VAT on Transportation Services in the UAE: A Complete Overview

The implications of Value Added Tax in the United Arab Emirates for transportation services and the shipping industry are complicated. Besides, it relies on several aspects, such as the mode of transportation, location of the supplies, etc. Article (1) of VAT law specifies the implementation of VAT on transportation services in UAE including shipment, packaging and securing cargo, preparation of customs documents, container management, storing, goods movement, and other related transportation services.

As the nation is evolving economically, it has become essential to understand the complexities of VAT in the transportation sector. Therefore, in this blog, we have explained some essentials of VAT on transportation services in UAE that will help you keep your finances on the right track and enjoy your journeys without any hindrances.

Value Added Tax (VAT) in the UAE

Introduced on January 1st, 2018, VAT is a consumption tax imposed on goods and services at each stage of production and distribution. It serves as a source of revenue for the government and diversification from oil dependence. Although the tax is levied on each stage of the supply chain, the ultimate outcome is borne by the end consumer of the product.

The standard VAT rate in the UAE is 5% applied to most goods and services, with certain exceptions. Businesses with taxable supplies and imports exceeding AED 375,000 in the previous 12 months have to mandatorily register for VAT, whereas businesses with supplies lesser than the specified threshold or above AED 187,500 can opt for voluntary registration.

Furthermore, all VAT-registered businesses are required to file VAT returns every tax period.

Role of FTA in imposing VAT on transportation services in UAE

The Federal Tax Authority (FTA) is a government agency that oversees, collects, and enforces federal taxes in the UAE such as Value Added Tax (VAT), excise taxes, and corporate income tax. The regulations and guidance issued by the FTA administer VAT compliance and implement it through audits and penalties.

Transportation services are arranged into various categories in the UAE –

• Domestic Transportation of goods
• International transportation of goods and passengers
• Cargo Transportation
• Inbound Transportation (movement of goods from outside the UAE to inside the UAE)
• Outbound Transportation (movement of goods from within the UAE to outside the UAE)
• Cross Border Transportation
• International Courier Services
• Domestic Courier Services
• Cash on Delivery Services
• Transportation services for passengers

To understand better the VAT law related to the transportation sector in the UAE, it is advisable to speak with a professional VAT consultant at Shuraa Tax who will explain various categories and the VAT implications in detail.

VAT on transportation services in UAE

Basically, the UAE VAT law is implemented on all three modes of transportation – air, sea, and land. However, the volume and destination of the consignment have an impact on the mode of transportation. Whatever mode you choose, assistance from a reputable company like Shuraa Tax can make the VAT procedures easy and simple.

Let’s have a look at the different modes of transportation in the UAE and the VAT ratings on them as per the FTA guidelines: –

Air transportation – According to the UAE VAT law, the supply of an airplane is zero-rated if used for the movement of goods or carrying passengers. It shall not be built and designed with the intention of leisure, sports, or recreation.

Sea transportation – Boats, ships, or floating structures built for commercial use shall be categorized as zero-rated supplies. Designing or modification of the ship for use in sports, entertainment, or leisure activities shall not be permitted.

Road transportation – Under the VAT law, VAT is also applied to the transportation of goods by road. The VAT rate would be zero if the bus or train is designed or modified for public transportation of ten or more passengers.

VAT ratings for Goods and Passenger Transportation

The VAT rates in the shipping sector for goods transportation are as follows: –

• VAT on international goods transportation – According to the FTA, any foreign consignment that begins or ends in the UAE shall be treated as a zero-rated supply.
• VAT on local goods transportation – On the other hand, goods transportation taking place within the UAE shall not be considered a zero-rated supply, rather a 5% VAT rate shall be applied to the freight.
• Local ship movement for international travel – Vessels occasionally performing coastal runs or local cargo movement within the UAE as part of global transportation shall be eligible for zero- ratings.
• VAT on transportation vessels – Vessels that are used for the transportation of goods for profit shall be eligible for a zero VAT rating. In simple terms, the delivery of a ship that is planned or adapted for commercial use rather than sports, pleasure, or leisure shall be applicable for zero-rating.
• VAT on cross-border trade – Cross-border trade, also known as high-seas sales, refers to the transportation of goods outside the country without the involvement of a port inside the country. For instance, the export of goods from the US to the UAE. Since the origin of the supply is outside of the UAE, it shall be exempt from VAT. Once the vessel reaches the destination, the vessel operator forwards the invoice to a potential UAE-based client.
• VAT on domestic passenger transportation – Transportation of passengers within the UAE is exempt from VAT, be it by land, water, or air.
• VAT on domestic passenger transportation for leisure – The passenger transport services used for pleasure trips within the UAE are subject to the standard 5% rate. For example, tourist cruises, private jet charters, etc.

Implications of transportation VAT in the UAE

The consequences of VAT on transportation services in UAE are different for individuals and businesses. Some of them are as follows: –

• Vehicles used for passenger transportation in the UAE such as taxis, buses, and trains are exempt from VAT.
• Flights, airfares, etc., are classified as zero-rated. This leads to lower costs compared to standard VAT rates.
• The VAT on travel agency in UAE is also zero-rated, thereby profiting airlines, hotels, and tourist attractions.
• Businesses offering zero-rated services can claim VAT paid on relevant expenses. This helps in managing their assets and resources.
• Businesses must maintain proper tax invoices, record-keeping, and VAT return filing even for zero-rated transactions.
• Since businesses impose VAT on goods and services, they can choose to absorb the cost and pass it on to customers, or change prices based on specific services.
• Individuals traveling for business purposes can benefit from claiming input tax refunds on their travel expenses.

Get professional support from the best VAT consultants in the UAE

With the professional support of licensed tax agents of Shuraa Tax Consultants and Accountants, businesses in the shipping and logistics industry can ensure VAT compliance in the UAE. FTA has issued specific regulations regarding VAT on transportation services in UAE, and following them can be very challenging, especially based on the factors defined by the FTA. Shuraa Tax can help businesses in such matters.

Shuraa Tax is one of the most trusted names in the UAE that promises smooth procedures in all VAT-related matters, including VAT filing, VAT returns, and VAT deregistration. They have highly qualified tax agents that help companies manage their functions and assure VAT compliance without any potential failure.

Contact Shuraa Tax today and discover the comprehensive range of services offered by them.