When businesses collaborate with social media influencers, it is not just about creating content or marketing the goods and services offered by the business; there is also the financial side to consider. One of the main points that is often overlooked is Value Added Tax (VAT). Even in the digital space, tax obligations exist, and understanding them is crucial.
This article aims to shed some light on this subject, offering businesses a clear guide on how VAT intersects with influencer engagements.
Value Added Tax in the UAE
The UAE implemented VAT through the Federal Decree-Law No. 8 of 2017, which took effect from January 1, 2018. As defined by the UAE’s Federal Tax Authority (FTA), VAT is a consumption tax applied at every stage of the supply chain and is ultimately paid by the final consumer. Every business needs to evaluate VAT obligations from two angles:
- As a provider of goods and services.
- As a receiver of goods and services.
Though the UAE’s tax laws do not specifically mention the VAT approach for dealings between businesses and social media influencers, it is important to recognize that the general VAT rules and principles still apply to such interactions.
Subjectivity of Engagements with Social Media Influencers to UAE VAT
According to UAE tax laws, social media influencers are considered individuals actively engaged in business. This classification means that their services are encompassed within the UAE’s VAT framework. Simplified, if a social media influencer fulfills the legal criteria, especially exceeding the designated VAT registration thresholds, they could be recognized as a taxable person under the UAE VAT legislation. Consequently, transactions executed by these taxable influencers are typically viewed as taxable supplies, making them liable for VAT in the UAE.
Receiving Supplies from Registered Social Media Influencers
When businesses partner with VAT-registered social media influencers for promotions, marketing, or any related services, it is vital to comprehend the tax implications from two distinct viewpoints:
From a Recipient’s View:
When a business avails services from a VAT-registered influencer, they should confirm that the influencer is correctly applying the appropriate VAT treatment. Furthermore, it is crucial for the business to obtain a proper tax invoice from the influencer. This document is essential if the business intends to claim back the input VAT, provided all prerequisites for input VAT recovery are met.
From a Supplier’s View:
Interestingly, in many scenarios, a business that engages with a VAT-registered influencer might also play the role of a supplier within that same transaction. This dual-role is especially apparent in barter transactions where goods or services are exchanged directly for influencer services. In these circumstances, the business might also be seen as providing a supply which may come under UAE’s VAT jurisdiction. If this supply is recognized as a taxable supply, then the business must declare the associated output VAT to the FTA and issue a tax invoice to the influencer.
To illustrate, consider a VAT-registered restaurant that collaborates with a VAT-registered Instagram personality. The influencer promotes the restaurant’s dishes on their account, and in exchange, enjoys a complimentary meal (a classic barter transaction). In this scenario, both the restaurant and the influencer act as taxable persons — both suppliers and recipients — for UAE VAT purposes. Consequently, each party must account for output VAT related to the services or goods they provide and issue the relevant tax invoices.
Receiving Supplies from Non-VAT-Registered Social Media Influencers
When businesses collaborate with social media influencers who are not VAT-registered for marketing, promotions, or other associated services, understanding the tax implications is essential. These can be categorized from two main angles:
From a Recipient’s View:
A business sourcing services from a non-VAT-registered influencer is not mandated to pay any VAT to said influencer. Nonetheless, for comprehensive record-keeping, it is advisable that the business secures an invoice and a payment receipt from the influencer.
From a Supplier’s View:
There are numerous situations where a business, even while availing services from a non-VAT-registered influencer, simultaneously acts as a supplier within that very deal. This dual role frequently surfaces in barter transactions, such as when goods or services are swapped directly for influencer services. Here, the business might be seen as providing a service or product that could fall within the UAE’s VAT scope. If this provision is considered a taxable supply, the business should disclose the related output VAT to the FTA and produce a tax invoice for the influencer.
For clarity, imagine a VAT-registered car showroom partnering with an Instagram influencer, offering them a month-long free Ferrari lease in exchange for promotional posts showcasing the showroom’s cars. In this setup, both the car showroom and the influencer play dual roles as suppliers and receivers. However, only the car showroom would be responsible for managing the VAT related to its supplies in the UAE. Hence, the showroom should report the output VAT concerning its services and issue the necessary tax invoice to the influencer.
Potential Tax Evasion when Engaging Non-VAT-Registered Social Media Influencers
At times, businesses may encounter influencers who, despite not being registered for UAE VAT, assert that there is no requirement for them to do so. In such situations, businesses must carefully verify such claims before entering into a professional relationship with these influencers. If a business determines that an influencer ought to be registered for VAT based on their earnings and activities, it is wise to abstain from collaborating with them. This precaution helps businesses sidestep potential allegations of being complicit in any tax evasion actions the influencer might be involved in.
Take, for instance, a prominent furniture store that approaches a social media influencer for a marketing service quote. The influencer responds with a quote of AED 350,000, dangerously close to the VAT registration threshold from just a single deal. Given the influencer’s known associations with other major UAE enterprises, the furniture store requests the influencer’s VAT registration details. The influencer then clarifies that they have not registered for UAE VAT and are not required to do so.
In such a scenario, it is highly probable that the influencer surpasses the VAT registration threshold and is intentionally avoiding it. Such behavior is a red flag for tax evasion. Hence, to shield itself from potential complicity in any tax evasion schemes, it is advisable for the furniture store to reconsider the collaboration.
Conclusion
Navigating the digital landscape, especially when collaborating with social media influencers, brings its own set of challenges when it comes to the UAE’s VAT rules. For businesses, understanding these rules and ensuring they are followed correctly is crucial. It is not just about marketing or promotions; it is also about making sure that taxes are handled correctly.
Before making any decisions, businesses should take a step back and verify an influencer’s VAT status, especially if claims seem too good to be true. Keeping detailed records, like invoices and payment receipts, is more than just good practice; it is a safeguard against potential issues down the road.
This Article is prepared by Mohamed El Baghdady, Partner, Head of Tax and Financial Crimes, and Marwan Alnooryani, Senior Tax Associate, at Habib Al Mulla & Partners Law Firm.
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