Tax-registered companies in the UAE are obligated to pay Value Added Tax (VAT) to the government at a rate of 5 per cent on their taxable supplies at each step of the supply chain, be it goods or services. Infamous for being a tax-free nation, the UAE brought into existence a “VAT system” on 1 January 2018 as a new source of income. The decision to implement VAT across the UAE was taken as a part of the country’s effort towards accomplishing its vision to continue to provide high-quality public services and lessening economic dependence on limited revenue sources such as tourism, fines, oil and other hydrocarbons.
Digital Marketing Business in Dubai
COVID-19 pandemic hit our blue globe so hard that it had to stop for some time to figure out new, safer ways to resume. One wave after another. There seems no end to this pig-headed pandemic. But the world has learned to live in the ebb and flow of pandemic waves. Walking towards the light at the end of the dark tunnel, the world could see the daylight holding the hand of digital transformation. After all, nothing can stand still life and business, no matter how many COVID-19 variants are still waiting for their turn to try to raze the human race to the ground. The world already embarked on its journey towards digital transformation. The pandemic just cannonballed it.
Importance of Digital Marketing
As the world is going digital at the speed of light, digital marketing has become the need of the hour. Connecting organisations with their customers when they are online, digital marketing has become the nucleus of the business world, no matter what industry they belong to or what products/services they are offering to the public. You are sure to see the products you are planning to buy on your phone screen whenever you go online. This is one of the magic tricks that digital marketing is expert in. There is a lot more!
Digital & E-services Subject to Pay VAT in UAE
No business today is a stranger to digital marketing. It has become the part and parcel of businesses worldwide. Achievement of goals seems next to impossible in the absence of digital marketing to most business persons and professionals. No wonder, more and more entrepreneurs, who are planning to do business in Dubai, are choosing to open a digital marketing agency to offer professional services in all aspects of digital marketing – from Digital Media Buying, Email Marketing, SEO, Campaign Development, and Blogger Outreach Programs to Content Development & Marketing. As far as VAT is concerned, any sort of digital services that are used and enjoyed in the UAE are levied 5% VAT. Such as:
- Online gaming
- Cloud software and storage
- Streaming or download media (including video & music)
However, there is no VAT registration threshold for non-resident providers of e-services. They are required to register straight away with the Federal Tax Authority. In light of the complex VAT registration process in the UAE; businesses have to comply with the regular VAT number application process. A foreign business will be needing a local tax agent to represent them and file returns.
VAT in Digital Marketing Businesses
VAT in the UAE is a hot-button issue, digital marketing companies need to be in the know of. There are myriad rules and regulations with regard to Value Added Tax in Dubai, UAE, and how a digital marketing firm can charge its customers depends on various facets. This includes whether a customer is a private consumer or another business. All the marketing establishments registered on the UAE VAT system should pay special heed to compliance with provisions of the VAT law related to online services in the UAE. The VAT journey of Digital marketing businesses in the UAE is smooth until they come across the stumbling blocks in the form of:
- The location of the service provider and the consumer receiving the service
- Quality of service provided or service performance
- Invoicing of goods & services supplied and billed by a third-party business entity. For instance, a customer provided with marketing material together with the supply of content hosting services and invoicing a customer through a party other than the provider and recipient of the services.
Importance of VAT Compliance in UAE
Not all businesses have to charge VAT from their customers, and digital marketing businesses don’t belong to this group. Regardless of the industry, being the owner of the taxable business in Dubai, UAE, you have to comply with rules and regulations as any sort of non-compliance towards VAT regulations may result in hefty fines. To steer clear of unnecessary fines for VAT non-compliance and to continue to carry on your business activities in the UAE, it’s vitally important that you remain au courant with all the VAT law provisions. You may also take VAT help from VAT specialists in the UAE to stay VAT-compliant.
Impact of VAT on Digital Marketing Entities
Digital marketing companies also are required to assess the impact of VAT on their business transactions when engaging with clients or external entities. When assessing the impact of VAT on entities rendering digital marketing services in the UAE, it is all-important to take into account the type and location of supply of the services that are to be offered to client entities. In addition, if a marketing business in the UAE furnishes both online and offline advertising services then the impact of VAT in the case of offline advertising will depend on the location where ads are to be posted while the VAT impact for online advertisement will depend on the requirements that are to be adhered to by the marketing businesses in accord with the provisions pertaining to marketing services in the UAE mentioned in the VAT law applicable in the UAE.
How to Determine Electronic Services?
To further assist the taxpayer with the provisions of UAE VAT law pertaining to digital marketing services, Article 23 provides some examples of services that can be seen as supplied electronically:
- The supply and updating of software
- The supply of domain names
- The supply of images, text, and information provided electronically such as photos, screensavers, electronic books and other digitized files and documents
- The supply of music, films and games on demand
- The supply of online magazines
- The supply of advertising space on a website and any rights associated with such advertising
- The supply of political, cultural, artistic, sporting, scientific, educational or entertainment broadcasts
- Live streaming via the internet
- The supply of distance learning
- Services of an equivalent type that have an identical purpose and function
How to ensure the service supplied comes under the electronic category?
The list provided is helpful and relatively comprehensive, and guides in figuring out the likes of these services for VAT purposes. However, it is possible to be misled by the list; and it is always necessary to keep in mind that these services will only be treated as electronic services where they meet the basic conditions – that they are delivered automatically and that this delivery takes place online. For example, whilst the supply of software on the list is regarded as an electronic service, it will only be treated as such where it is delivered automatically, online – such as a download from an online seller. If the software is purchased on a physical medium such as a disk or flash drive, it is not taken under the rules for electronic services. In the light of all the above-mentioned services, there is a series of questions that might spring up in taxpayers’ heads to conclude whether they are supplying electronic services such as:
- Is it a service listed in Article 23, or a service similar to any service in the list?
- Is it delivered online?
- Is it delivered automatically?
If the answers to these questions are all affirmative, it is safe to assume the service is an electronic service for the purposes of the VAT law. The principle here is quite straightforward and easy to understand. Basically, the taxpayer has to evaluate where the service is enjoyed. Easier said than done?
In practice, of course, this may be far from simple because, by their very nature, electronic services can be received in more than one location simultaneously and can cross borders almost without restriction. For instance, one could subscribe to a streaming service in the UAE but will then can access their account across the world. Unquestionably, it would be impossible for a supplier to foretell the use of a service of this type when the sale is made, in order to only charge VAT when it is used in the UAE.
Should the service be taxed in the UAE?
The VAT law uses the concept of “place of supply” to ensure whether a supply will be taxed in the UAE.
When it comes to identifying taxable electronic (and telecommunication) services in the UAE, there is a special set of “place of supply” rules placed in Article 31 of The Federal Decree-Law No.8 of 2017 on Value Added Tax (‘the Decree Law’). This Article states that:
The place of supply shall be:
- In the UAE, to the extent of the usage and enjoyment of the supply in the State.
- Outside the UAE, to the extent of the usage and enjoyment of the supply outside the State.
The actual use and enjoyment of all ……… electronic services shall be where these services were utilised no matter what the location of contract or payment was.
Digital Marketing Companies, UAE: VAT Registration
First and foremost, UAE digital marketing businesses must ensure that their financial records are up-to-date and studied up to the hilt to find out if they are eligible to charge VAT. They must register their business for VAT the moment they surpass the minimum mandatory threshold, which means if their taxable supplies/imports exceed AED 375,000. However, on touching the voluntary registration threshold of AED 187,500, they may choose to do so for their own good. As VAT-registered businesses, digital marketing entities have to:
- Charge VAT on their taxable offerings
- Reclaim (or request to adjust) VAT they paid on business-related goods/services
- Regularly notify the VAT they have charged versus the amount of VAT paid
UAE Digital Marketing Service Providers: VAT Compliance
To ensure VAT compliance, the UAE-based companies in the digital marketing sector should take first make a list of all the VAT-eligible online advertising and marketing services and then ascertain the location of the customers/target audiences for each of the services mentioned on the list. After these two steps, the companies should determine the tax liability as well as tax responsibility when signing the contract with their customer.
VAT Impact Analysis
The answer to whether the entities providing marketing services in the UAE will charge VAT or not varies as per various scenarios arising due to the location of all three parties – marketing company, service client and target audience – involved in the transaction. Ahead, we will analyse in what cases marketing companies supplying marketing and advertisement solutions will be liable to charge VAT and in what cases they won’t be.
Marketing Entity + Service Client Inside the UAE & Target Audience Outside the UAE: If a UAE-based marketing company offers marketing and advertisement services to a client entity located inside the UAE, but the target audience for the said services is residing outside the UAE then in such a case the place of supply for VAT purposes would be considered outside the UAE and therefore no VAT would be applicable as the said transaction falls outside the scope of VAT in the UAE.
Marketing Entity Inside the UAE & Service Client + Target Audience Outside the UAE: If a digital marketing company located in the UAE provides marketing and advertisement services to a client entity based outside the UAE and the target audience for which the ads are to be posted are also sitting outside the UAE then the place of supply for VAT purposes would also be regarded as outside the UAE as the services in question will be consumed outside the UAE. In this scenario also the entity will charge no VAT on the services provided to the client entity.
Marketing Entity + Target Audience Inside the UAE & Service Client Outside the UAE: If a marketing company provides electronic services to a client entity that does not have a fixed establishment in the UAE but the target audience of the ads that are to be posted is located inside the UAE then in such a situation the transaction would be seen as an export of service and therefore VAT will be charged at the rate 0% on the transaction.
Marketing Entity + Service Client + Target Audience Inside the UAE: If a marketing company in the UAE provides marketing and advertisement services to a client located in the UAE and the target audience of the ads to be posted are also inside the UAE then in that scenario, the place of supply for VAT purposes would be the UAE as the provider and recipient of the marketing services are both located inside the UAE and top of that, the services to be provided will be consumed within the nation as the target audience is also located inside the UAE. In this case, the VAT would applicable at the standard rate of 5%.
Summing Up to Outline
In a nutshell, if the place of service supply is outside the UAE as explained in case-1 and case-2, no VAT (NIL VAT) will be applicable. If the place of service supply is inside the UAE but treated as an export because the client entity is not located in the UAE resulting in VAT as shown in case-3, VAT will be charged but at the rate of 0% (zero-rated VAT) and lastly, if the place of target audience and client entity is inside the UAE as exhibited in case-4, VAT is applicable at the standard rate of 5%. The term “outside the UAE” is a reference to countries other than the VAT implementing states, in line with the GCC VAT agreement that all the GCC member states signed in 2017.
Your One-Stop-Spot for VAT Solutions
Whether you are hemming and hawing about hiring a VAT trainer to be VAT prepared or looking for the best VAT service providers in Dubai, UAE for your digital marketing business? Home to qualified and experienced Dubai business advisors and VAT consultants, Adam Global, Dubai (AG)is the answer. You can make the most of our years of experience in all the aspects of business set-up, development and expansion, whether you are in the initial phase of business set-up or planning to scale up your business. Our expertise in a wide spectrum of tax and consultancy services can not only help you make your in-house finance professionals VAT-ready but also help you stay compliant with the VAT law in all seven emirates of the UAE. Get in touch with us to benefit from our first-time free consultancy.