Excise Goods which are deficient or missing and the process for the destruction of Excise Goods within a Designated Zone - EXTP007

EXTP007

Excise Tax Public Clarification

Excise Goods which are deficient or missing and the process for the destruction of Excise Goods within a Designated Zone

Issue

There are certain limited cases envisaged under Cabinet Decision No. 37 of 2017 on the Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Excise Tax ("the Executive Regulation"), where a relief from excise tax is available for excise goods that are found to be deficient, or there is a shortage in their quantity, within an excise tax designated zone.

In addition, there may also be circumstances where a business may seek relief from the Federal Tax Authority ("FTA") from paying the Excise Tax associated with goods destroyed within a designated zone.

In order to destroy excise goods and obtain the relief mentioned above, the FTA must be notified of the deficiency or shortage, and its approval must be obtained in line with the process outlined in this document.

Summary

Inprinciple, goods that are considered 'wastage' or are deficient or there is a shortage of the expected quantity when located within a designated zone, will be treated by the FTA as having been released for consumption and, therefore, will be subject to excise tax.

As an exception to the above provision, the Executive Regulation allows for a relief to be granted from accounting for excise tax on goods located within an excise tax designated zone in certain cases. Such relief is available where the warehouse keeper responsible for the excise goods follows the process outlined in this document.

Relief will only be granted where the FTA is notified by the warehouse keeper within the specified timeframe and accepts that the deficiency in, or shortage of, the excise goods is due to a legitimate cause.

Where a taxable person intends to destroy excise goods located within a designated zone, they must first obtain prior approval from the FTA in order to destroy the goods.

Detailed discussion

Wastage of excise goods already released for consumption in the UAE

There are many instances in the normal course of business during which excise goods, which may already have been subject to excise tax, cannot be sold or otherwise used in the course of business. For example, goods may expire before they are legitimately able to be sold, they may be damaged beyond the ability to sell them on, they may be the product of normal wastage in the course of production, or there may be a lack of consumer demand meaning that goods cannot be sold.

There is no ability under the Executive Regulation for businesses to secure relief on products which have been subject to excise tax previously but are then considered as 'wastage'.

Wastage of excise goods within an excise tax designated zone

Under the provision of Article 12(3)(d) of the Executive Regulation^[1], excise goods will be considered as leaving the excise tax designated zone and released for free circulation where they are found to be deficient or there is a shortage in their quantity from a designated zone, or during a transfer between designated zones, or whilst held in a suspension arrangement in accordance with the Customs Laws.

Therefore, in principle, such goods will be considered as released for consumption and excise tax shall be due on the volume of goods which are found to have a shortage or deficiency from the stock level which entered the designated zone or produced inside the designated zone.

As an exception to the above, the Executive Regulation states in Article 12(5)^[2] that a deficiency in excise goods or a shortage in their quantity will not be considered to be a release for consumption where:

a) The warehouse keeper responsible for the excise goods notifies the FTA within 30 days of discovering the deficiency in the stock or shortage in quantity; and

b) It appears that the shortage of, or deficiency in, the excise goods is due to a legitimate cause accepted by the FTA.

As a result, in order to obtain the relief, the warehouse keeper must notify the FTA of these circumstances and the FTA must be satisfied with the circumstances leading to the deficiency or shortage. Where these conditions are met, the taxable person shall not be required to account for excise tax on the deficient or missing goods.

Where the goods require destruction, such destruction of the goods must not occur until permission has been obtained from the FTA that the goods may be destroyed. This is because the FTA may wish to inspect the goods prior to granting its approval to apply the relief.

Process of obtaining relief

In order to submit a notification in respect of deficient goods or those found to be short in quantity, and to request approval to destroy the excise goods, the Warehouse Keeper responsible for the Designated Zone must submit a request to the FTA – in practice this is achieved via the submission of a declaration to the FTA. The declaration must be submitted to the FTA within 30 days of discovering the deficiency or shortage.

The FTA has made a form available via the e- Services Portal known as the Lost and Damaged Declaration EX203B (the Excise Tax Return User Guide published on FTA website details the steps for submitting the declaration). This declaration must be completed and submitted by the taxable person which owns the goods, following which the declaration will automatically be sent to the Warehouse Keeper of the designated zone for approval. The Warehouse Keeper must approve the declaration in order for it to be submitted to the FTA, and the submission by the taxable person and approval by the Warehouse Keeper must all be completed within the 30-day timeframe from the discovery of the deficiency or shortage.

A dedicated email address is also available to provide any additional supporting information which may be requested by the FTA in addition to the information within the declaration as follows:

deficiencyandshortage@tax.gov.ae

The declaration submitted to the FTA must contain the following information:

The TRN of the owner of the goods;
The Registration number of the Warehouse Keeper;
Information relating to the planned location for the destruction (if applicable) of the goods e.g. at a specified disposal facility;
Reference number of the designated zone in which the goods are held;
Date of entry of the goods into the designated zone;
The date on which the deficiency, damage, or shortage of the goods was discovered;
The reason for the notification (i.e. the cause which led to the deficiency or shortage of the goods) and the reason for the request for approval of destruction, if relevant;
Supporting evidence validating the reason for the notification given above;
Description of the type of goods to be destroyed, including the item code; and
The value of excise tax which would have been due on those goods.

Legitimate cause

The FTA is able to grant relief from accounting for the excise tax or provide permission for goods to be destroyed where the FTA accepts that the deficiency or shortage in the excise goods is due to a legitimate cause.

The FTA will accept an application as having a legitimate cause where the reason for the deficiency or shortage in the excise goods falls under one of the following categories:

1. Force majeure – i.e. circumstances beyond the Warehouse Keeper or Taxable Person's control, which lead to the excise goods being damaged or destroyed -for example, flood, fire or theft.

2. Natural wastage and shortage – i.e. unintentional spoiling, shortage, contamination or otherwise unfit for consumption for any natural reason -for example shortage or deficiency caused by storage conditions or the shortage of goods caused by loss of moisture.

3. Wastage or shortage in the course of production – i.e. an allowable threshold of excise goods which become unusable or a shortage occurred as a result of the manufacturing process to produce another excise good. Where the wastage exceeds the expected allowable threshold without good cause, the application may be rejected.

It must be noted that if the production process contains multiple stages and there are excise goods produced at each stage of production, the quantity of deficiency or wastage should be declared for each stage of production separately.

Supporting documentation

The declaration should include valid supporting documentation in order to validate the reasons given for the deficiency or shortage in quantity of the goods and the reasons why the destruction of the goods is required.

In all cases where destruction of the goods is requested, the declaration should include an approval from the competent authority e.g. Customs, the Municipality, etc. granting permission for destruction of the goods. The approval should ideally specify the manner of destruction which is allowable.

Additionally, the declaration should include supporting documentation relating to the reason for which it is claiming the relief. Examples of acceptable supporting documentation include:

1. Force majeure – any of the following, where available:

Police report, or other rescue services report (e.g. Civil Defence) relating to the issue;
Insurance claim reporting the issue and the arising damage;
Photographic evidence of the damage.

2. Natural wastage – any available documentary evidence supporting the natural wastage of the goods, including but not limited to:

Photographic evidence;
Records of product expiry dates;
Details relating to the manner in which goods were stored, where the inadequate storage of the goods has resulted in their natural wastage;
Inventory reports that indicate a shortage in the quantity of excise goods (for example as a result of moisture loss);
Reports or other records indicating that there was insufficient time or insufficient demand to sell the products prior to expiry.

3. Wastage or shortage in the course of production – production reports showing the volume of products that were used in the production process (inputs) and the volumes produced (outputs) for the period that gave rise to the shortage. This should include the percentage of product wastage or shortage experienced by the business, and details of the manufacturing formula of the business (i.e. the business should be aware of the typical percentage of wastage generated by the production of certain products).

Where evidence is provided which indicates the wastage or shortage threshold is above a certain tolerance level, the FTA may commence Tax Audit proceedings.

Receiving a response to an application

The FTA will assess the declaration submitted and respond to the request within 30 days from receipt of the declaration and will determine whether there is a legitimate cause for the deficiency or shortage in the goods, and whether inspection is required or sufficient grounds for destruction without further inspection exist (on case by case basis)

The FTA will then respond to the request by either:

a) Granting full or partial relief of Excise Tax and accepting the reason of shortage or deficiency of Excise Goods.

b) Rejecting the relief request from Excise Tax in the event that FTA believes that the cause of deficiency or shortage in the Excise Goods is an illegitimate reason, or if the request is not submitted within 30 days from the date of discovering the deficiency or shortage in the Excise Goods

c) In the event that the request relates to goods that are intended be destroyed or disposed, the FTA may notify the Warehouse Keeper of the intention to inspect the goods or to allow the goods to be destroyed or disposed without the need of inspection. In both cases the Taxable Person will be required to provide evidence that the goods have been destroyed or disposed after completing the destruction process in order to grant him relief from Excise Tax (e.g. Destruction Certificate from the party responsible for the destruction process).

^[1]Article 12(3) states:
For the purposes of paragraph (b) of Clause (1) of this Article Excise Goods shall be treated as leaving a Designated Zone and enter free circulation at the occurrence of any of the following:

The Excise Goods leave a Designated Zone, unless they are moved to another Designated Zone without being released for consumption or will be Exported in accordance with such conditions as specified by the Decree-Law and this Decision;
They are consumed or bought for consumption within a Designated Zone;
There is an irregularity in the course of a transfer of Excise Goods between Designated Zones which resulted in Excise Goods being released for consumption; or
They are found to be deficient or there is a shortage in their quantity from a Designated Zone or during transfer between Designated Zones or whilst held in a suspension arrangement in accordance with the Customs Laws.

^[2]Article 12(5) states:
As an exception to paragraph(d) of Clause (3) of this Article, release for consumption is not deemed to have occurred if:

The Warehouse Keeper responsible for the Excise Goods notifies the Authority within 30 days of discovering deficiency in the stock or shortage in quantity; and
It appears that the shortage of, or deficiency in, the Excise Goods is due to a legitimate cause accepted by the Authority.

Article 12(6) states:

Deficient goods may be destroyed before the lapse of 30 days following notification to the Authority, if the Authority has confirmed that the goods maybe destroyed.

Article 12(7) states:

For the purposes of Clause (6) of this Article, the goods may be destroyed after 30 days have lapsed following notification to the Authority, unless the Authority has directed that the goods must be retained for inspection.

Article 12(8) states:

If, during the period specified in Clauses (6) and(7), the Authority gives the Warehouse Keeper notice to Warehouse Keeper until such time as the Authority has so inspected them and given permission for destruction to take place.

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.