A warranty backed product is one of the key driving factors for customers buying new products across the globe. With globalization, the customers may travel with such products to any part of the globe. For example, customers travelling to various countries may opt for global warranty for any portable electronic products ranging from cellphone to watches etc. Generally, manufacturers appoint a service provider as its authorized service center to render services for all warranty claims.
However, for products suited to a specific region/ market, the manufacturers makes a contract with the dealers selling such goods.
Also, in certain cases, warranty is included in the sale price. However, for certain goods, additional consideration is recovered by the manufacturer or dealer selling those goods from the customer in order to opt for warranty.
Thus, one can say that the manufacturers and resellers/ dealers/ distributors enter into different type of warranty arrangements to support any post sales defects. We have enlisted below few of the warranty arrangements:
(a) Damaged goods are given by customer to dealer and dealer replaces the new product.
(b) Damaged goods are given by customer to authorized service centre for repair and then authorized service centre repairs the goods. Such repairs are made for a charge or without a charge.
(a) Dealer may have the following arrangements with the manufacturer:
(b) Dealer may choose to himself provide additional warranty, generally termed as ‘dealer warranty’.
Considering, that the above arrangements may involve cross border movement of goods as manufacturers are located in foreign territory, such arrangements have implications from customs as well from a VAT standpoint.
As per UAE VAT Laws, supply of goods or services in UAE for a consideration are subject to VAT.
One has to identify the implications from a customs standpoint when the dealer sends the goods to the manufacturer either for repair or for replacement. The dealer has already discharged the Customs duty at the time of initial import. Accordingly, one should analyse if the Customs duty shall be applicable on re-import of repaired goods or on import of replaced goods.
As regards to VAT, one may argue that VAT should not be applicable on replacement of in-warranty goods. However, in cases where the dealer or distributor recovers consideration from the manufacturer for replacing such goods, VAT may be applicable considering the supply is effected in UAE. For additional warranty given by the dealers, the dealer may have to incur additional cost on import of goods which cannot be reimbursed from the manufacturers.
Though VAT provisions of each country should be analyzed carefully, reference can be drawn from the recently issued public clarification (VAT/PC/20/1) on the VAT treatment of repairing goods that are under a warranty by Bahrain’s National Bureau for Revenue (NBR).
The transaction wise segregation is specified in the public clarification which is as follows:
• Third-party warranty repair services i.e. when a dealer or a manufacturer arranges for a third-party to carry out repair services for the goods within the warranty period, such supplies should be subject to VAT at the standard rate of 5%.
• Provision of additional warranty:
In such cases, the manufacturer is accountable for the VAT at the standard rate of 5% on the consideration recovered for supplying extended warranty.
To conclude, the VAT treatment should be aligned for all the contracts/ arrangements between the manufacturer, dealer and the customer to avoid any non-compliance from the perspective of payment of VAT or documentation standpoint.
Source Credit – GCC Fin tax