VAT Implications in Transportation Industry

The transportation of goods from one place to another located within the UAE, constitute local transportation of goods. Any domestic supply of goods in the UAE qualifies as the taxable supply of service.

Tax implication:

The tax implication for the local supply of transportation service would be subject to 5% rate of tax.

As per Article (45) of VAT Decree Law No.8 of 2017, has specifically identified the following services related to transport services as Zero-rated supply of services:

1. International transport of passengers and Goods which starts or ends in the State or passes through its territory, including Transport-related Services.
2. Supply of air, sea, and land means of transport for the transportation of passengers and Goods as specified in the Executive Regulation of this Decree-Law.
3. Supply of Goods and Services related to the supply of the means of transport mentioned in point 2 above in this Article and which are designed for the operation, repair, maintenance or conversion of these means of transport.
4. Supply of aircrafts or vessels designated for rescue and assistance by air or sea.
5. Supply of Goods and Services related to the transfer of Goods or passengers aboard land, air or sea means of transport pursuant to Clauses (2) and (3) of this Article, designated for consumption on board; or anything consumed by any means of transport, any installations or addition thereto or any other use during transportation.

As per Article (33) of the Executive Regulations (ER) states the conditions where it can be categorized as zero-rated supply of services which are as follows:

1. Transporting passengers or Goods from a place in the State to a place outside the State.
2. Transporting passengers or Goods from a place outside the State to a place in the State.
3. Transporting passengers from a place in the State to another place in the State by sea or air or land as part of a supply of an international transport of those passengers if either or both the first place of departure, or the final place of destination, is outside the State.
4. Transporting Goods from a place in the State to another place in the State if the Services are supplied as part, or for the purpose, of the supply of Services of transporting Goods either from a place in the State to a place outside the State or from a place outside the State to a place in the State.

The following Goods and Services shall be zero-rated if they are supplied in respect of the transportation services of passengers or Goods to which either Clause 1 of this Article applies or which are treated as taking place outside the State:

1. The Goods which are supplied for use or consumption or sale by or on an aircraft or a ship.
2. The Services supplied during the supply of transportation services.
3. The Service of insuring, or the arranging of the insurance, or the arranging of the transport of passengers or Goods.

2. A supply of a postage stamp issued by Emirates Post Group shall be zero-rated where the postage stamp may only be redeemed for transportation of Goods to a place outside the State.

In recent times we have observed many transportations services-based company facing challenges decoding the right tax implications for their transaction. As explained in the VAT law, international transportation of goods and passengers indicate a disclosure of zero-rated supply of service. But disclosing the revenue based on the above belief is not advisable, since the documentation and the nature of transaction in the complete international transportation services is required to be considered. The documentation always forms the basis for the right disclosures of amount in the VAT returns. Also, the organization role in the international transportation determines the taxability implications for its transactions conducted.

Thus, its safely advisable to have the above factors in consideration before determining the tax implication of the transactions conducted by the organization.

Cargo, also known as freight, refers to goods being transported from a place outside UAE or within UAE to place outside UAE or within UAE. Originally, the term “cargo” referred to goods being loaded onboard a vessel. These days, however, cargo is used for all types of goods, including those carried by rail, van, truck, or intermodal container.

Though cargo means all goods onboard a transport vehicle, it does not include items such as personnel bags, goods in the storage, equipment, or products to support the transport carried onboard. Cargo transport is mainly for commercial purpose for which an air waybill, bill of lading or other receipt is issued by the carrier.

The Cargo transportation can be further diversified into the following categories:

1. Inbound Transportation Services.
2. outbound Transportation Services.
3. Cross Border Transportation Services.

Inbound Transportation Services:

Inbound Transportation Services relates to the movement of goods from outside UAE to within UAE.

Tax Implication:

The tax implication for the inbound transportation services depends on the movement of goods. If the services are an integral continuous part of the international transportation services of goods it would be taxable under Article (33) of the ER.

For e.g., the Client contracts a shipping company to deliver goods from abroad to the UAE. The client contracts with shipping company to receive the goods from the UAE port and to deliver them to the client or another person (e.g., the client’s client) in the UAE mainland or FZ. In this case, the contract between shipping company and the client is only for the local leg of the journey. Consequently, in accordance with Article 22(1) of the Executive Regulation, the place of supply of shipping company’s supply of local transport is within the UAE.

Documents that are advised to be retained for the concerned service are as follows:

1. Agreement /contract of service
2. Commercial Invoice
3. Proof of payment
4. Custom Declaration
5. Bill of Lading / Airway Bill
6. Bill of Entry / Certificate of Origin

Outbound transportation Services:

Outbound Transportation Services relates to the movement of goods from within UAE or FZ to outside the UAE.

Tax Implication:

The tax implication in this can be related to Article (30) of the ER, where the transportation services can be disclosed as zero-rated supplies.

For e.g., the client (including overseas entities subcontracting the local UAE leg of the transport) contracts with shipping company to pick-up the goods from the client’s UAE mainland or FZ location to the UAE port and clear them for export from the UAE. In this case, the contract between shipping company and the client is only for the UAE element of the journey. Here, the clearance service is supplied in relation to the international transport. On the basis that the international transport service starts in the UAE, the clearance service qualifies for zero-rating under Article 33(1) of the Executive Regulation.

Documents that are advised to be retained for the concerned service are as follows:

1. Agreement /contract of service
2. Export documents issued by the local Emirate Customs Department in respect of Goods leaving the State.
3. Proof of payment
4. Custom Declaration
5. Bill of Lading / Airway Bill.

Cross- Border transportation Services:

Cross- Border transportation is undertaken outside UAE; goods does not touch the UAE port. For e.g., the goods are exported from outside UAE and are delivered to place outside UAE.

Tax Implication:

As per Article (30) of Federal Decree Law No.8 of 2017 of VAT, the tax implication for supply of transportation services is related place where the transportation commenced.

The documents as stated for the outbound transportation is same for the cross- border transportation services.

Courier services focuses on express and door-to-door delivery. Couriers may use self-owned, privately shared, or public transportation to supply these services. The transportation services include delivery of the goods outside the UAE and within the UAE. This includes express delivery services, services on demand pick up or definite delivery service

Courier Agencies can be categorized into the following types as follows:

1. International Courier Services
2. Domestic Courier Services
3. Cash on Delivery Services

International Courier Services:

International courier services include the transportation / delivery of goods/ packages between (B2B) Business to Business or Business to Customer. During the exports / imports the courier agency services assist the client in clearing the goods from the customs authority and charge a service fee as per the mutual agreement.

In the international market courier agency practice in as per the disbursement and reimbursement cases. During imports many a times, the importer assigns the task to the courier agencies to transport the goods from the custom authority to the warehouse. Here if the courier agency acts an agent it can lead to supply of disbursement where there would be no tax implication. But if the courier agency agrees to act as the principal of the receiver of goods, then it could lead to reimbursement case and can have tax implication as per the transaction conducted.

Tax Implication:

Services related to international transportation:

The courier agency services are related to the international transportation of goods and passengers it can be treated as zero-rated supply. If there is a service fee charged by the transportation company regarding the services provided by the company, then it would be charged as per Article (30) of the UAE VAT law.

Services provided from Outside UAE to within UAE:

 If the services have been provided from outside the UAE to a place within UAE, then the place of supply commencement will be considered. Since the place of commencement is outside UAE, the tax implication for the same would be Out of scope.

Services provided from within UAE to outside UAE:

If the services have been provided from within UAE to Outside the UAE, then the place of supply commencement will be considered. Since the place of commencement is within UAE, the tax implication for the same would be zero-rated supply.

Domestic Courier Services:

Domestic courier services relate to the transportation of goods/ packages within the UAE. This includes local delivery and transportation of goods. Here too the courier agency may charge the service fee as per the mutual agreement.

Taxability:

Since the services has been commenced and provided within the UAE it would be taxable as the standard rated supply as per the UAE VAT Law.

Cash on Delivery Services:

Cash on delivery services are an arrangement between the courier agency and the online distributors or suppliers to deliver the goods to the customers at the specified location as per the specified time. Here the agency charges a service fee based on the arrangement of delivery of goods.

Tax Implications:

If the goods are to be delivered within the UAE it would qualify as a standard rated supply. Since the basis of transaction is cash based, the agency invoices the concerned merchants that are located outside UAE. As per the Article (30) of the UAE VAT law, the origin of supply would be considered and as per the basis of documentation they may qualify as zero-rated supply of service.

As analyzed in the earlier context, regarding the supply of transportation services related to goods in the various types of transactions.  Now, let’s analyze the supply of transportation services related to passengers in different situations.

• Local Transportations:

As per Article (46) of the Federal Decree Law No.8, has explicitly exempted the supply of local passenger transport. To highlight more in detail, as per Article (45) of the ER, states

1. The supply of local passenger transport Services in a qualifying means of transport by land, water, or air from a place in the State to another place in the State shall be exempt.
2. The phrase “qualifying means of transport” means:
3. A motor vehicle, including a taxi, bus, railway train, tram, monorail, or similar means of transport, designed or adapted for transport of passengers.
4. A ferry boat, abra or other similar vessel designed or adapted for transport of passengers. c. A helicopter or airplane designed or adapted for transport of passengers and approved for transport of passengers in accordance with Federal Law No. 20 of 1991 on Civil Aviation.

The local transportation of passengers refers to travel from one place to another place located within the UAE. Any transportation service provided within UAE would be considered as exempt supply of service. For e.g., passengers travelling in public transport like metro, taxi, buses will be considered as exempt supply of service since the primary supply of service is local transportation services.

Another e.g., a very recent case study of Careem taxis is explained as follows, a person uses the service of Careem taxis to travel from one place to another place located within UAE, here the taxi fare paid by the person is a tax inclusive fare. As per UAE VAT Law, the supply of transportation of passenger service is exempt, thus no tax can be charged on the same. But the service fee charged by the Careem would be subject to standard rate of tax.

To simplify the above exception, let’s look at few examples for easy understanding.

1. The Dubai Bus that is utilized for the sightseeing purpose by the passengers. In this case the primary reason of utilizing this service is for recreational purpose. Thus, this shall not constitute as supply of local passenger transport of service and would be taxable supply of service.
2. The limousine car used for touring or celebration purpose will also qualify as an exception and not fall under local supply passenger transportation. This shall be treated as taxable supply of service.

Another Example

In hospitality industry, like hotels we commonly see the services provided by the hotels for the pickup and drop off the guest from hotels to the airports, here the supply of transportation services would be exempt being the primary nature of service being local supply of transportation services.

At times in hospitality industry the cars are leased from the third-party companies to provide the transportation services for their guest, staff, or clients. Depending upon the organization requirements the cars are leased for longer durations (monthly or yearly) or for short durations (daily or weekly based). Such activity of leasing cars is a taxable supply of service i.e., subject to 5% rate of tax.