One of the many nice things about being a tax lawyer is that as well as being paid to solve complex problems and argue, you also get to help your clients save money. Sometimes a lot of money.
Tax avoidance, tax planning and tax mitigation are expressions that have acquired a bad reputation (quite often with some justification) but it remains possible in most jurisdictions - and that includes the UAE - to structure commercial arrangements in such a way as to minimise VAT.
As Lord Tomlin famously said in the Duke of Westminster case (1936). “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”.
This is an oversimplification of how things work today, but there is a truth at its core.
There are some tax lawyers who still push the boundaries of what is acceptable from a tax point of view. It was recently reported, for instance, that British Olympic Medallist and Tour de France winner Sir Bradley Wiggins had been advised to invest in the Cup Trust scheme, which is one of the most shocking pieces of attempted tax avoidance of recent years. The scheme used a registered charity purportedly to generate huge tax losses but with only a tiny proportion of the tax saved going to charitable causes. There really is little excuse for advisers who advise on these artificial schemes and absolutely none for taxpayers who invest in them.
My advice to any business looking to do anything artificial to avoid UAE VAT, or create a timing advantage, is not to bother. Artificiality sometimes worked when tax and tax avoidance was regarded as fair game (around 1973, if you are wondering), but now courts around the world are taking a far dimmer view of anything that whiffs even slightly of avoidance, and I’ve no reason to think that the tax courts in the UAE will be any different.
For example, I would be highly wary of setting up a “shell” company to create a more favourable VAT result, invoicing the “wrong” party or creating artificial transactions between group companies solely in an attempt to accelerate tax recovery.
One advantage of the UAE having few exemptions compared to other countries is that most businesses should be able to recover VAT in any event, which means that it is the banks and other entities that aren’t making supplies for VAT purposes that will most likely to suffer a cost.
If I were a bank, I would be considering whether I could look at my overall structure and operations with a view to minimising the 5 per cent VAT cost on my supplies. This isn’t simply a matter of documenting a deal differently (if a contract doesn’t reflect reality, it won’t be respected by the Federal Tax Authority or the courts) but there is often some flexibility to set up operations or structure arrangements in a more favourable way.
Jurisprudence from across the world shows that subtle differences in the way in which a contract is drafted can fundamentally affect the VAT treatment. So, for example, in determining whether there is a “single composite supply” of zero-rated services (such as a new villa with a fully-fitted kitchen) or a zero-rated supply of a new villa and a standard-rated supply of a kitchen, the legislation specifically requires one to look at the contract, among other things.
It is important for banks and other entities (or individuals) who cannot recover VAT to consider whether there is a VAT cost in the way they have decided to create legal relations and whether that cost could be mitigated by creating those legal relations slightly different. The same goes for international supplies of goods and services, where there is much potential for irrecoverable VAT in circumstances where – arguably – the position should be cash neutral.
It goes even further. In my 20 years or so of having advised on VAT in the UK, and the last year in the UAE, there have been occasions where – somewhat to my surprise – on reading the legislation and applying it to the facts, VAT has not applied to a transaction where the client had expected it to be.
Obviously with VAT currently standing in the UAE at a rate of 5 per cent, compared to rates of typically around 20 per cent in other countries, many businesses may instinctively feel able to absorb the VAT cost or pass it on to customers, particularly if it arises in respect of an unusual, one-off but relatively small transaction. But why should a developer charge VAT on a kitchen if, as a matter of law, it does not have to? Few UAE businesses can easily knock 5 per cent off their margin and few consumers are happy voluntarily to pay 5 per cent more.
It’s unlikely that the FTA would agree to waive VAT in the event that it unexpectedly or unfairly arose as a matter of law, and nor should they. Conversely, businesses should not feel obliged to charge more VAT than they need to. But that requires a careful appreciation of businesses’ supply chains, careful reading of the law and careful application to the particular contract.
Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape