It is important to know more about UAE VAT Implications in Transportation Industry. In simple terms, transportation refers to the various methods used to move goods or passengers from one location to another at a scheduled time based on customer needs. This can involve different vehicles such as buses, trains, cars, planes, and ships, and can occur via different routes like roads, airways, or seas.

Transportation-Related Services

According to Federal Decree Law No.8 of 2017 of VAT, Article (1) defines transport-related services as the shipment, packaging, and securing of cargo, preparation of customs documents, container management, loading, unloading, storage, and movement of goods, or any other closely related or necessary services for conducting transportation services.

The supply of transportation services, as defined above, has tax implications as stated in Article (30) of Federal Decree Law No.8 of 2017 of VAT. For these services, the place of supply is where the transportation begins. The Executive Regulation of this Decree-Law will specify the place of supply for transportation services if the journey includes more than one stop.

According to Article (22) of the Executive Regulations (ER), the place of supply for each transportation service is where that service begins, especially when a journey includes multiple stops and consists of multiple supplies as per Clause 5 of Article 4 of this Decision. The place of supply for Transport-Related Services should be the same as the place of supply for the related transportation service.

Types of Transportation Services

Transportation services are categorized into various types, including:

• Local Transportation of goods
• International transportation services of goods and passengers
• Cargo Transportation services
• Inbound Transportation
• Outbound Transportation
• Cross Border transportation
• Courier Services
• International Courier Services
• Domestic Courier Services
• Cash on Delivery Services
• Transportation services related to passengers.

For a better understanding of the VAT law perspective on the transportation sector of goods and passengers, let’s understand each category in detail.

International Transportation Services of Good and Passengers

Specific regulations under VAT Decree Law No.8 of 2017, Article (45), govern international transportation services of goods and passengers. These services are classified as zero-rated supply of services and include:

• International transport of passengers and goods that start or end in the State or pass through its territory, including related services.
• 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.
• The operation, repair, maintenance, or conversion of the means of transport mentioned above involves the supply of related goods and services.
• Supply of aircraft or vessels designated for rescue and assistance by air or sea.
• Supply of goods and services related to the transfer of goods or passengers aboard land, air, or sea means of transport, designated for consumption on board or anything consumed by any means of transport, any installations or addition thereto, or any other use during transportation.

Article (33) of the Executive Regulations (ER) specifies the conditions for categorizing a service as zero-rated.

• Transporting passengers or goods from a place in the State to a place outside the State.
• Transporting passengers or goods from a place outside the State to a place in the State.
• Transporting passengers within the State as part of an international transport service if the journey starts or ends outside the State.
• Transporting goods within the State if the services are part of the supply of services of transporting goods either from a place in the State to a place outside the State or vice versa.

Goods and services supplied in respect of the transportation services of passengers or goods are also zero-rated if they either apply to Clause 1 of this Article or are treated as taking place outside the State. This includes goods supplied for use or consumption or sale by or on an aircraft or a ship, services supplied during the supply of transportation services, and the service of insuring or arranging the insurance or transport of passengers or goods.

If a postage stamp issued by the Emirates Post Group can only be redeemed for the transportation of goods to a place outside the State, its supply is zero-rated.

It’s important for transportation service-based companies to consider these regulations when determining tax implications for their transactions. The nature of the transaction and the documentation involved in international transportation services play a crucial role in the correct disclosure of amounts in VAT returns. Therefore, it’s advisable to consider these factors before determining the tax implications of the transactions conducted by the organization.

Cargo Transportation Services:

Cargo, also known as freight, refers to goods transported from one location to another, either within or outside the UAE. The term “cargo” originally referred to goods loaded on a ship, but it now applies to goods transported by various means, including rail, van, truck, or intermodal container.

Cargo refers to all goods on a transport vehicle, excluding items such as personnel bags, goods in storage, equipment, or products supporting the transport onboard. Cargo transport is primarily for commercial purposes, and a carrier issues an air waybill, bill of lading, or other receipt.

Cargo transportation can be categorized into:

• Inbound Transportation Services
• Outbound Transportation Services
• Cross Border Transportation Services

Inbound Transportation Services:

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

Tax Implication:

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

For instance, if a client contracts a shipping company to deliver goods from abroad to the UAE, and the contract between the shipping company and the client is only for the local leg of the journey, then in accordance with Article 22(1) of the Executive Regulation, the place of supply of the shipping company’s supply of local transport is within the UAE.

Outbound Transportation Services:

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

Tax Implication:

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

For instance, if a client contracts with a 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, the clearance service qualifies for zero-rating under Article 33(1) of the Executive Regulation.

Cross-Border Transportation Services:

Cross-Border transportation occurs outside the UAE; the goods do not touch the UAE port. For example, the goods are exported from outside the UAE and are delivered to a place outside the UAE.

Tax Implication:

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

The documents required for the outbound transportation are the same for the cross-border transportation services. These include:

• Agreement/contract of service
• Commercial Invoice
• Proof of payment
• Custom Declaration
• Bill of Lading / Airway Bill
• Bill of Entry / Certificate of Origin

Courier Services:

Courier services specialize in express and door-to-door delivery. Couriers may use their own vehicles, shared private transportation, or public transportation to provide these services. The services include the delivery of goods both within and outside the UAE and encompass express delivery services, on-demand pickup, and definite delivery service.

Courier agencies can be classified into the following types:

• International Courier Services
• Domestic Courier Services
• Cash on Delivery Services

International Courier Services:

International courier services involve the transportation/delivery of goods/packages between businesses (B2B) or from businesses to customers (B2C). During exports/imports, courier agencies assist clients in clearing goods from customs authorities and charge a service fee as per the mutual agreement.

In the international market, courier agencies operate based on disbursement and reimbursement cases. During imports, the importer often assigns the task to courier agencies to transport the goods from the customs authority to the warehouse. If the courier agency acts as an agent, it can lead to a supply of disbursement where there would be no tax implication. However, if the courier agency agrees to act as the principal of the receiver of goods, then it could lead to a reimbursement case and can have tax implications as per the transaction conducted.

Tax Implication:

• If courier agency services relate to the international transportation of goods and passengers, they qualify as a zero-rated supply. The transportation company charges a service fee for its services according to Article (30) of the UAE VAT law.
• If services originate from outside the UAE and are provided to a location within the UAE, then the place where the supply commences is taken into consideration. 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 a service fee as per the mutual agreement.

Taxability:

Since the services have 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 the transaction is cash-based, the agency invoices the concerned merchants that are located outside UAE. As per Article (30) of the UAE VAT law, the origin of supply would be considered and, based on the documentation, they may qualify as zero-rated supply of service.

Transportation and Services Related to Passengers:

Let’s delve into the supply of transportation services related to passengers in different scenarios.

Local Transportation:

According to Article (46) of the Federal Decree Law No.8, the supply of local passenger transport is explicitly exempted. Article (45) of the Executive Regulations (ER) further clarifies that the supply of local passenger transport services in a qualifying means of transport by land, water, or air from one place in the State to another place in the State shall be exempt. A “qualifying means of transport” includes motor vehicles, ferry boats, abras, helicopters, or airplanes designed or adapted for transport of passengers.

Local passenger transportation refers to travel from one place to another within the UAE. Any transportation service provided within the UAE would be considered an exempt supply of service. For example, passengers traveling 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.

However, there are exceptions. For instance, if a Dubai Bus is used for sightseeing purposes by the passengers, this service is primarily for recreational purposes and does not constitute as supply of local passenger transport service and would be a taxable supply of service. Similarly, a limousine car used for touring or celebration purposes will also qualify as an exception and not fall under local supply passenger transportation. This shall be treated as a taxable supply of service.

In the hospitality industry, services provided by hotels for the pickup and drop off of guests from hotels to the airports would be exempt as the primary nature of service is local supply of transportation services. However, if cars are leased from third-party companies to provide transportation services for their guests, staff, or clients, such activity of leasing cars is a taxable supply of service, subject to a 5% rate of tax.

Contact ProAct for more information.

ProAct can help you with more information. ProAct stands as a prominent accounting and auditing firm in the UAE, renowned for delivering personalized and top-tier services to our extensive clientele across the country. Over the past years, ProAct has consistently excelled in meeting the unique needs and demands of our clients, thanks to our exceptional team of skilled accountants, auditors, and tax consultants.

With a firm commitment to providing cost-effective solutions, ProAct is fully equipped to unravel the intricate intricacies of taxation for your business. We understand the complexities involved and are dedicated to assisting you every step of the way.

Discover the comprehensive range of services offered by ProAct by reaching out to us today. Our expert team is ready to provide you with the highest level of service and support.