Articles

The Federal Tax Authority (FTA) has issued Public Clarification VATP043 (replacing VATP032) to provide essential guidance on the updated Reverse Charge Mechanism (RCM) for transactions involving precious goods in the UAE. This clarification follows Cabinet Decision No. 127 of 2024, which significantly expanded the scope of RCM, effective from February 26, 2025.

This shift is more than a technical update; it’s a strategic move to secure VAT collection, streamline cash flow for VAT-registered businesses, and combat potential fraud in the high-value precious metals and stones sector.
The New Scope: Broader Than Ever
The previous RCM largely focused on domestic supplies of gold and diamonds. VATP043 confirms the sweeping expansion introduced by the Cabinet Decision, bringing a much wider range of high-value commodities under the mechanism.
The scope of Precious Metals now includes Gold, Silver, Platinum, and Palladium. Furthermore, the definition of Precious Stones has been expanded significantly to cover natural and synthetic diamonds, Pearls, Rubies, Sapphires, and Emeralds. The RCM also applies to Jewelry made from these materials, provided the value of the precious components exceeds the value of other components used in the piece.
This comprehensive expansion means that a significant portion of the business-to-business (B2B) trade in luxury and industrial precious materials now falls under the RCM, fundamentally changing how suppliers and buyers handle VAT in these transactions.
Compliance Hinges on Documentation
The core operational burden of the expanded RCM falls heavily on documentation and verification. VATP043 clearly outlines the strict conditions that both the supplier and the recipient must satisfy for the RCM to apply to a B2B transaction:

1. Recipient is VAT-Registered: The buyer must be registered for VAT in the UAE.
2. Intent of Use: The buyer must intend to either resell the precious goods or use them in the production or manufacture of other precious goods.
3. Mandatory Declaration: The recipient must provide the supplier with a written declaration confirming both their VAT registration status and their intent of use before the date of supply.
   Crucially, the supplier must receive and verify the recipient’s declaration. If these conditions are not met, the supplier is obligated to charge and remit standard 5% VAT, shifting the liability and cash flow impact back to the traditional method.
   The Critical Clarification on ‘Making Services’
   One of the most valuable aspects of VATP043 is the guidance provided on making services (such as charges for assembly, cutting, or manufacturing jewelry).
   The FTA clarifies that the RCM applies only to the supply of the Precious Goods themselves, and not generally to the services used to modify them. However, an exception exists:

• If the supplier charges a single composite price for the precious goods and the making service, and the making service is incidental and inseparable from the supply of the goods, the entire transaction may be treated as a single composite supply subject to the RCM.
• If the making charges are separately invoiced, the service component remains subject to standard 5% VAT, even if the goods component is covered by RCM.
  This clarification is vital for manufacturers and jewelers who often combine the sale of materials with a service fee, requiring businesses to meticulously review their invoicing practices.
  Key Takeaway for Businesses
  VATP043, coupled with the Cabinet Decision, confirms that the UAE is actively strengthening its VAT controls in high-risk sectors. For businesses trading in precious materials, proactive compliance is non-negotiable:
• Systems Update: Update all Enterprise Resource Planning (ERP) and accounting systems to correctly apply RCM to the expanded list of goods, effective February 26, 2025.
• Training & Verification: Ensure sales and compliance teams are fully trained on the mandatory written declaration requirement and the process for verifying the recipient’s VAT registration number (TRN) via FTA tools.
• Invoicing Precision: Clearly define and separate charges for goods versus services to ensure the correct VAT treatment is applied, especially in composite supplies.
  This expansion offers a cash flow advantage and simplified compliance for compliant businesses, but non-compliance—particularly regarding documentation—will expose the supplier to the risk of becoming jointly liable for the uncollected VAT.

The UAE tax system has witnessed a crucial settlement of a core dispute regarding the application of the administrative penalties cap. The Federal Supreme Court (FSC) has issued a significant judgment clarifying how the maximum limit for penalties is calculated, setting a new course for the Federal Tax Authority (FTA) and all taxable persons.

The controversy centered on how to interpret the statutory maximum penalty of 200% of the tax amount: Does this cap apply to the total penalties imposed in a single assessment, or to each penalty individually?
The Legal Provision in Question
The disagreement stems from the interpretation of Article 24(4) of the Federal Decree-Law No. 28 of 2022 on Tax Procedures, which stipulates: “The amount of any Administrative Penalty shall not exceed two times the amount of Tax in respect of which the Administrative Penalties Assessment was issued.”

While the text aims to cap the total penalties imposed in connection with a specific amount of tax, it did not explicitly define whether this limit applies to the individual penalty or the aggregate amount contained in the assessment.
The Conflicting Interpretations
Lower courts were faced with two opposing interpretations of the text, each carrying major financial implications:

1. The Taxpayer’s Position: The Cap Applies to the Entire Assessment
   The taxpayer, in the case before the FSC, argued that the text refers to the “Administrative Penalties Assessment” as one document. Therefore, the total sum of administrative penalties imposed for related violations should not exceed double (200%) the total amount of the underlying tax assessed. This interpretation aimed to limit the accumulation of penalties resulting from multiple breaches.
2. The FTA’s Position: The Cap Applies to Each Penalty
   The Federal Tax Authority maintained the opposite view, arguing that Article 24(4) should be read to limit each individual administrative penalty. Since each penalty is calculated based on the specific violation it relates to, the legal requirement is met as long as each separate penalty does not exceed 200% of the tax amount that triggered it, even if the total penalties surpass that threshold when aggregated.
   The Federal Supreme Court’s Ruling: Cap Applies Per Penalty
   In its judgment issued on 23 April 2025 in Administrative Appeal No. 337 of 2025 (Tax), the Federal Supreme Court agreed with the FTA, confirming that the 200% cap applies to each penalty independently, and not to the aggregate penalties within the assessment.
   The Supreme Court confirmed in its judgment: “Each penalty, individually and specifically, must not exceed double [the tax amount].”

The Court focused on the literal and grammatical structure of the law, interpreting the phrase “any Administrative Penalty” to mean each specific penalty. This stance settles the debate and leaves little room for alternative interpretations.
Implications for Taxpayers and Compliance
While the decision ultimately ruled against the taxpayer in this specific case, it establishes a defined legal principle and has immediate practical consequences:

1. Constraints on Challenging Total Amounts: Taxpayers may no longer successfully argue that the total amount of penalties in an assessment must be limited to 200% of the overall tax. Future challenges must demonstrate that a specific, individual penalty exceeded its legal maximum.
2. Increased Importance of Compliance: Given that each breach (even minor or repeated errors) can now generate a separate penalty of up to 200% of the associated tax, taxpayers must be even more meticulous with administrative requirements. Maintaining accurate records, meeting deadlines, and full compliance are now paramount to avoid the cumulative accumulation of significant liabilities.
   The FSC’s ruling reinforces the principle of proportionality, where each penalty must be calibrated against its associated tax obligation. This judgment is a defining moment for the UAE tax penalties regime and necessitates that all taxable persons re-evaluate their compliance strategies.

In the rapidly evolving tax landscape of the UAE, a critical legal debate has emerged concerning the precise moment a taxpayer can escalate a dispute from the administrative level to the courts. This issue centers on the statutory deadline for the Tax Disputes Resolution Committee (TDRC), a body with quasi-judicial authority, to issue its decision.

The tension lies between the explicit statutory timelines designed to ensure swift resolution and the judicial tendency to prioritize a complete administrative decision as the basis for a court appeal. A recent ruling from the Federal Supreme Court (FSC) has provided necessary, though nuanced, guidance on how to interpret this procedural bottleneck.
The Procedural Bottleneck: Deadlines and the Right to Appeal
The conflict arises from the deadlines stipulated in the Federal Decree-Law No. 28 of 2022 on Tax Procedures.

• The Clock Starts: The TDRC is required to decide on objections within 20 business days from receipt, extendable by up to 60 additional business days.
• The Path to Court: Article 36(1) of the Tax Procedures Law allows a taxpayer to appeal the case to the competent court within 40 business days in two specific scenarios:

1. Full or partial objection to the TDRC’s decision.
2. Non-issuance of a decision by the TDRC.
   The core interpretative challenge is determining when the TDRC’s inaction (or “silence”) constitutes a “non-issuance” under Article 36(1)(b), thereby triggering the taxpayer’s 40-day appeal window.
   The Federal Supreme Court’s View: Prioritizing the Decision
   In a pivotal judgment (No. 388 of 2024, issued on 14 May 2025), the Federal Supreme Court (FSC) weighed in, reinforcing the TDRC’s quasi-judicial role and emphasizing that its final decision must form the subject of subsequent judicial review.
   The FSC held that:

• Appeals to court should generally be based on a final decision from the TDRC.
• The TDRC has the discretion to extend its decision period when necessary, and the statutory timeframes are to be understood in a procedural and organizational manner.
  In the specific case reviewed, the FSC concluded that initiating an appeal prior to the issuance of a decision by the TDRC was premature. This decision suggests a judicial tendency to allow the TDRC to retain jurisdiction beyond the prescribed deadlines unless and until a formal decision is eventually issued.
  The Contrast: Silence as Rejection
  The FSC’s approach stands in contrast to the principle of “implicit rejection,” which is often applied in administrative law and is explicitly defined in specific tax dispute contexts:
• TDRC Retains Jurisdiction (FSC Trend): This interpretation generally requires the taxpayer to wait for the TDRC’s decision, even if delayed. The inherent risk is that the taxpayer could lose the 40-day appeal window if the TDRC issues a delayed decision and the taxpayer fails to monitor the status closely.
• Silence as Implicit Rejection (Specific Disputes): Cabinet Decision No. 12 of 2025, which governs tax disputes involving government entities, explicitly states that the TDRC’s failure to issue a decision within the timeframe is to be treated as an implicit rejection, providing clear procedural grounds for escalation—a clarity that is currently missing from the general tax dispute framework.
  This distinction highlights the importance of contextual legal interpretation and the procedural risks involved in prematurely appealing a case where the TDRC’s jurisdiction may still be deemed ongoing.
  Strategic Implications for Taxpayers
  The FSC ruling reinforces the importance of procedural rigor. While Article 36(1)(b) remains a legal avenue for appeal in cases of non-issuance, its application must be strategically evaluated.
  Taxpayers facing delays must:
• Weigh the Risks: Balance the risk of filing a premature appeal (and having it dismissed) against the risk of waiting too long (and losing the 40-day window after a delayed decision is finally issued).
• Monitor Status: Closely track the objection status via the TDRC Electronic Portal.
• Seek Counsel: Given the highly technical interpretation of procedural law, expert legal counsel is essential to avoid procedural pitfalls that could affect the admissibility and ultimate success of the case.
  The FSC’s guidance ensures the judicial review process is built upon a definitive TDRC decision. However, until the law explicitly defines the procedural effect of TDRC inaction in all disputes, taxpayers must navigate this grey area with strategic foresight and caution.

The United Arab Emirates (UAE) has announced a significant evolution of its Excise Tax regime for sugar-sweetened beverages (SSBs), transitioning away from a flat-rate model to a tiered-volumetric system. Effective January 1, 2026, the tax amount will be directly proportional to the actual sugar content of the drink, marking a major policy change aimed at incentivizing healthier consumption and production habits.

A Move Away from the Flat Rate Since its introduction, the UAE’s Excise Tax on sweetened drinks has been applied at a flat rate of 50%, based on the retail price. This ad-valorem model treated a product with minimal added sugar the same as one with exceptionally high sugar content, offering little financial incentive for manufacturers to reduce sugar levels.
Under the new framework, championed by the Ministry of Finance (MOF) and the Federal Tax Authority (FTA), the calculation method will shift:

• Old Model: 50% of the retail price, regardless of sugar amount.
• New Model: A tiered, volume-based tax (per litre) determined by the grams of sugar or other sweeteners per 100 millilitres (ml) of the beverage.
  The higher the sugar concentration, the higher the tax rate applied. The specific tax rates for each tier are expected to be set by a forthcoming Cabinet Decision, but the general principle is clear: more sugar equals more tax.
  Key Features of the New Tiered System
  The reform, which aligns the UAE with the unified approach adopted by the Gulf Cooperation Council (GCC), brings several critical changes for businesses and consumers:

1. Tiered Structure: The new system introduces graduated tax brackets, likely to include categories such as:

• High Sugar: Products with a specified high concentration (e.g., \bm{\ge 8} grams per 100 ml).
• Moderate Sugar: Products falling between the high and low thresholds.
• Low Sugar: Products below a minimal threshold (e.g., \bm{< 5} grams per 100 ml).

1. Incentive for Reformulation: The financial penalty for high-sugar products creates a strong incentive for manufacturers to reformulate their beverages, potentially leading to lower prices for healthier, low-sugar options.
2. Exclusions and Redefinitions:

• Artificial Sweeteners: Drinks containing only artificial sweeteners and no added sugar are expected to be exempt from the tax (a 0% rate).
• Natural Sugar: Drinks containing only naturally occurring sugar (like 100% fruit juices without added sweeteners) remain outside the scope of the Excise Tax.
• Carbonated Drinks: These will no longer be treated as a separate excise category but will fall under the new Sweetened Drinks definition, with their tax liability determined solely by their sugar content.
  Preparing for the 2026 Implementation
  The FTA has issued public clarifications (such as EXTP012) to give businesses sufficient lead time to prepare for the January 1, 2026, effective date. The transition presents significant compliance challenges that require proactive measures:
• Product Reassessment: Businesses must conduct comprehensive laboratory analysis and verification of the sugar content for their entire beverage portfolio to accurately determine the tax band for each product.
• System Upgrades: Internal enterprise resource planning (ERP), accounting, and pricing systems must be upgraded to handle the new tiered-volumetric calculations, replacing the old ad-valorem methodology.
• Documentation and Reporting: Taxable persons will be required to maintain meticulous records and documentation to substantiate the sugar content reported to the FTA.
• Stock Transition: The MOF has indicated that a mechanism will be introduced to allow importers and producers who paid the old 50% tax on unsold goods to claim a deduction if their products fall into a lower tax tier under the new system, ensuring fairness during the transition.
  Ultimately, this reform reflects the UAE’s twin commitments: to maintaining a flexible and effective tax system aligned with international best practices, and to promoting public health by reducing sugar consumption and combating diseases like obesity and diabetes. For the beverage industry, the new year will bring a decisive shift where every gram of sugar has a measurable financial impact.