The course is taxation

EX Work (EXW)

Delivered Duty Paid (DDP)

Free on Board (FOB)

Cost and Freight (C&F)

Cost Insurance Freight (CIF)

Incoterms

Sharjah university – Taxation & Zakat

EX Work (EXW)

Under the Incoterms 2020 rules, EXW means the seller has fulfilled its obligation when the goods are made available to the buyer, usually at the seller’s location. The seller should package the goods appropriately or as specified in the agreement between both parties. The buyer is responsible for loading the goods on their transport and everything else necessary to get the goods to the final destination.

The risk or liability for the goods transfers from the seller to the buyer when the goods are made available at the named place. That means that if damage occurs while the goods are being loaded on the buyer’s transport, the buyer is at risk even if the seller is assisting with the loading.

Incoterms

Sharjah university – Taxation & Zakat

Delivered Duty Paid (DDP)

Can be used for any transport mode, or where there is more than one transport mode.

The seller is responsible for arranging carriage and delivering the goods at the named place, cleared for import and all applicable taxes and duties paid (e.g. VAT, GST)

Risk transfers from seller to buyer when the goods are made available to the buyer, ready for unloading from the arriving conveyance

This rule places the maximum obligation on the seller, and is the only rule that requires the seller to take responsibility for import clearance and payment of taxes and/or import duty.

These last requirements can be highly problematical for the seller. In some countries, import clearance procedures are complex and bureaucratic, and so best left to the buyer who has local knowledge.

Incoterms

Sharjah university – Taxation & Zakat

Free on Board (FOB)

Use of this rule is restricted to goods transported by sea or inland waterway.

In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos

Seller delivers goods, cleared for export, loaded on board the vessel at the named port.

Once the goods have been loaded on board, risk transfers to the buyer, who bears all costs thereafter.

Incoterms

Sharjah university – Taxation & Zakat

Cost and Freight (C&F)

Use of this rule is restricted to goods transported by sea or inland waterway.

Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded on board the vessel.

However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place.

Incoterms

Sharjah university – Taxation & Zakat

Cost Insurance Freight (CIF)

Use of this rule is restricted to goods transported by sea or inland waterway.

In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos

Seller arranges and pays for transport to named port. Seller delivers goods, cleared for export, loaded on board the vessel.

However risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place.

Seller also arranges and pays for insurance for the goods for carriage to the named port.

However as with “Carriage and Insurance Paid To”, the rule only require a minimum level of cover, which may be commercially unrealistic. Therefore the level of cover may need to be addressed elsewhere in the commercial agreement.

Incoterms

Sharjah university – Taxation & Zakat

Lecture 09

Sharjah university – Taxation & Zakat

08 March 2020

Page 71

Customs valuation

08 March 2020

Page 72

Customs valuation

Sharjah university – Taxation & Zakat

Customs valuation is a customs procedure applied to determine the customs value of imported goods. If the customs duty rate is ad valorem, the customs value is essential to determine the duty to be paid on an imported good

Within the GCC region, generally ad valorem customs duty rates apply to imported goods. Any exceptions, such as specific duty rates that are based on weight or volume, are not expected to apply for the companies in normal course of business

Correct valuation of goods is therefore important, not only for compliance reasons, but also from a duty optimization perspective

Customs valuation

Sharjah university – Taxation & Zakat

Transaction value method

Identical goods method

Similar goods method

Deductive method

Computed method

Fall back method

Transaction value method

Identical goods method

Similar goods method

Deductive method

Computed method

Reasonable methods

WTO legislation

GCC legislation (incl. UAE)

Most local GCC countries’ legislation would equal the WTO valuation methods and its sequential application, barring interpretation or definition differences

Customs valuation

Sharjah university – Taxation & Zakat

The transaction value is the price actually paid or payable by the buyer to or for the benefit of the seller for the imported goods, and includes all payments made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller

These elements will be further addressed separately

In addition, the companies should especially mindful with respect to the following:

Evidence of sale / shipping invoicing

Restrictions or conditions applicable

CIF value

Related party transactions

Customs valuation Price actually paid or payable

Sharjah university – Taxation & Zakat

Generally, the price actually paid or payable would be the monetary amount specified in the invoice or contract between the buyer and the seller. Note that the actual price does not need to be fixed at the time of importation, as long as it is based on a fixed formula or method in the agreement, for example international commodity exchange rates or cost-plus methods. Within the GCC region, in general a shipping invoice stating the estimated value of the goods would then be accepted

Examples of elements to be included in the transaction value

Examples of elements not to be included in the transaction value

Customs valuation Price actually paid or payable

Sharjah university – Taxation & Zakat

Examples of elements to be included in the transaction value

Commissions and brokerage, except buying commission;

The cost of the containers which are treated as being one for customs purposes with the goods in question;

The cost of packing whether for labor or materials;

The value of the following goods and services (assists) provided by the buyer, directly or indirectly, free of charge or at a reduced cost, for its use in the production of the imported goods and sale thereof for export to the GCC States, provided that such value is properly apportioned:

materials, components, parts and similar items used in production of the imported goods;

tools, dies, molds and similar items used in production of the imported goods;

materials consumed in production of the imported goods; and

engineering, development, artwork, design work, and plans and sketches undertaken elsewhere than the GCC States, and necessary for the production of the imported goods.

royalty and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;

The value of any part of the proceeds from any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller;

The cost of transport of the imported goods to the port or place of importation; and

Loading, unloading, handling and insurance costs associated with the transport of the imported goods to the port or place of importation.

Customs valuation Price actually paid or payable

Sharjah university – Taxation & Zakat

Examples of elements not to be included in the transaction value

The value for customs purposes shall not include the following costs and amounts provided that they are identified separately from the price actually paid or payable:

Post-importation costs, such as:

charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation of goods to the GCC States;

transportation, loading, unloading, handling and insurance charges of the imported goods after importation;

customs duties or any other taxes levied on the imported goods after importation to the GCC States;

dividends or other payments from the buyer to the seller that do not relate to the imported goods;

interest that might have accrued on the basis of a financial agreement concluded by the buyer for purchasing the imported goods;

activities undertaken by the buyer on his own account.

Credit balances with the buyer in favor of the importer;

Amounts of export subsidy that might be provided by some countries for exportation of some goods; and

Any anti-dumping amounts when goods are sold at dumped prices (i.e., less than the cost), since the dumping must be treated according to the Anti-Dumping Agreement).

Customs valuation Imported goods

Sharjah university – Taxation & Zakat

Amounts actually paid or payable by the buyer should only be included for as far as these are considered remuneration for the imported goods. Amounts payable that do not relate to the goods that are being imported, should not be included in the value of the goods being imported

Examples of elements to be included in the transaction value:

Payments for (additional) warranty after importation of the goods

Additional payments required in case of late payment of the invoice

Examples of elements not to be included in the transaction value:

Payments in addition and apart from the price for the goods, for example for installation services to be provided by employees of the seller after importation

Interest payable in case of a purchase on credit, if reasonable/commercial and billed and contracted separately

Risk of the transaction value being rejected in case of:

Package deals; being a shipment of goods that are classifiable under different tariff categories, but sold for one price, without clear unit prices available

Damaged or partially damaged or defective goods being accepted by the importer for the (same) price agreed upon for undamaged goods

Customs valuation Condition of sale

Sharjah university – Taxation & Zakat

The customs value should include all payments made as a condition of sale of the imported goods by the buyer. It is therefore irrelevant to which party payment is made; if the payment is requested for by the seller or the buyer is in any way required to settle payment following the sale or the sales contract, this payment is to be included into the customs value

In other words, the customs value may include payments that are not made to the seller of the goods, as long as the seller requires the buyer to settle these in light of the sale

Examples of elements to be included in the transaction value:

The (added) value of any subsequent resale, disposal or use of the imported goods, if it accrues directly or indirectly to the seller

Insurance payments made to ensure DOD (delivery on deadline)

Examples of elements not to be included in the transaction value:

A flow of dividends from the buyer to the seller, not related to the goods being imported

Risk of the transaction value being rejected in case of:

The sale or price being subject to a condition or consideration for which a value cannot be determined, unless the restriction does not substantially affect the value of the goods; for example if the buyer is not allowed to sell or exhibit goods prior to a fixed date

Customs valuation (continued) Related party

Sharjah university – Taxation & Zakat

The transaction value can only be used to determine the customs value of the goods provided that the buyer and seller are not related, or, where they are, the value is acceptable for customs purposes

Be mindful of the fact that customs legislation has its own, very broad definition of related parties, which does not resemble any related party legislation with respect to transfer pricing

Parties are considered to be related in case any of the following conditions is met:

The officers or directors of one company are (generally) the same persons as the officers or directors of the other company;

The companies are legally recognized as partners in business;

One of the companies has employed (contracted) the other company;

5% or more of the outstanding voting stock or shares are controlled or held by the same person or company, either directly or indirectly;

One of the companies directly or indirectly controls the other;

Both companies are directly or indirectly controlled by a third person;

Both companies directly or indirectly control a third person; or

One of the officers or directors or one of the persons controlling a company is a member of the same family as one of the officers or directors of one of the persons controlling the other company

Customs valuation Related party

Sharjah university – Taxation & Zakat

Establishing that a buyer and a seller are considered to be related parties, should not immediately lead to the transaction value being rejected. Instead, circumstances surrounding the sale should be examined in order to establish whether the relationship between the buyer and the seller has influenced the price (transaction value)

Based on WTO legislation, if the customs authorities has grounds for considering that the relationship influenced the price, it should communicate the grounds to the importer and must grant the importer a reasonable opportunity to respond. The transaction value between related parties should be accepted whenever the importer successfully demonstrates that the value closely approximates:

The transaction value in sales to unrelated buyers of identical or similar goods for export to the same country of importation; or

The customs value calculated based on the deductive method; or

The customs value calculated based on the computed method;

All while taking into account differences in commercial levels, quantity levels, packing, transport and insurance costs and all other costs which should have incurred by a buyer that is not related to a seller

Transfer pricing documentation may in some cases be used to support the abovementioned calculations, however, this cannot be considered officially accepted evidence

Customs valuation Related party

Sharjah university – Taxation & Zakat

Only if the importer is unsuccessful in demonstrating that the value was not influenced by the relationship between the buyer and the seller, the customs authority should reject the use of the transaction value method to calculate the customs value

Subsequently, the customs value of the goods should be calculated based on one of the other customs valuation methods in line of order. It is not allowed for the customs authority to amend the transaction value in order for it to be an acceptable customs value, without consulting whether one of the other customs valuation methods could be used to calculate the customs value first

Unfortunately, within the GCC practice, this methodology is not always consistently applied. Usually, a customs authority would be expected to accept the value that is invoiced by the seller, unless circumstances would give rise to suspecting the goods are seriously undervalued

If so, we understand from our experiences with the general practice that a customs authority would increase the value to an amount that would be acceptable from a customs perspective, rather than to (first) apply one of the other customs valuation methods in line of order. Although this new value would be presented to the importer to be accepted or not, the new value could only be challenged by taking the case to court, which we would generally not advise any business to do within the GCC region

As a result, we would recommend businesses importing goods into the GCC region to apply commercial values and retain sufficient documentation to support their customs value calculations, in order to provide as few occasion as possible to the customs authority to consider goods being undervalued and consequently to amend the customs value declared. EY would be able to assist in valuation manners prior and during discussions with any customs authority in the GCC region, including settlement advice

Lecture 10

Sharjah university – Taxation & Zakat

08 March 2020

Page 84

Customs broker management

08 March 2020

Page 85

Customs broker management

Sharjah university – Taxation & Zakat

In the UAE, generally, customs brokers and agents undertake the indispensable function of preparing and filing customs entry documentation

To enable these third parties to fulfill this function in a manner consistent with the UAE customs and trade compliance objectives, it is essential that brokers are always provided with the information they need to do their job

This means, in relation to each and every customs declaration they file on business’s behalf, brokers must have clear directions on key entry data such as:

Tariff classification

Product value

Customs regime to which the products are being imported

Country of origin

It is preferred best practice that brokers or agents should not determine these matters on Doka’s behalf but, rather, always follow clear instructions provided by the business unit in whose name the import declaration is being lodged

Customs broker management

Sharjah university – Taxation & Zakat

Whenever a customs broker or agent is used to submit entries, their activities should be controlled and underpinned by clear contractual arrangements such as a brokerage service agreement

This brokerage service agreement should carefully define the third party’s responsibilities and obligations in relation to the particular customs clearance activities they will be undertaking on business behalf

Contracts with brokers and agents must also contain business’s standard compliance clause which requires all business partners to act consistently with the Group (business) Code of Conduct

The brokerage service agreement will in addition serve as an important benchmark against which you can review and assess the broker’s ongoing performance and charges

Customs broker management

Sharjah university – Taxation & Zakat

Another feature of best practice management is to routinely and diligently review the entry declarations customs brokers and agents are submitting on business’s behalf

For example, every month samples of each customs broker’s entry declarations might be reviewed to ensure all of the following data elements exactly match the business unit’s commercial records and associated supporting documentation: 

Customs value

Country of origin

Quantity of goods

Tariff classification

Customs broker management

Sharjah university – Taxation & Zakat

Finally, a further best practice management control over brokers’ and agents’ activities is to review carefully all invoices received for their customs clearance and other associated services

This review should particularly focus on scrutiny of the following areas:

Verification that charges for specific activities are consistent with the relevant underlying brokerage service agreements

Identification of any unusual invoice line items (which, amongst other things, could be indicative of inappropriate facilitation payments having taken place)

Reconciliation of any re-charges for duty or other import taxes against the relevant customs entry documentation to confirm that those exact payments were indeed made on business behalf

Fines and Penalties

08 March 2020

Page 90

Fines and Penalties

Sharjah university – Taxation & Zakat

Should the business be subjected to a customs audit, it will be requested to demonstrate the whereabouts of any goods it has imported into the free zone, for a specific period, by providing its inventory count

The UAE Customs will then compare the information provided to business inventory count with the import and export customs declarations that they have processed under their customs code for the same period

An inability to locate or trace goods may lead the UAE Customs to assume that the “missing goods” have entered the mainland UAE without following the necessary customs declaration formalities or that business is manipulating the quantities, weight or values o its imported and exported goods into and out of free zone

The UAE Customs may apply a 5% customs duty and potentially a 10% penalty on the value of the “missing goods” and may constitute this as “smuggling”. Irrespective of business intention, Customs authorities may also request an admission of guilt letter, confirming that they had in fact “smuggled” the goods

Fines and Penalties

Sharjah university – Taxation & Zakat

Article 176 of the GCC Common Customs Law prescribes the following statute of limitations:

Fifteen years for the two following events:

Smuggling and similar crimes from the date of commission thereof

Enforcement of smuggling rulings from the date of issue

 Five years for the following cases unless a claim is filed in connection therewith:

Investigation of the violations as of the date of occurrence

Collection of imposed fines and confiscations as of the date of issue of the ruling

Collection of Customs duties and other fees which have not been collected as a result of department’s inadvertent error as of the date of registration of the Customs declaration

In practice, the customs audit period could go back to the date when the JAFZA entity under audit was established within JAFZA

Excise tax

08 March 2020

Page 93

Excise tax Legislative framework

Sharjah university – Taxation & Zakat

Federal Decree-Law No. (7) of 2017 on Excise Tax was issued on 21 August 2017

Aided by the Cabinet decision No. (37) of 2017 on the Executive Regulation and the Cabinet decision no, (38) of 2017 made on 24th Sept 2017

Makes The Excise tax effective date from 1st Oct 2017

Key characteristics of Excise Tax

Imposed at specific rates on selective commodities

Indirect tax (incurred by the end consumer)

Collected once in the commercial chain from importers, manufacturers or producers of selective goods and stockpilers

Excise tax Legislative framework – extended scope

Sharjah university – Taxation & Zakat

Aided by the Cabinet decision No. (52) of 2019 made on 4th August 2019

Key characteristics of extended Excise Tax scope

Imposed at specific rates on selective commodities

Indirect tax (incurred by the end consumer)

Collected once in the commercial chain from importers, manufacturers or producers of selective goods and stockpilers

Scope of Excise Tax? Products ranging from Carbonated drinks, Tobacco products, Energy drinks are subjected to tax

Sharjah university – Taxation & Zakat

Carbonated drinks – 50%

Any aerated beverage except for unflavored aerated water

Any concentrate, powder, gel or extract intended to be made into an aerated beverage

Tobacco & Tobacco products – 100%

All items listed within Schedule 24 of the GCC Common Customs Tariff

Energy drinks – 100%

Any beverage which is marketed or sold as an energy drink, containing stimulant substances that provide mental and physical stimulation such as caffeine, taurine, ginseng and guarana.

Any concentrate, powder, gel or extract intended to be made into an energy drinks

Electronic smoking tools and liquids – 100%

Sweetened beverages – 50%

Excise tax Who is responsible?

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Stockpilers

The person who owns Excise Goods and cannot demonstrate that such goods had been previously subject to Excise tax

Can determine whether a business is a stockpiler by:

Calculating the average monthly sales of excise goods over 12 months prior to 1st of October 2017 and multiplying it by 2

Calculating the average monthly stock on hand of excise goods

This test should be done on SKU basis using the FTA product list as the basis

Valuation:

Price published by Federal Tax Authority standard price list; or

Retail sales price of the goods (less the excise tax applicable)

Producers

Importers

Stockpilers

Others involved

Excise tax When the excise tax becomes due?

Sharjah university – Taxation & Zakat

Tax calculation for including on a return to be done on the following dates:

Import – at the date of import of the excise goods

Manufacturer – at the date of production

Stockpiler – date of acquisition of the goods

Designated zone – date of release for consumption from the designated zone

Excise tax When the excise tax becomes due?

Sharjah university – Taxation & Zakat

Goods are released for consumption, when:

They are produced

They are released from a designated zone

Produced means:

Ready to held for retail sales

Ready / fit for consumption

Ready to be sold to a producer if required to be further combined with any other products to be made ready for consumption / sale

Manufacturer / Stockpiler

Levies Excise

If Manufacturer / Stockpiler doesn’t levy, any other would be responsible to assess for Excise

Ultimate burden is on Consumer

Excise tax When the excise tax becomes due?

Sharjah university – Taxation & Zakat

Released from designated zone means:

Goods leave the designated zone

Consumed or bought for consumption from the zone or within zone

Irregularity in inter – zone transfers

Shortage during the inter – zone transfer, deficiency / shortage in a designated zone

Designated Zone

Consumed / Retail sale from Designated zone

Excise tax

Sharjah university – Taxation & Zakat

Excise Tax will be applied to the Excise Price of the goods i.e. the tax base

The Excise Price will be the higher of:

The price published by the FTA in a standard price list; or

Designated Retail Sales Price of the goods, less the excise tax applicable

Carbonated Drinks

Tobacco & tobacco products

Energy Drinks

Energy Drinks

Sweetened beverages

Electronic smoking tools and liquids

Excise tax Designated Zone

Sharjah university – Taxation & Zakat

Two types- Fenced free zone and area specified by FTA

Any area specified by the FTA

Located in a specific geographic area

Has security measures in place to restrict entry and exit of individuals and movement of goods to and from that area, according to conditions specified by the FTA

Has an appointed Warehouse Keeper

Type A

Type B

A fenced free zone or located within a fenced free zone

Has security measures in place to restrict entry and exit of individuals and movements of goods to & from the Designated Zone

Controlled & supervised by a Customs Authority 

Has an appointed Warehouse Keeper