Oil & gas sector in UAE is one area where VAT implication is technical enough to misunderstood. The classification of crude and non-crude products and selling to registered vs unregistered customer can contribute to that confusion greatly.
Let’s try to simplify the UAE VAT implication on oil & gas sector. The first identification we need to make is whether we are making a local supply or and export sale.
- Export sale of oil & gas products is zero-rated as per article 45(1) of UAE VAT Law.
- If you are making a local supply of oil & gas related products another distinction required is whether is crude oil/gas or non-crude oil/gas as both are subject to different VAT rates.
Different VAT Rates in UAE
There are two VAT rates applicable in UAE.
- 5% VAT Rate (Standard Rate)
- 0% VAT Rate (Zero-rate)
When the law specifies that any taxable item, it can be zero-rated or standard-rated.
Taxability of Local Supply of Oil & Gas
- Local supply of non-crude oil & natural gas is subject to standard rate (5%)
- Local supply of crude oil & natural gas is subject to zero-rate (0%) as per article 45(12) of UAE VAT Law
The responsibility of Recording VAT on Supply of Oil & Gas
After establishing that what VAT rate would be applicable on respective oil & gas supply, the next step is to identify who would be having the responsibility of recording VAT and showing in its VAT return.
As a general rule, the recipient of the supply of hydrocarbons (oil & gas) would be responsible to record VAT liability unless it is sold to an unregistered person or to a registered person who is not the reseller or who does not use the oil/gas to produce any form of energy. This would be recorded under Reverse Charge Mechanism, where the recipient records VAT liability instead of the supplier of the goods or services.
Therefore, whether the local supply of the concerned hydrocarbons is subject to zero-rate or standard-rate, if it is supplied to a registered recipient who will be reselling it or producing energy from it, the liability of recording VAT will be shifted to the recipient of the product. Due care to be taken here that even if you are buying crude-oil which is zero-rated, it needs to be recorded under reverse charge mechanism by the recipient. Although, the supplier, in this case, will not record output VAT, still, it can claim input VAT on such suppliers subject the general rules of recoverability of input VAT.
A written confirmation to be taken from the buyer who claims to be a reseller of non-crude oil/gas or an energy producer. Along with this obligation, the seller must also confirm the tax registration number of the recipient to establish that it is supplied to a registered person. Failing to do so the supplier may be held responsible for VAT obligation.
To conclude, one must take care of the nature of the oil/gas product being supplied as well as to whom it is supplied to correctly record VAT related obligations.