The United Arab Emirates (UAE) Federal Government has approved the Value Added Tax (VAT) Law and published the law on 27 August 2017. The official title is Federal Decree-Law No.(8) of 2017. The Law refers to the Executive Regulations, which will provide more specific guidance.
Effective date of implementation: – Article 85 provides that the Law shall be effective from 1 January 2018.
Tax-free living in the UAE is near to it’s end.
Dubai is one of the seven states of United Arab Emirates, well-known to attract overseas business, tourists and corporates for its tax-free structure. Along with Dubai, none of the other emirates levy a federal tax, though they have a legal right to do so.
Although expats have always flocked to the UAE for its well-known status as a tax haven, that’s all going to change slightly from the beginning of next year with the introduction of 5% Value Added Tax (VAT) in the six countries of the Gulf Corporation Council (GCC), including the UAE, on 1 January 2018.
Value Added Tax (VAT) is set to make its debut in the six-nation GCC block in 2018. VAT will be another source of raising revenues for governments in the Gulf Cooperation Council (GCC). Governments have been considering the need to diversify income sources and this is even more the case given the developments negatively affecting government revenues in the region such as reduced income from oil revenues.
Tax on Value addition: –
VAT is charged at each step of the ‘supply chain’ on value addition. End consumers generally bear the VAT cost while registered businesses collect and account for the tax, in a way acting as a tax collector on behalf of the Federal Tax Authority. Over 150 countries have implemented VAT or its equivalent, “Goods and Services Tax (GST)”, India has recently implemented GST effective 1st July 2017.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain
Effective date of Implementation
Article 85 provides that the Law shall be effective from 1 January 2018.
Scope of levy
Article 2 provides that all taxable supplies (including deemed supplies) as well as imported concerned goods shall be subject to VAT. The term “concerned goods” is defined as imported goods that would not be exempted if they had been supplied in the UAE. The VAT treatment of concerned goods will be regulated by the Executive Regulations.
Article 3 provides that a standard rate of 5% will be imposed on the supply of goods and services as well as importation. There are however certain exceptions where the zero-rate will apply as well as exemptions.
UAE residents are, under Article 13, required to register for VAT if the value of goods and services supplied exceeds (or is expected to exceed) the registration threshold to be specified in the Executive Regulations. Persons without residency in a Gulf Cooperation Council Member State where VAT will be implemented will be required to register for VAT if they supply goods or services in the UAE and no other person is required to account for VAT in respect of those supplies.
A person may apply to the tax authority to be exempted from the VAT registration requirement if the person only makes zero-rated supplies. A person may voluntarily register for VAT under Article 17 if the voluntary registration threshold per the Executive Regulations is exceeded or expected to be exceeded in a 12-month period. Two or more persons conducting business in the UAE may register as a “Tax Group” if the parties are related, each entity has a place of establishment in the UAE and the parties are the parties are subject to common control.
A business must register if:
- The total value of their taxable supplies made within the UAE exceeds the mandatory registration threshold over the previous 12 month period, or
- They anticipate making taxable supplies with a value exceeding the mandatory registration threshold in the next 30 days.
- The mandatory registration threshold will be AED 375,000.
A business may apply to register if they do not meet the mandatory registration criteria and:
- The total value of their taxable supplies or taxable expenditure in the previous 12 months exceeds the voluntary registration threshold, or
- They anticipate that the total value of their taxable supplies or taxable expenditure will exceed the voluntary registration threshold in the next 30 days.
- The voluntary registration threshold will be AED 187,500.
Supplies between related parties
The value of supplies between related parties is deemed to be the market value of the supply if less than market value was charged and the recipient would not have been entitled to full input tax recovery.
Advertised prices must include VAT unless conditions of the Executive Regulations are met.
The VAT Act sets forth 14 instances where supplies may qualify for zero-rating, including exports,
international transport, investment metals, first supply of residential buildings (provided it is supplied within three years of completion), crude oil and gas. Educational services as well as preventative and basic healthcare services and related goods and services may also be zero-rated if complying with
the specifications in the Executive Regulations.
Designated Free Zones are deemed to be outside the UAE. Goods may be transferred between designated zones without VAT. The Executive Regulations will specify the applicable procedures and conditions.
The supply of bare land, local passenger transport and the sale and lease of residential buildings will be exempt from VAT as well as financial services specified in the Executive Regulations.
Tax invoices must be issued within 14 days from the date of supply. In instances where the value of the
supply is in a currency other than DUAE Dirham, the amount must be converted to Dirham using the exchange rate approved by the Central Bank at the date of supply.
For the purposes of understanding whether a registration obligation exists, a taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%. Imports are also taken into consideration for this purpose, if a supply of such goods or services would be taxable if made within the UAE.
A VAT registered person may reduce output tax in the tax period that an irrecoverable debt is written off if VAT was charged and paid when the goods or services were supplied, more than six months has passed from the date of supply, provided the supplier notifies the recipient of the amount written off.
The Law refers to the Executive Regulations, which will provide more specific guidance on:
- VAT registration thresholds
- Specific place of supply rules
- Profit Margin Scheme
- Conditions and obligations in respect of the reverse charge mechanism
- Defining Designated Zones
- Exempt financial services
- Content of tax invoices
- Content and form of tax return including conditions thereof
- Adjustments to tax invoices and tax returns
- Tax periods
- Capital Assets Scheme
- Payment of tax and other dues relating to VAT
- Transitional provisions where a contract was concluded on or before 31 December 2017 but the supply under the contract is made wholly or partly on or after 1 January 2018.
What is the difference between VAT and Sales Tax?
A sales tax is also a consumption tax, just like VAT. For the general public there may be no observable difference between how the two types of taxes work, but there are some key differences. In many countries, sales taxes are only imposed on transactions involving goods. In addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.
Many countries prefer a VAT over sales taxes for a range of reasons. Importantly, VAT is considered a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
Why is the UAE implementing VAT?
The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
Why does the UAE need to coordinate VAT implementation with other GCC countries?
The UAE is part of a group of countries which are closely connected through “The Economic Agreement between the GCC States” and “The GCC Customs Union”. The GCC group of nations have historically worked together in designing and implementing new public policies as we recognize that such a collaborative approach is best for the region.
How will the government collect VAT?
Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
How can one object to the decisions of the Authority?
Any person will be able to object a decision of the Federal Tax Authority.
As a first step, the person shall request the FTA to reconsider its decision. Such request of re-consideration has to be made within 20 business days from the date the person was notified of the original decision of the FTA, and the FTA will have 20 business days from receipt of such application to provide its revised decision.
If the person is not satisfied with the revised decision of the FTA, it will be able to object to the Tax Disputes Resolution Committee which will be set up for these purposes. Objections to the Committee will need to be submitted within 20 business days from the date the person was notified of the FTA’s revised decision, and the person must pay all taxes and penalties subject of objection before objecting to the Committee. The Committee will typically be required to give its decision regarding the objection within 20 business days from its receipt.
As a final step, if the person is not satisfied with the decision of the Committee, the person may challenge its decision before the competent court. The appeal must be made within 20 business days from the date of the appellant being notified of the Committee’s decision
Who can or will be able to register for VAT?
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT
What are the VAT-related responsibilities of businesses?
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case we need to establish whether they should be registered.
VAT-registered businesses generally:
- must charge VAT on taxable goods or services they supply;
- may reclaim any VAT they’ve paid on business-related goods or services;
- keep a range of business records which will allow the government to check that they have got things right
If you’re a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be made online.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to the government. If you’ve paid more VAT than you’ve charged, you can reclaim the difference.
When are registered businesses required to file VAT returns?
Taxpayers must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, should the FTA decide so) within 28 days from the end of the tax period in accordance with the procedures specified in the VAT legislation. The Tax returns shall be filed online using e-Services.
How should a business determine the place of supply?
The place of supply will determine whether a supply is made within the UAE (in which case the UAE VAT law will apply), or outside the UAE for VAT purposes. For a supply of goods, the place of supply should be the location of goods when the supply takes place with special rules for certain categories of supplies (e.g. water and energy, cross border supplies). For the supply of services, the place of supply should be where the supplier is established with special rules for certain categories of supplies (e.g. cross border supplies between businesses).
How will real estate be treated?
The VAT treatment of real estate will depend on whether it is a commercial or residential property. Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%). On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within 3 years from their completion will be zero-rated.
Will tourists also pay VAT?
Yes. Tourism spending is a major source of revenue for the UAE and goods purchased by visitors will not be exempted at the point of sale. Anyone buying perfumes, make-up, luxury bags and big-ticket items in the UAE can expect to pay an additional 5 per cent of the sale price. The Ministry of Economy, however, assured that the tax rate is “deliberately low so that VAT is a limited burden on all consumers.” It also remains to be seen if tourists will be given the option to obtain a tax refund at some point, as observed in other countries.
Sources: Federal Tax Authority UAE, Ministry of Finance UAE etc.
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Global tax Team, Get Set Business Solutions
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