Business models have drastically evolved to accommodate flexibility and efficiency.  One such model is the ‘Bill-to-Ship-to’ arrangement which encompasses complexities in the realm of Value Added Tax.  Around the globe, this model has different VAT treatment.

In general practice, there are two entities, the seller who invoices (transfers the title of the goods) and sells the goods to the purchaser who is also the recipient of the goods.  In a Bill-to-Ship-to model, there are three distinct entities, the seller, the purchaser, and the actual recipient of goods.  This arrangement is often driven by various factors such as supply chain optimization, distribution efficiency, or strategic partnerships.

The fundamental rule of VAT is if the goods are located in the UAE, it is a taxable supply and subject to 5% (except concessional goods such as medication, etc).  In case goods are exported outside the UAE, they should be subject to 0% VAT.  Bill-to-Ship-to model can have two scenarios A. Where goods are sold to an entity in the UAE and sent outside the UAE and, B. Where goods are sold to an entity outside the UAE and sent within the UAE.

In the first scenario, the seller issues an invoice to the purchaser in the UAE and the title of the goods is transferred to the purchaser within in the UAE.  At the behest of the purchaser, the seller sends the goods outside the UAE to a separate entity (recipient of goods).  Based on the literal interpretation, some may consider that since the goods have departed the UAE, the supplier should qualify the transaction as an export at 0% VAT, more so where the customs documentation shows the seller as the exporter.  However, the contractual relationship in this transaction is between the seller and the purchaser and subsequently between the purchaser and the recipient of the goods and thus two distinct supplies.  The FTA has clarified in the Automotive Sector VAT Guide – VATGAM1 that such cases entail two separate underlying transactions.  The first transaction is the domestic supply from the seller to the purchaser which should be taxable at 5%.  This is due to the reason that the seller is selling the goods to the purchaser in the UAE and the title of the goods is in the UAE.  Unlike a few other jurisdictions, the relevance is not provided on the actual movement of the goods.

The subsequent leg of this transaction is the supply of goods from the purchaser to the actual recipient (who is outside the UAE).  This should qualify as an export. It is also clarified that businesses should mention in the export documents the fact that the seller is acting as an agent on behalf of the purchaser to send the goods to the recipient outside the UAE.  This clear documentation will enable the purchaser to qualify its subsequent supply to the recipient of goods for zero-rating benefit.  Needless to mention, in the absence of proper documentation both the supplies i.e. from the seller to purchaser and subsequently from the purchaser to the actual recipient of goods will be subject to 5% VAT even though the goods have physically moved outside the UAE.

The second scenario captures the situation where the seller issues an invoice to a purchaser outside the UAE, however, the goods are sent/ consumed by a recipient of goods in the UAE.  The basic definition of exports is when goods are departing the UAE to a person whose place of establishment or fixed establishment is outside the UAE.  In the current scenario, although the title of the goods is transferred to an entity outside the UAE, the goods are not physically moving outside the UAE.  Therefore, such transactions should be subject to 5% VAT.  A classic example of such cases is the components replaced by domestic dealers for which warranty is provided by international brands. In such events, the customer approaches the dealer and gets the component replaced without paying anything.  The dealer thereafter issues an invoice to an entity outside the UAE with VAT The VAT charged to the purchaser outside the UAE will become a cost unless it explores the opportunity of seeking a refund under the Business Visitor Scheme.

It is often observed that businesses neglect the VAT impact on such transactions that require careful consideration and proactive management.  By understanding the VAT implications, businesses can navigate this model successfully while mitigating risks and ensuring compliance.