Excise Tax Designated Zones – Calculation of financial guarantees - EXTP008

EXTP008

Excise Tax Public Clarification

Excise Tax Designated Zones – Calculation of financial guarantees

Issue

All Warehouse Keepers ^[1] (and persons intending to register as Warehouse Keepers) are required to provide a financial guarantee for each Designated Zone^[1] the Warehouse Keeper is responsible for. The amount of the required guarantee is determined by the Federal Tax Authority ("FTA").^[2]

The FTA wants to acknowledge Warehouse Keepers with good governance of their tax affairs by reducing the amount of the required financial guarantee based on the Warehouse Keeper's and the Taxable Person's compliance history.

This Public Clarification provides guidance on how financial guarantees in respect of Excise Tax Designated Zones are calculated. This Public Clarification takes effect from 1 September 2022.

Summary

At the time Excise Tax was introduced in 2017, the FTA did not have sufficient compliance history to determine a compliance risk-based financial guarantee amount for Excise Tax Designated Zones.

In the past five years, compliance history has been monitored and, in line with international best practice, from 1 September 2022, financial guarantees will be determined using a different risk-based approach which considers certain variables. This approach benefits compliant Warehouse Keepers, as a good compliance history results in a lower financial guarantee amount.

The amount of the financial guarantee in respect of each Excise Tax Designated Zone shall be calculated from 1 September 2022, as follows:

Step 1: Calculate the Guarantee Base based on the Excise Tax due on the average month-end stock over a period of twelve months.
Step 2: The FTA will determine the applicable and appropriate financial guarantee percentage based on multiple factors, including the compliance history of the relevant taxable person and the Warehouse Keeper, as well as the financial situation of the person required to provide the financial guarantee.
Step 3: The rate determined in Step 2 will be applied to the Guarantee Base calculated in Step 1 to calculate the preliminary financial guarantee amount.
Step 4: The FTA will further determine the required financial guarantee amount in respect of the specific Designated Zone by adjusting the preliminary financial guarantee amount if either the minimum or the maximum threshold applies.

Detailed analysis

The new methodology to determine the amount of the financial guarantee required for each Excise Tax Designated Zone acknowledges tax compliant behavior and results in a lower guarantee amount the longer the Warehouse Keeper (including all its Designated Zones) remain fully tax compliant.

Step 1 - Guarantee Base

The first step to determine the Guarantee Base in respect of a specific Designated Zone is to calculate the average month-end stock of the relevant Excise Goods over a twelve-month period. This calculation is performed in respect of each Excise Good product in the Designated Zone to allow the appropriate Excise Tax rate to be applied.

The term 'month-end stock' means the stock of the relevant Excise Goods Product ("Product") in the Designated Zone at the end of each calendar month during the relevant twelve-month period. The average month-end stock is calculated by aggregating the relevant month-end stock over the relevant twelve-month period and dividing the total per Product by twelve.

The relevant twelve-month period is determined as follows:

New Designated Zone registration - the twelve months following the month in which the registration application is submitted. In such instance, the person applying for the new Designated Zone registration is required to forecast the expected month-end stock per Product for each of these twelve months.
Renewal of a Designated Zone registration - the twelve months preceding the month in which the renewal request is submitted. In such case, the person applying for the renewal shall use the actual month-end stock per Product for each month of the preceding twelve months.

The person applying for a Designated Zone registration or renewal ("the Applicant") shall provide the details of the 'month-end stock' per month for the relevant twelve-month period per Excise Goods Product and category^[3] of Product to the FTA to determine the value of the Guarantee Base, considering the relevant Excise Tax rates^[4].

Step 2 - Financial guarantee percentage

The FTA will determine the applicable financial guarantee by applying a relevant percentage to the Guarantee Base. A preliminary financial guarantee percentage is determined based on residence status, compliance history, financial status, number of years the Applicant is in operation. In some instances, the preliminary financial guarantee percentage determined based on such factors may be overridden by a specified guarantee percentage to determine the final financial guarantee percentage.

Preliminary financial guarantee percentage

2.1 Residence Status

The residence status percentage depends on whether the Applicant is:

A legal person with a head office or branch located in the UAE.
A natural person who is a citizen of a GCC country.
Any other person.

2.2 Compliance history

The financial guarantee percentage depends on whether the FTA issued one or more Excise Tax assessments to the Warehouse Keeper (or any taxable person that has Excise Goods in any of the Warehouse Keeper's Designated Zones) in the five years preceding the Designated Warehouse registration or renewal, as well as the value of such assessments.

The financial guarantee percentage is also affected if the FTA liquidated a financial guarantee previously submitted by the Warehouse Keeper during the five years preceding the date the FTA requested the financial guarantee in respect of the registration or renewal of the Warehouse Keeper's Designated Zone.

2.3 Financial status

The financial status percentage depends on:

The value of the Warehouse Keeper's assets as per the Warehouse Keeper's audited financial statements for its financial year preceding the application for Designated Zone registration or renewal; and
The number of employees the Warehouse Keeper has. Supporting evidence needs to be provided in the form of a Ministry of Human Resources and Emiratisation ("MOHRE") report or equivalent documentation confirming the number of persons employed by the Warehouse Keeper.

2.4 Number of years of operation

The financial guarantee percentage also depends on whether the Warehouse Keeper has been operating for at least five years at the time of the submission of a new Designated Zone registration or renewal application.

Final financial guarantee percentage

The preliminary financial guarantee percentage calculated in 2.1-2.4 above shall be substituted by a specified guarantee percentage in the following cases:

If no Excise Tax assessments resulting in an Excise Tax difference exceeding 5% of the total Excise Tax due according to tax returns and declarations submitted in a year were issued during the five years preceding the date the FTA requested the financial guarantee.
If the Warehouse Keeper or any of its key employees was party to, or facilitated tax evasion.

Step 3 – Preliminary financial guarantee amount

The preliminary financial guarantee amount will be calculated by applying the final financial guarantee percentage calculated in Step 2 to the Guarantee Base calculated in Step 1.

Step 4 – Required financial guarantee amount

The minimum financial guarantee amount is AED 175,000. Consequently, if the preliminary financial guarantee amount per Step 3 is less than the minimum threshold, the required financial guarantee amount for the new registration or renewal of that Designated Zone shall be AED 175,000.

The required financial guarantee amount shall be capped at AED 25 million if all of the following conditions are met:

The FTA did not issue any Excise Tax assessments resulting in an Excise Tax difference exceeding 5% of the total Excise Tax due according to tax returns and declarations delivered in a year, during the five years preceding the date the FTA requested the financial guarantee.
The FTA has not liquidated a financial guarantee previously submitted by the Warehouse Keeper during the five years preceding the date the FTA requested the financial guarantee in respect of the registration of the Warehouse Keeper's new Designated Zone or the renewal of a registered Designated Zone.
Neither the Warehouse Keeper nor any of its key employees was party to, or facilitated tax evasion.

If any of the two conditions is not met, the upper limit of AED 25 million shall not apply.

This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Law No. 7 of 2017 on Tax Procedures and its amendments, Federal Decree-Law No. 7 of 2017 on Excise Tax and their Executive Regulations.
This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.

In this clarification, Federal Decree-Law No. 7 of 2017 on Excise Tax is referred to as 'Decree-Law', Cabinet Decision No. 37 of 2017 on the Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Excise Tax is referred to as 'Executive Regulation' and Cabinet Decision No. 52 of 2019 on Excise Goods, Excise Tax Rates and the Methods of Calculating the Excise Price is referred to as 'Cabinet Decision No. 52'.

^[1]Article 1 of the Decree-Law defines the following terms as

'Designated Zone' - any fenced area intended to be a free zone that cannot be entered or exited except through a designated road, and any area designated by the FTA as being subject to the supervision of a Warehouse Keeper, in accordance with the Executive Regulation.
'Warehouse Keeper' - any person approved and registered at the FTA to supervise a Designated Zone in accordance with the Executive Regulation.

^[2]Article 9(5)(c) of the Executive Regulation states that, for the purposes of registering a Warehouse Keeper, the FTA may require the Warehouse Keeper to provide a financial security for each Designated Zone he is responsible for as determined by the FTA.

^[3]Article 2 of Cabinet Decision No. 52 states that, for the purposes of Article 2 of the Decree-Law, tax shall be applicable on the following Excise Goods:

Tobacco and tobacco products
Liquids used in electronic smoking devices and tools
Electronic smoking devices and tools
Carbonated drinks
Energy drinks
Sweetened drinks

^[4]Article 12 of Cabinet Decision No. 52 states that, for the purposes of Article 3 of the Decree-Law, tax shall apply to the Excise Goods stipulated under Article 2 of the Decision pursuant to the following rates:

Excise Good	Tax rate
Tobacco and tobacco products	100%
Liquids used in electronic smoking devices and tools	100%
Electronic smoking devices and tools	100%
Carbonated drinks	50%
Energy drinks	100%
Sweetened drinks	50%