Restructure cross-border documentation for defensible exports—aligning paper trails with tax treatment at every node
A UAE-based supplier engaged us to evaluate the VAT implications of a cross-border supply arrangement involving deliveries to Iraq. The business model included issuing commercial invoices to a UAE-based affiliated entity while physically shipping goods to an unrelated Iraqi customer. The UAE entity was contractually responsible for payment, while the ultimate consignee in Iraq received the goods and took beneficial ownership.
At first glance, the transaction appeared to qualify as a zero-rated export under Article 45(1)(a) of UAE Federal Decree-Law No. 8 of 2017, which provides that exports of goods outside the Implementing States are zero-rated when made by a taxable supplier. Export documentation — including customs clearance and the packing list — identified the Iraqi company as the consignee, while the UAE supplier acted as the consignor. However, upon closer examination, we identified a critical VAT risk arising from the mismatch between the invoice and the export trail.
The issue centered around the FTA’s treatment of “Bill To / Ship To” arrangements, a structure scrutinized across industries and specifically addressed in the FTA’s Automotive VAT Guide (Section 5.2). According to this guidance, a transaction where the invoice is issued to a UAE-based party (the “Bill To”) and goods are shipped to an overseas party (the “Ship To”) does not qualify as a direct export by the supplier, and is instead treated as a local supply to the UAE customer.
In the structure presented, the supplier’s invoice was addressed to a UAE-based company, even though the export documents named an Iraqi consignee. This creates the perception that the UAE supplier sold the goods to the UAE billing entity, who then resold them (or transferred title) to the Iraqi buyer — a two-step supply, with the first leg being subject to 5% UAE VAT. Under this view, the supplier’s transaction is confined to the UAE, and the export is effectively performed by the UAE buyer, not the original supplier.
This risk was compounded by references to the UAE entity in the “Bill To” field of the invoice and export documents. While the Iraqi party was the recipient of the goods, the economic supply chain appeared to exist between the UAE supplier and UAE affiliate, rendering the transaction ineligible for zero-rating under the FTA’s published position.
To mitigate this, we advised the supplier to realign both the contractual and documentary trail with the intended tax treatment. Specifically:
- The invoice and purchase order should be issued directly to the Iraqi company, as the legal and economic buyer of the goods.
- The UAE-based entity should not be named as the “Bill To” party; if they are involved in payment logistics, this should be clarified through a side agreement or internal instruction — not by appearing as the buyer in commercial documents.
- All export documentation — including commercial invoices, packing lists, customs declarations, and shipping instructions — must consistently reflect the Iraqi company as the purchaser and consignee.
- We further recommended filing a private clarification with the FTA, explaining the proposed structure and requesting pre-approval to ensure future defensibility of the zero-rating treatment.
Finally, we emphasized the potential consequences of inaction. Should the FTA audit and reclassify the transaction as a local supply, the supplier could face:
- 5% VAT liability on the full invoice value, unrecoverable from the foreign customer.
- Penalties of up to 300% of the unpaid VAT, plus AED 2,000 per period under voluntary disclosure rules.
- Reputational risk and the possibility of further scrutiny across all past export transactions involving similar structures.
This case underscores the critical importance of documentation consistency and contract alignment in cross-border supplies. UAE VAT zero-rating is not solely based on the movement of goods — it depends heavily on who is billed, who pays, and how the supply chain is documented. Misuse of the “Bill To / Ship To” model can unintentionally convert a legitimate export into a domestic supply, triggering avoidable tax liabilities. Proactive structuring and pre-clearance with the FTA are essential for businesses operating in high-risk trade models.
