Tax Treatment of Making Services – Clarification of Publications on Gold & Diamonds

On November 29, 2022, the FTA (Federal Revenue Agency) of the United Arab Emirates issued a public interpretation (VATP032) regarding gold and diamonds. This amendment addresses the Corporate Tax UAE treatment of manufacturing services in the jewelry industry (especially for gold and diamonds), rendering the previous public clarification VATP029 invalid.

The revised public clarification will determine how VAT (Value Added Tax) is applied to the cost of producing gold and diamond jewelry. Furthermore, this clarification is consistent with the Government’s Decision No. 25 in 2018 on the mechanism for managing VAT on gold and diamonds among real estate registrants (Cabinet Decision No. 25).

DETAILED ANALYSIS OF VAT PUBLICATION (VATP032) ON GOLD AND DIAMONDS

A temporary change in definition (from June 1, 2018, to December 31, 2022) will allow reversing charging to be applied to production costs associated with sourcing gold. However, the change in definition will be subject to conditions, as outlined in Cabinet Decision No. 25  2018, for this particular period only.

VATP029 (from June 1, 2018, to December 31, 2022) applies to jewelry, with the main ingredients being gold, diamonds, and other products. This may involve the performance of services related to delivering these goods. In addition, VATP032 will take effect on January 1, 2023, and will apply to gold, diamonds, and products containing significant amounts of the ingredients above.

SINGLE AGGREGATE SUPPLY:

The transaction is considered aggregate supply when a supplier’s invoice refers to a single price, including production costs. In addition, however, the transaction must meet the following conditions:

Supply must include the central element (gold) and secondary factors such as ancillary services (including manufacturing services from January 1, 2023) or related elements forming the source of the supply. Single and inseparable arc.
Latest gold prices and secondary services must be aggregated.
Suppliers of gold and related services/products must be the same entity.

2) COMPLIANCE REQUIREMENTS:

If the transaction meets the above conditions, the gold supply (including secondary services) will be considered the aggregate supply. In addition, a transaction may be eligible for reverse charging if it meets the criteria outlined in Cabinet Decision 25. 

Understand that both the supplier and the buyer must have full transaction documents, especially the buyer.
Buyer must have a tax invoice issued by the supplier with details of the one-time review for the gold product (including related services), clearly stating that the reverse charging mechanism applies to this transaction.

TYPES OF TRANSACTIONS AND APPLICATION OF VAT LAW IN THESE CASES

TRANSACTION 

When the gold value and the cost of production are separately on the tax invoice.

 OPERATION

Gold values ​​and crafting fees are not considered aggregate supplies (if they do not meet the aggregate supply requirements mentioned above).

The old VAT publication (VATP029) explains that the reverse charging mechanism is applied in the above two cases. However, the recipient must pay VAT for the opposite charge. Regarding production costs, the supplier must charge a 5% VAT on the cost of production while still including the forward cost.

WILL THINGS CHANGE WITH THE CLARIFICATION OF THE NEW VAT PUBLICATION (VATP032)? 

The reverse charging mechanism will apply to gold and production costs (until June 1, 2018, to December 31, 2022) to clarify the new VAT publication. This VAT publication will apply to both transactions above. However, everything will change as of January 1, 2023. From January 1, 2023, the reverse calculation mechanism will be applied to gold. The supplier will be subject to 5% VAT on production costs. Again, this VAT publication clarification will apply to both transactions.

For general supplies, the reverse charging mechanism will apply to gold and production costs (for VATP029 and VATP032).  

IMPACT OF VAT PUBLICATION CLARIFICATION ON VAT RETURNS (WITH HYPOTHETICAL SCENARIOS)

EXAMPLE 1

Suppose the taxable object applies the provisions of the Government’s Decision No. 25 on gold objects (except for production services) from June 1, 2019, to December 31, 2022. In that case, this provision is not required. Revision of previous VAT returns. 

 EXAMPLE 2 

 Suppose the taxable subject applies the provisions of Decision No. 25 of the Government to gold artifacts and production costs (directly related to the supply of gold objects). In that case, the impact will be as follows: 

THERE IS NO NEED TO ADJUST THE PREVIOUS VAT RETURN. 

 EXAMPLE #3 

 If the taxpayer submits a voluntary declaration according to VATP029 public explanation of the gold fee regarding the following situations for VAT and RCM (reverse charging mechanism)

Want to apply VAT on production costs listed separately from the gold item on the invoice. 
RCM has applied for toll collection.

In the above case, there is no need to adjust the previous VAT return.

FINAL THOUGHTS

Most sellers pass VAT on to buyers. However, the responsibility of a company/entrepreneur continues beyond there. Sure, filing, documenting, and claiming a VAT refund is difficult. Still, every business must meet these responsibilities to conduct business in the UAE. Furthermore, the gold and diamond market in the UAE is unique. Therefore, applying the same VAT settings to other UAE companies is impractical. Therefore, the Government of the United Arab Emirates has carefully revised the VAT applied to gold and diamonds and their production cost.

 The authorities have concluded that the previous clarification of VATP029 caused confusion in the minds of the companies involved and created obstacles when submitting VAT returns. With the introduction of the new amendment VATP032 (applicable from January 1, 2023), people will have a clearer picture of VAT applied to gold and diamonds, including processing costs.

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