Tax Considerations for UAE Logistics Businesses
In the intricate realm of taxation, logistics businesses in the UAE find themselves at a pivotal crossroads, especially when it comes to Value Added Tax (VAT) and Corporate Tax. The industry must tread cautiously through the labyrinth of tax concessions and regulations.
Under global norms, international transportation generally enjoys a zero-rated status under UAE’s VAT laws. This applies to the international movement of passengers or goods, regardless of whether the journey begins or ends within the UAE or merely traverses its borders.
However, a nuanced ambiguity emerges concerning international transportation originating from outside the UAE. When the place of supply lies beyond UAE borders, logic dictates that such transportation services should fall outside the scope of UAE’s VAT jurisdiction. Nevertheless, the logistics sector needs to meticulously assess whether these services merit a zero-rated classification or are entirely exempt from the VAT regime.
Zero-Rated or Not?
Transport-related services encompass a broad spectrum, including cargo shipment, packaging, customs documentation, container management, loading, unloading, storage, and the overall movement of goods, among other closely related services. These services generally fall into two categories:
- Services provided in conjunction with international transportation.
- Services provided independently, without any direct link to international transportation.
Many UAE logistics companies consider transport-related services as zero-rated in both scenarios. However, the critical question remains: Are these services genuinely zero-rated, particularly in the second scenario?
Zero-rating seemingly applies to transport-related services provided in tandem with international transportation. No standalone zero-rating provisions exclusively address these services.
In cases where a UAE logistics firm extends both international transportation and transport-related services to a client, it’s reasonable to assume that both should qualify for zero-rating. However, if the logistics firm exclusively offers transport-related services without international transportation, these services might not inherently qualify for zero-rating. In such instances, standard VAT rates may apply when these services are provided to another UAE entity or customer.
Guidance from Saudi Arabia on VAT pertaining to transportation services can offer valuable insights. An illustration from this guidance involves a scenario where an individual relocates from Riyadh to Beirut. This person contracts a freight company to transport their personal belongings. The freight company is also entrusted with storing the goods for an extended duration before shipment.
In this case, the storage charges are considered ancillary to, and provided with, the international transport of goods, rendering them eligible for zero-rating.
Conversely, if an acquaintance of this individual requires storage for their goods and engages the same freight company for storage but selects a different company for courier services to Beirut, a distinct entity now provides the storage service. These storage services are not ancillary to international transport and should be subject to a standard 5 percent VAT rate.
Penalties and Tax Liabilities
As the UAE’s VAT system approaches its sixth anniversary since implementation, logistics service providers face potential tax arrears and penalties if their current VAT positions prove inconsistent with tax laws. Additionally, logistics service providers operating within free zones enjoy a favorable 0 percent corporate tax rate.
Nonetheless, this preferential corporate tax rate is contingent upon stringent conditions. The logistics sector must tread carefully to maintain eligibility for the 0 percent corporate tax rate. A comprehensive evaluation of existing tax positions is strongly recommended to avert potential penalty pitfalls, whether immediately or in the foreseeable future. In the intricate world of taxation, vigilance and compliance are paramount for UAE logistics enterprises.