VAT on Supply of Electronic Devices
Implications of UAE VAT on Supply of Electronic Devices
In August 2023, Cabinet Decision No. 91 was enacted, introducing a distinctive reverse charge mechanism for the local supply of electronic devices. This decision outlines the specific conditions and requirements that must be fulfilled for the application of VAT through the reverse charge mechanism. Subsequently, in October 2023, the issuance of New Cabinet Decision No. 262 clarified the criteria governing the identification of “Pieces and Parts” of Electronic Devices. Both of these decisions came into effect on October 30, 2023.
An electronic device as defined in the decision, refers to:
- Mobile phones & Smart Phones:
The definition of “Mobile Phones and Smart Phones” in this context is limited to devices that function through wireless transmission. Devices utilizing physical connections like wires or fiber-optic cables are explicitly excluded from the scope of this decision.
Additionally, Smart Watches are included in this category, either as an extension of a smart phone or mobile phone or as devices capable of independent and direct connection to cellular networks
This decision extends its applicability to computer devices, without differentiation based on whether they operate wirelessly or require physical connections. The comprehensive definition encompasses various types of computer devices, such as personal computers, desktop computers, minicomputers, analog, digital, and hybrid computers, server computers, computerized engine control units (“ECU”) for automobiles, and comparable devices.
E-readers, specifically marketed without additional features like gaming or web browsing and designed with distinct hardware and software features compared to tablets, fall outside the scope of the Electronic Devices definition.
- Pieces and Parts related to Electronic Devices:
A part or piece is related to electronic device if:
- It is commonly used in manufacturing of electronic devices and is necessary for their normal operation.
- It is not typically used in manufacturing of devices but is necessary for their normal operation, like chargers, power cords, and battery packs.
- It is a replacement for parts meeting criteria a or b.
Nevertheless, these criteria do not come into play under certain circumstances:
- When a component enhances the device’s functions or enjoyment but isn’t essential for its operation. Examples of such pieces and parts include but are not limited to external speakers, phone cases and covers, headphones and earphones, screen protectors, selfie sticks, device holders etc.
- It’s a SIM card or similar external smart cards.
Reverse Charge Mechanism on supply of “Electronic Devices”
If a supplier provides electronic devices to a person who is registered recipient and the person plans to either resell (Wholesale or Retail) the devices or use them to produce more electronic devices, certain rules shall apply:
- The supplier doesn’t have to deal with the taxes related to supply of electronic devices. They don’t need to report this tax in their tax return.
- The person receiving the electronic devices needs to handle the tax on the value of the devices. They are responsible for all tax obligations related to this supply and need to report the due tax.
“These rules don’t apply if the supply is zero-rated”
To make sure application of these rules, following shall be considered:
- Prior to the date of supply of electronic devices, the person receiving them needs to give the supplier a written declaration stating the purpose is either to resell or use them in making more electronic devices. They also need to written declaration that they are registered with the authority.
- Before providing the electronic devices, the supplier needs to receive and keep these declarations. They also need to check that the person receiving the devices is registered as per the authority’s approval.
In case of failure in furnishing the necessary declarations, these rules won’t be applicable and the supplier cannot presume that the electronic devices are meant for the purposes mentioned above. In such cases, the supplier is obligated to account for Output Tax on the supply. If the Recipient neglects to declare his intent to use Electronic Devices, as required by Cabinet Decision No. 91, the input tax incurred on the supply becomes irrecoverable.
When Electronic Devices are supplied from the UAE mainland to a Designated Zone, or a movement of such goods from the UAE mainland to a Designated Zone, shall not be treated as Zero-rated supply and subject to the provisions of Cabinet Decision No. 91.
In conclusion, the enactment of Cabinet Decision No. 91 and Ministerial Decision No. 262 in August and October 2023, respectively, introduces a reverse charge mechanism for the local supply of electronic devices in the UAE. The defined categories of electronic devices, along with specific criteria for pieces and parts, delineate the scope of application. Compliance with written declarations and registration requirements is crucial for the effective implementation of the reverse charge mechanism, emphasizing accountability for VAT obligations between suppliers and registered recipients.