Applicability of VAT on Automotive Sector
1. Sale of Cars within UAE:
The sale of cars within the UAE is subject to VAT at 5%. There are different kinds of arrangements for the sale of cars;
- In outright sales, the supply of cars is subject to VAT at 5%.
- In hire-purchase arrangements, two separate supplies take place for VAT purposes. For a car sold under such an arrangement, the motor vehicle trader transfers the car ownership to the finance company, which lets the hirer use the car during the period of hire.
- Motor Vehicle Trader: A motor vehicle trader is required to issue a tax invoice to the finance company and accounts for VAT on the car’s sale price.
- Finance company: The finance company must issue invoices to the customer, which will generally have two components: (a) the hire instalments which are subject to VAT; and (b) the interest amounts which are exempt for VAT purposes. However, suppose the finance charge is included in the total amount payable by the customer in instalments. In that case, the total amount payable will be liable to VAT, as the amount will be subject to the same VAT treatment as the car itself. It is important to note that no supply takes place for VAT purposes on account of repossession of the car, and therefore no VAT implications arise at this point.
- In a trade-in situation, two separate supplies occur for VAT purposes: (i) The sale of the new car to the customer; and (ii) The customer’s sale of the old car to the motor vehicle trader. In both cases, the trader should account for VAT on the sales price of the new car.
- The sale of cars to foreign governments, international organizations, diplomatic bodies and missions, or an official thereof, are also subject to VAT at 5%.
2. Sale of Used/ Pre-owned Cars:
The sale of used cars is also subject to VAT at 5%, irrespective of whether the VAT is accounted for on the entire sales value of the car or in accordance with the Profit Margin Scheme.
Profit Margin Scheme:
In accordance with the Profit Margin Scheme, a VAT registered supplier can account for VAT on the basis of the profit earned on taxable supplies instead of accounting for VAT on the value of such supplies. It is important to note that applying the Profit Margin Scheme is optional and applicability of the Profit Margin Scheme is subject to meeting certain prescribed conditions;
- The motor vehicle trader must have purchased the car from:
- a non-taxable person; or
- a taxable person who calculated tax on the supply by reference to the Profit Margin Scheme.
- As an alternative to condition (a), where the car is purchased from a VAT registered supplier, input tax must not have been recovered by reference to Article 53 of the Executive Regulation.
- The car must have been subject to VAT before the supply.
- The motor vehicle trader must inform the FTA that it has opted to account for VAT by reference to the Profit Margin Scheme via its tax return.
Instances when the Profit Margin Scheme does not apply:
- Cars purchased prior to the implementation of VAT.
- Cars imported into the UAE, where the VAT paid upon import has been recovered.
3. Lease of Cars:
The activity of leasing cars is a taxable supply that is subject to VAT at 5%.
The value of supply in the case of leased cars is the entire amount received or expected to be received for the lease of cars, less the tax amount. i.e. The Salik deducted from the vehicle’s account is essentially a cost incurred by the lessor company to provide car leasing services to the customer. The recharge of such a cost is subject to VAT and should be included in the taxable value of the supply.
4. Export of Cars:
- Where the motor vehicle trader is responsible for arranging the transport of sold cars from the UAE or appoints an agent to do so on its behalf (this is known as a “direct export”), the supply can be zero-rated if the following conditions are met:
- The cars are physically exported to a place outside the UAE.
- The exporter retains official and commercial evidence of export or customs suspension.
- Where the “overseas customer” is responsible for arranging the collection of the cars from the motor vehicle trader in the UAE and then exporting the cars or has appointed an agent to do so on his behalf (this is known as an “indirect export”), the supply can be zero-rated if the following conditions are met:
- The cars are physically exported to a place outside UAE.
- The overseas customer obtains official and commercial evidence of export or customs suspension.
- The cars are not used or altered in the time between supply and export or customs suspension.
Where the above conditions for zero-rating are not met, or if the car is not exported from the UAE or put into a customs suspension regime within the required period of 90 days, the motor vehicle trader should account for VAT on the supply at the default rate of 5%. If an exporter believes that the export is not possible within 90 days from the date of supply, it may apply for an exception from the FTA.
5. Import of Cars:
Import of cars to UAE from any country outside UAE is subject to VAT at 5%. The VAT registered importer can claim paid VAT under RCM (Reverse Charge Mechanism) from the FTA. If the importer is not registered for VAT at the time of import, the importer would need to pay VAT to the FTA before the relevant Customs department can release the cars.
6. Warranty Claims:
- Warranty service included in the price of the car: If the cost of the warranty is included in the price of the car, the supplier will undertake to repair any defects in the car for a specified period free of charge., no further VAT implications will arise at the time of providing the essential repair services as VAT would have already been accounted for on the original price.
- Warranty service supplied for an extra charge: The supply of an extended warranty is a taxable supply of services that is subject to VAT at 5%.
Reimbursement of repair costs by distributors from manufacturers:
Where a distributor provides warranty services to a customer in the UAE, no VAT implications arise. For vehicles manufactured outside the UAE, a key point to note is that the reimbursement of costs by UAE distributors from overseas manufacturers to carry out warranty repairs is subject to VAT at 5%.
The VAT treatment of auctions depends on whether the auctioneer acts as a principal supplier or as an agent on behalf of another person.
- Auctioneer acting as the principal supplier: The auctioneer must account for VAT at 5% on the supply.
- Auctioneer acting as an agent of the principal supplier: In this case, the VAT treatment of the sale of the cars must be considered from the perspective of the principal supplier/owner of the cars.
The commission charged by auctioneers:
The commission or premium charged by the auctioneer to the principal supplier of a car or the buyer of the car or both is subject to VAT at 5%.
8. Promotions and Discounts:
Free promotional gifts and discounts on the sale of cars are free of charge.
9. Company Cars and Demo Cars:
- Input tax recovery on the purchase, rent or lease of a company car:
The input tax incurred on the purchase, rent, or lease of a company car is blocked if the car is available for an employee’s personal use.
- Demo cars:
Where the payment made by the original manufacturer is a genuine reduction of the original sales price, such a payment will be considered as a retrospective discount. Suppose the payment relates to any obligations assumed by the motor vehicle trader to perform a specific activity (i.e. Marketing Service). In that case, the payment will be treated as consideration for a taxable supply.