VAT ESR EXCISE ADVISOR CONSULTANT UAE DUBAI ABUDHABI

VAT Grouping a Boon or Curse?

Add Your Heading Text Here

Add Your Heading Text Here

Add Your Heading Text Here

UAE, with its seven emirates and housing more than 40 free zones, offers a wide range of business incentives and ownership freedom. Businesses often establish themselves in different emirates and free zones to benefit from the opportunities there or enjoy the Emirates’ additional benefits. Setting up a business in other Emirate or Free zones canlead to a situation where more than one license is registered. Understanding this practical situation of multiple licenses for one company, the VAT law has included VAT Grouping provisions.

This provision allows a group of companies with common ownership, the management or economic interdependence to form a tax group, and compliance with the Federal Tax Authority.

Key take Aways

  1. Forming a tax group is at the discretion of the entities
  2. Every tax group will have a representative member who is responsible for all the group VAT transactions.
  3. There are conditions to be met for grouping entities; these can be either control or practice.
  4. Once grouped all the entities will be under one TRN
  5. There are benefits and drawback of grouping.
  6. The grouping may enable to save tax.
  7. The grouping may lead to additional cost to the business.
  8. FTA has the right to amend or group two or more entities if certain conditions are satisfied.

Key Terms

Tax Group: Two or more Persons registered with the Authority for Tax purposes as a single taxable person per the Decree-Law provisions.

Representative Member: A member of the tax group appointed as ‘representative member’ by the member company. All of the VAT obligations of the tax group is the responsibility of the representative member.

Group VAT return: A consolidated VAT return filed by the representative company for the entire tax group.

Conditions for VAT Grouping

  1. There should be a minimum two-person to create a tax group,
  2. Each person has a place of establishment or fixed establishment in the UAE,
  3. Persons applying for VAT grouping should be a related party, and
  4. One person controls the other person(s) in the group.

Entities should meet all the above conditions to qualify for VAT grouping.

Two or more person shall be treated as a related party if we can prove control or associate practice.

To establish control, one person should control another person by holding voting right or interest of 50% or more or controlling any other means such a controlling the composition of the Board of directors.

The VAT regulations specify other practice that can treat two person as related parties. There are three types of practices – Economic, Financial and Regulatory. Below are listed activity as per the Executive regulation Article 9:

Economic practices:

  1. Achieving a common commercial objective; 
  2. One Person’s Business benefiting another Person’s Business;
  3. Supplying of Goods or Services by different Businesses to the same customers

Financial practices:

  1. One Person’s Business gives financial support to another Person’s Business.
  2. One Person’s Business not being financially viable without another Person’s Business.
  3. Common financial interest in the proceeds

Regulatory practices:

  1. Common management.
  2. Common employees, whether or not jointly employed. 
  3. Common shareholders or economic ownership.

Power of FTA in VAT Grouping:

The Authority may reject the grouping application in the case of any of the following :

  1. If persons do not meet the conditions of related party
  2. Where there are serious grounds for believing that if the registration as a Tax Group is permitted, it would enable Tax Evasion or significantly decrease Tax revenues of the Authority or increase the administrative burden on the Authority significantly
  3. Where any of the Persons included in the application is not a legal person.
  4. Where one of the Persons is a Government Entity specified in VAT decree-law, and other is not.
  5. Where one of the Persons is a charity as specified in VAT decree-law and other is not.

It is important to note that a natural person cannot form part of a tax group. We cannot group a government entity with Non-Government entities. We cannot group a charity entity with Non- charity entity entities.

Tax grouping a Boon or Curse.

Before we can conclude whether grouping two or more connected person into the tax group is beneficial for a business or detrimental, we have to understand the effect of tax grouping. First, once tax grouped, only one TRN number will be active for the entire group. Apart from one TRN number Article 12 of the Executive Regulations following effects:

  1. All members business- Representative Member’s business: Any Business carried on by a member of the Tax Group shall be deemed to be carried on by the representative member and not by any other Tax Group member. 
  2. Intra Group transaction – out of scope: Any supply made by a member of the Tax Group to another member of the same Tax Group may be disregarded.
  3. All supply of group is deemed to made by Representative member: Any supply, taxable or otherwise, by a member of the Tax Group shall be considered to be made by the representative member. 
  4. All import by the group is deemed to be made by Representative member: Any Import of Concerned Goods or Concerned Services by a member of the Tax Group shall be considered an import by the representative member. 
  5. Any supply received by a member of a tax group is treated as received by the representative member: Any supply of Goods or Services to a member of the Tax Group from a Person who is not a member of the Tax Group is a supply to the representative member. 
  6. Any output charged by the member is charged by Representative member: Any Output Tax charged by a member of the Tax Group shall be deemed charged by the representative member. 
  7. Any Input incurred by the member is treated as incurred by the representative member: Any Input Tax incurred by a member of the Tax Group shall be deemed to be incurred by the representative member.

Let’s decode the effect of tax group on how it will reflect in business:

  • One Tax Return: Once entities are grouped into a tax group, only one VAT return is required. 

Benefit:

  1. One group return instead of the return being filed by each entity.
  2. VAT payable (for all group entity) one payment, instead of payments by each member separately, hence reducing process time and easy cash flow management.
  3. In the case of VAT refund (for all group entity), only one refund application instead of a multiple refund application reduces the processing time.
  4. Ability to set off payable against VAT refund. Within the tax group, a person has a payable position, and some have a VAT refund position. Grouping will allow to set off excess payable against the refund. Hence reduced pressure on cash flow management.

Drawbacks

Centralized VAT Function: In case of 3–5-member tax group, the group tax return can be managed with good coordination within the group member. However, where the tax group comprises more entities, a centralized VAT function may be required, and additional investment in VAT professional resources, IT solutions may be necessary. This may lead to additional cost to the business.

  • Grouping of taxable and exempt supply

As stated in the grouping effect, all taxable supply made by a member is deemed to be made by the representative company. Having an entity with exempt supply in the group will lead to input tax apportionment for the whole group. This may lead to higher tax payment or a lower tax payment at the group level. 

Example 1: ABC LLC and XYZ FZC have formed a tax group, and they are going to submit a VAT return for the tax period Jan 20XX to Mar 20XX. Below are the details of transactions for each entity: 

ABC LLC Amount (AED) VAT applicable (AED)
Total supply chargeable at 5% 100,000 5,000
Total supply chargeable at 0% 50,000 0
Total input tax incurred at 5% 60,000 3,000
     
XYZ FZC    
Total supply chargeable at 5% 50,000 2,500
Total supply chargeable at 0% 50,000 0
Total Exempt Supply 150,000 0
Total input tax incurred at 5% 90,000 4,500
Total input incurred for taxable supply (i.e. for 5% and 0%) 50,000 2,500
Total input incurred for exempt supply only 10,000 500
Total input incurred for both taxable and exempt supply 30,000 1,500

Now let us see how the individual tax return will look like

ABC LLC

Transaction Amount AED
Total supply chargeable at 5% 100,000 5,000
Total supply chargeable at 0% 50,000 0
Total Output tax   5,000
Total input tax incurred at 5% 60,000 3,000
Total input tax   3,000
Net VAT Payable    2,000

XYZ FZC

Transaction Amount AED
Total supply chargeable at 5% 50,000 2,500
Total supply chargeable at 0% 50,000 0
Total Exempt Supply 150,000 0
Total Output tax   2,500
Total input tax incurred at 5% 90,000 2 3,750 1
Total input tax   3,750
Net VAT Refund     (- )1,250

1 Input tax claim under input tax apportionment method.

 I am assuming the standard method of input tax apportionment used.

Inputs Value VAT incurred  VAT Claimable Remarks
Total input incurred for taxable supply (i.e., for 5% and 0%) 50,000 2,500 2,500 Fully claimable 
Total input incurred for exempt supply only 10,000 500 0 Fully disallowed
Total input incurred for both taxable and exempt supply 30,000 1,500 1,2501,500 x [2,500/(2,500+500) C= AED 1500 X A/(A+B)
Total   4,500 3,750  

2 the value shall be total of all taxable expenses incurred, and there is no need to adjust the value proportionately. To know in detail, download our free VAT material on common mistakes in the VAT return.

The total payout to the FTA should be AED 750 if a separate return were submitted. (AED 2,000 less AED 1,250).

As these two entities are grouped, and group return need to be submitted. Suppose we have identified AED 10,000 expenses (from the total of AED 60,000, as in above example) incurred by company ABC LLC as administrative expenses incurred for managing the tax group and cannot be attributable only to the taxable supply of ABC LLC.

 Tax return of the group will look as under:

Transaction Amount AED
Total supply chargeable at 5% 150,000 7,500
Total supply chargeable at 0% 100,000 0
Total Exempt Supply 150,000 0
Total Output tax   7,500
Total input tax incurred at 5% 150,000 2 6,818 1
Total input tax   6,818
Net VAT Payable     682

1 Input tax claim under input tax apportionment method.

I am assuming the standard method of input tax apportionment used.

Inputs Value VAT incurred  VAT Claimable Remarks
Total input incurred for taxable supply (i.e., for 5% and 0%) 100,000 5,000 5,000 Fully claimable 
Total Input incurred for exempt supply only 10,000 500 0 Fully disallowed
Total input incurred for both taxable and exempt supply 40,000(30,000 of XYZ and 10,000 additional general expenses identified) 2,000 1,8182,000 x [5,000/(5,000+500)] C= AED 1500 X A/(A+B)
Total 150,000 7,500 6,818  

Due to the grouping, the group as a whole is going to pay lesser VAT amount compared to submitting the return individually. Individually they were paying AED 750/- as compared to AED 682/- when group return is offered.

We have made an excel template to iterating different scenarios. Based on the experiment, we can say that grouping of a member can be either beneficial or detrimental depending upon the supply composition.

Conclusion

Grouping of entities under a tax group is always a conscious choice of the taxable person. Hence a group of companies can either continue filing the individual return, group all the companies into one group or have multiple groups.

Before an entity decides on VAT grouping, one should do a cost-benefit analysis of VAT grouping or otherwise. The benefit can be tax savings, a lesser number of return filing, a lesser number of VAT refund applications, and the ability to settle payment against a member company’s refund, thereby reducing stress on cash flow. The drawback could be that grouping you may end up paying more tax to the FTA, or additional resource cost may be needed.

Each cost and benefit need to be analyzed, and before deciding on VAT grouping. But it will be worth considering that FTA has the right to amend your grouping application or force you to create a tax group if its detrimental the tax revenue.

Like this article?