In line with the Gulf Cooperation Council (GCC) Value Added Tax (VAT) Framework Agreement, the UAE is anticipated to introduce VAT at a standard rate of 5% starting from 1 January 2018.
It is expected that businesses making a taxable supply in excess of AED 375,000 are obliged to register for VAT and those with taxable supply between AED 187,500 and AED 375,000 may opt to register for VAT and will be required to carry out the necessary VAT compliances as required by the Law.
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VAT is an indirect tax. It is one of the most common types of consumption tax found around the world. VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government. A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on the 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.
The UAE Government provides various facilities and services to its residents. Such services include public schools, parks, hospitals, etc. and these are paid for from the government budgets. VAT will provide UAE with a new source of income. This will enable the continued provision of high-quality public services in future. It will also help the UAE government in reducing dependence on oil and other hydrocarbons as a source of revenue.
VAT is likely to be effective across the UAE from 1 January 2018.
The UAE VAT Law, namely Federal Decree Law No. (8) of 2017 on Value Added Tax is accessible through the Ministry of Finance website. The link to access the VAT Law is https://www.mof.gov.ae/en/lawsandpolitics/govlaws/pages/vat-law.aspx
There are several steps that businesses may consider for VAT readiness and these include:
− Map the current business transactions and overlay the VAT footprint to assess impact of new law;
− Take impact mitigation measures by restructuring transaction flows and/or supply chain;
− Redesign the processes in line with the above;
− Assess IT readiness requirements and take necessary steps to bring in functional modifications;
− Assess and implement registration and compliance requirements; and
− Assess steps to be taken to ensure smooth transition including stakeholder communication and documentation requirements
− Ensure VAT registration, if applicable is done before the date of implementation.
VAT, as a general consumption tax, is expected to apply to a majority of transactions in goods and services. However, a limited number of exemptions may be granted by the UAE government. This could take the form of applying a zero rate of tax or treating the supply as ‘exempt’. See below for further explanation.
The standard rate of VAT in the UAE is expected to be 5% which will be applied to most goods and services. It is also expected that certain goods and services may be exempt (e.g. certain financial services, leasing of residential property) and zero-rated i.e. subject to VAT at the rate of 0% (exports of goods and services, certain medicines and medical equipment).
Zero-rated supply is a taxable supply which is charged at 0% VAT while exempt supply is a non-taxable supply. The difference between exempt and zero-rated goods/ services is that input tax credit (the VAT paid on your business inputs) can be recovered whereas no such recovery is allowed if you use your business acquisitions to make an exempt supply. Businesses making exempt supplies will incur a real VAT cost, impacting on their existing cost structure.
The average rate is 16.9%, the lowest rate is 5% (UAE and other GCC states) and the highest rate is 27% (Hungary).
No, all businesses need not register for VAT. Only those businesses with annual sales of taxable supplies exceeding the expected prescribed threshold of USD 100,000 (AED 375,000) are mandatorily required to be registered for VAT. However, those below the prescribed threshold may apply to be voluntarily registered if their turnover ranges between USD 50,000 and USD 100,000 or their annual expenditure exceeds USD50,000. Registration as a tax group may be applied if certain conditions are met.
Registration for VAT is expected to be made available to businesses that meet the requirements criteria and will open during the third quarter of 2017 on a voluntary basis and fourth quarter of 2017 on a compulsory basis.
Businesses will only be able to register online using e-Services.
DMCC Authority will be conducting free training and education sessions in order to assist its member companies to prepare for VAT.
Registered businesses will be expected to submit VAT returns on a regular basis. It is expected that the default period for filing VAT returns will be quarterly for the majority of businesses. Some business may be required to file monthly.
It is expected that most of the services other than specifically exempted or zero-rated would be subject to VAT. However, since DMCC is operating in a free zone, we would need to wait for clarifications from the Ministry of Finance on how VAT will be applied to free zone entities.
The taxable person shall keep the following records of:
Taxable persons for VAT must retain the above-mentioned records for at least 5 years. The Executive Regulation of the Decree-Law on VAT shall specify further details on restrictions and conditions with respect to maintaining the records listed above.
No VAT will be charged on the export of goods and services. In order to make exports competitive, VAT on exports will be zero-rated and the exporter can recover all the input tax incurred in the course of his business.
VAT will be 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. However, it is expected that if goods imported remain in UAE then reverse charge mechanism (or self-accounting for the VAT) would apply which will have a favourable cash flow impact.
VAT is essentially a tax on consumption taking place in the UAE. If you acquire goods or services from an entity located outside the GCC and those goods and services are provided to a customer outside the GCC then that supply takes place wholly outside the UAE and VAT will not be applicable.
The executive regulations would specify the conditions and controls for exempting/zero rates of supplies.
With regards to paper trading companies, since the supplies of paper trading companies do not involve physical movement of goods from/to the UAE and the movement of goods is outside UAE, the place of supply will be outside UAE. Accordingly, the same would not fall within the purview of UAE VAT.