A formal ruling system is essential for ambiguous VAT scenarios

Any confusion over the application of VAT would be easily solved if those affected could approach the Federal Tax Authority for a ruling

SHARJAH , UNITED ARAB EMIRATES , NOV 22   – 2017 :- One of the person taking a container of fish from the Kalba fishermen after fishing near the corniche area at Kalba in Sharjah. These fishermen are using old Toyota Land Cruisers for pulling the fishing net. The whole process of fishing with these old Land Cruisers is around 5 to 6 hours.  (Pawan Singh / The National) For Weekend
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The decision by the FTA to extend the date of the first VAT declaration period for some companies is not evidence that VAT compliance is becoming more difficult than expected. Requiring a number of companies to file returns by the end of January or February was always going to prove challenging, and the response is a sensible, pragmatic measure, with minimal impact on government finances.

But should the transitional rules have anticipated this? Probably, and this is where proper consultation by governments and revenue authorities with businesses and other stakeholders can be beneficial in designing and implementing a tax system.

The request by fishermen in the North of the UAE to be taken outside the VAT system is not without merit but is unlikely to be successful.  Like the fishermen, I expect to see more industries requesting a different treatment as the impact of VAT on their sectors becomes clear. Note that it only took a week for Saudi Arabia to change the status of healthcare and education from standard to zero rated, a position the UAE had always taken. Will more supplies fall into zero rating? Certainly businesses will be asking.

And the saga of whether health clubs are entitled to charge members who prepaid in 2017 an additional amount in respect of VAT looks set to run and run. To any health club managers reading this: I think there is a reasonable argument that VAT should not be assessed at all on the fees paid by members before January 1 2018, even if they relate to periods after January 1 2018. There was a case in the UK on the VAT status of amounts due from health club membership defaulters, which went all the way to the Court of Appeal in 2014, and I expect the UAE courts in due course will need to determine similar VAT treatments in a glorious range of scenarios.


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Some of the VAT issues that health clubs and other businesses are grappling with, and will continue to grapple with, could be easily solved by a formal system for obtaining a ruling from the Federal Tax Authority.  Obtaining a ruling from the FTA is proving problematic at the moment. Sometimes taxpayers are being told in response to a very reasonable question about how the law applies to a particular set of not-straightforward facts is that the answer is in the legislation, and they (or their advisers) just need to read the law more carefully.

Sometimes taxpayers and advisers are getting contradictory advice on the application of the law to defined facts from different officials within the FTA. Sometimes it is proving impossible to receive an answer at all from the FTA. Where  the FTA expressed a view, it is unclear to what extent it is binding.

A formal system of providing a ruling in relation to tax is common in most jurisdictions. Any law, tax or otherwise, contains elements of ambiguity. Providing a tax ruling gives a revenue authority the opportunity to provide clarity to the taxpayer on the tax treatment of a certain transaction or arrangement. This is particularly important in relation to VAT.

VAT was designed independently by two people - an American and a German - early in the 20th century, but it was first enacted in the 1960s by continental European countries that have a civil, rather than a common law, legal code. Civil law jurisdictions tend to set out laws in general terms, rather than detailed statutes. VAT Acts tend to be drafted in much the same way across the globe even in common law jurisdictions (and the UAE Decree-Law will look familiar to VAT practitioners in most countries).

However, given that the law is drafted as a principles-based code, the answers cannot always be found in the legislation in a particular case. Take for example the rules relating to supplies via agent. A supply made “through an agent acting in the name of and on behalf of a principal” is treated as a supply by the principal. A supply “through an agent acting in his own name”.


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In the majority of cases, it should be clear whether an agent is acting on behalf of a disclosed principal - for example, an estate agent will generally be. But in a significant minority of cases there will be doubt. What if the contract does not disclose the name of the principal but the agent tells the recipient the existence and name of the principal? Being able to approach the FTA for a ruling on a particular scenario is essential, particularly where (as will generally be the case in relation to agents), the ultimate VAT position should be identical for all parties whatever the correct analysis.

One question that arises is to what extent the taxpayer should be entitled to rely on rulings that turn out to be wrong as a matter of law. On the one hand, the taxpayer may have relied on the advice. On the other, it is for the FTA to administer the law, not to make it.

That question won’t be resolved in this column. The FTA may not be in a position to resolve it yet. But the FTA should ensure that as soon as possible it communicates clearly the circumstances in which it is prepared to give a ruling; the information that the taxpayer must supply; the format that the ruling request must take and the timeframe in which the FTA must respond. Otherwise, chaos will ensue.

Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape