated as taking place outside of the UAE.
The use and enjoyment must be determined on the basis of the place in which the Electronic Services are consumed, regardless of the place of the contract or payment.
Guiding principles for determining the place of use and enjoyment:
- If an Electronic Service is provided to a physical location, the place of use and enjoyment is at that physical location;
- In respect of Electronic Services provided on a mobile device, the use and enjoyment can be determined as per the recipient’s location at the time the service is provided.
To following details may be considered when ascertaining the recipient’s location:
- The IP address of device receiving Electronic Service;
- The country code on the SIM card receiving the Electronic Service;
- Place of residence;
- The address to which bills are sent;
- Bank details.
The Imposition of VAT
The Place of Supply of Electronic Services determines whether the services are subject to VAT in UAE. In the event that the Place of Supply is deemed to be in the UAE then the services will fall within the scope of UAE VAT.
VAT is applied at the rate of 5% on the supply of taxable supplies in the UAE. However, the supply may be subject to the zero VAT rate if it falls within one of the categories specified in Article 45 of the VAT Law, which relates to instances where the Zero-VAT rate is applicable.
Accounting for VAT
The responsibility for accounting for VAT usually lies with the supplier of the Electronic Services in the UAE, unless the reverse charge mechanism is applied.
With regard to the import of Electronic Services from abroad into the UAE (i.e., cross-border supply), the reverse-charge mechanism will be relevant if the supplier does not reside in the UAE and the recipient is either registered or required to register for VAT in UAE.
When applying the reverse-charge mechanism to a supply, it is the taxable recipient, instead of the non-resident supplier, which must account for the applicable VAT.