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E-commerce and VAT: A blackhole for intermediaries, marketplace operators

Many marketplace operators would like to believe that they are only acting as an intermediary connecting the actual supplier and the actual recipients.

We all know that VAT is inter-alia applicable on every taxable supply made by a taxable person. In the emerging age of e-commerce, it is often challenging to identify the actual supplier and the corresponding VAT implications thereon.

FTA has clarified that in the context of e-commerce, electronic marketplaces may operate under any of the two categories:

. sell goods or services themselves; or

. act as intermediaries between the supplier and the recipient of goods/services

Many marketplace operators would like to believe that they are only acting as an intermediary connecting the actual supplier and the actual recipients. They often calculate their VAT liability only on the commission considering that it as the only value addition provided by them.

However, the VAT treatment of supplies using intermediaries will depend on the arrangement between the supplier, the intermediary and the recipient of the supply.

The intermediary could operate either as a disclosed agent or as an undisclosed agent.

Disclosed , Undisclosed Agency

A ‘disclosed agent’ is an agent which acts on behalf and in the name of a principal supplier. In disclosed agency situations, the end-customer of the supply knows that it is dealing with an agent of a principal supplier, even if the end-customer may not have any direct communication with the principal supplier.

An undisclosed agent is an agent acting in its own name, where the end-customer has no knowledge, and cannot be reasonably expected to have knowledge, that the agent is acting on behalf of a principal supplier.

In case of a disclosed agent, then the supply is treated as made directly by the principal supplier. The intermediary is liable for VAT only on its commission.

On the other hand, in case of an undisclosed agent, there are two supplies for VAT purposes namely, (i) from the principal supplier to the intermediary, and (ii) from the intermediary to the end-customer. The intermediary would be liable to VAT on the entire consideration received from the end-customer.

In a landmark case, the UK courts have held that the terminology in an agreement is not the necessarily the main factor in determining whether agency does or does not exist. The usage of the words ‘agency’ and ‘commission’ alone does not determine the relationship between the parties. As per FTA guidance also, the contractual arrangements between the parties should be taken into consideration to determine the true relationship.

Further, it is commonly accepted that the factors such as the powers exercised by the agent, restrictions on the actual service providers, understanding of a typical consumer, price negotiation etc should be considered in determining the status of the agent.

International Jurisprudence

Aside from agency contracts, it could also be possible that the intermediary acts as a principal contractor itself with a back-to-back arrangements with other service providers.

On a dispute relating to trade practice, and not concerning VAT, he European Court of Justice (ECJ) and UK Supreme Court had examined the business model of a ride hailing company.

It was held that the ride hailing company could not be viewed as simply an agent but should be regarded as the contractor.

The ruling had a direct consequence on VAT liabilities and created a significant disruption. The ride hailing company became liable for VAT on the entire consideration received from the end-customer.

UAE VAT implications

Correctly determining the status of a supplier is important to ensure VAT compliance and reduce penalty risks.

E-commerce operators like ride-hailing companies (as passenger transport is exempt), holiday home rental companies, aggregators etc. should review their business models and VAT positions. If a marketplace is operating as a principal contractor itself, or as an undisclosed agent, it could be liable to significant VAT implications.

The writer is the md of AskPankaj Tax Consultants. For feedback and queries write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.