FTA clarifies VAT on gold, diamond deals in UAE

The Federal Tax Authority (FTA) on Wednesday clarified that the new Cabinet decision issued about VAT reverse charge mechanism for the gold and diamond industry will only pertain to commercial transactions between registered dealers.

As per the reverse charge mechanism, registered dealers shall not charge Value Added Tax (VAT) when supplying to another tax registered merchant with gold, diamonds or products where the principal component is of gold or diamonds, as long as the latter intends to resell such products, or use them to manufacture gold, diamonds or products where the principal component is of gold or diamonds. The registered recipient must include such supplies in his tax returns.

Khalid Ali Al Bustani, director-general, FTA, explained that the reverse charge mechanism (RCM) applies on supplies of gold and diamonds between registered businesses. This includes three categories of supplies: gold, diamonds or products where the principal component is of gold or diamonds, such as jewellery. This procedure does not apply to zero-rated supplies, namely: exports of gold, diamonds or products where the principal component is of gold or diamonds; as well as the supply of investment grade precious metals.

The authority said the impact of VAT on sales of gold and diamonds to be reduced between registered dealers according to reverse charge mechanism. Thomas Vanhee, Partner, Aurifer Middle East Tax, said Cabinet decision only applies in B2B situation where the diamonds and gold are sold for resale or manufacturing. In other words retail sales of gold and diamonds are still fully subject to VAT at five per cent.

He pointed out that rumours have it that the gold lobby in Saudi Arabia is requesting similar reliefs from the government. Nirav Shah, director, Fame Advisory, said the Cabinet decision on transaction for gold and diamond trade which takes place between two VAT registered businesses will not be required to charge VAT. Only recipient needs to account under reverse charge. “This is very positive for the industry as it will reduce compliance burden on wholesale segment. It’s a welcome move,” Shah said.

“While this is a welcome move, one needs to be careful as recoverable input tax can only be claimed as credit for any taxable supply, such treatment could be treated as being outside the scope as these invoices are not to be reported, hence one needs to be careful while claiming input tax credit if majority of turnover consists of whole sale trade sales,” he added.

The Cabinet decision maintains that taxable persons are generally entitled to deduct the tax they incur on their inputs in their tax returns; hence registered gold and diamonds recipients can recover the tax they incurred on their purchases in the same tax return in which they calculate their due taxes, thus maintaining liquidity and cash flow. – waheedabbas@khaleejtimes.com

4 conditions must for transactions

• The recipient must be registered for VAT with the FTA on the date of supply.
• Purchase must be made with the intention to resell the supplies, or use them to manufacture or products where the principal component is of gold or diamonds.
• The recipient must declare to the supplier (in writing) that he/she is registered with the FTA at the date of supply and that his/her intention from purchasing the supplies is to resell them or to produce or manufacture products where the principal component is of gold or diamonds.
• The recipient must state his intention to account for the tax on this supply in his/her tax return.

All you need to know about VAT on gold and diamonds

What will be the VAT treatment of gold & diamonds?

Where a business supplies gold or diamonds to a VAT-registered recipient, and the recipient is purchasing the goods in order to either resell, produce or manufacture gold and diamond based products, the supplier will not be required to account for VAT on such sales or report it on its VAT return.

Instead, the VAT-registered recipient will be required to account for the tax and include the output tax due on the supply on its VAT return.

The recipient will then also be able to recover the VAT on the supply on the same VAT return, subject to its normal input tax recovery position.As a result, fully taxable businesses which purchase gold and diamonds for resale, production or manufacture will not have to make payment of the VAT due on the supply.

What type of goods will this mechanism apply to?

The scheme will apply to the following goods only:

• Gold
• Diamonds
• Products where the principal component is gold or diamonds e.g. jewellery

What type of goods will this mechanism not apply to?

The mechanism will not apply to goods that are subject to the zero rate, namely:

• Exports of gold, diamonds and products where the principal component is gold or diamonds
• Supplies of investment precious metals

Apply the mechanism?

In order to apply the mechanism on the supply of gold or diamonds, the following conditions must be met:

• The recipient of the goods must be registered for VAT in the UAE at the date of supply.
• The recipient must be purchasing gold or diamonds, or products where the principal component is gold or diamonds.
• The recipient must be purchasing the goods in order to resell, produce or manufacture them into another product where the principal component is gold or diamonds.
• The recipient business must have provided confirmation in writing that it is registered for VAT at the date of supply, that the purposes of obtaining the goods is for resale, production or manufacture of such goods, and that it will account for the VAT due on the supply.

 What are the obligations on the supplier?

Before applying the mechanism, the supplier needs to:

• Obtain a written declaration from the recipient (template shall be provided by FTA).
• Confirm that the recipient is registered for VAT as per the validation checks provided by the FTA.

What gold and diamond products will be subject to VAT at 5%?

Gold, diamonds and products of gold and diamonds shall be subject to 5% in any of the following cases:

• Where the recipient of such goods is not registered for VAT at the date of supply.
• Where the recipient’s purpose of purchasing such goods is not to resell, produce or manufacture goods or diamonds or products where the principal component is gold or diamonds.
• Where the supply is of a product where gold and diamonds are not the principal component.

Courtesy: Khaleej Times/ Image: saudigazette