The UAE aims to implement Value Added Tax (VAT) along with other GCC member states with effect from 1st January 2018. A standard rate of 5% will be applicable on almost all goods and services except education, healthcare and basic food items. The Federal VAT Law (27th August 2017) established the domestic rules with applying VAT in UAE.
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GCC (Gulf Co-operation Council) countries have agreed ‘in principle’ to the GCC VAT
Agreement to levy VAT (Value Added Tax) in UAE region. This will help the region to reduce their
dependence on oil and other hydrocarbon products as a source of revenue. It is agreed by all the
GCC countries that VAT will be introduced in every country latest by 1st January 2019. However,
UAE decided to implement VAT likely w.e.f 1st January 2018.
We believe the decision to implement VAT would cause a paradigm shift in business dynamics of the country as well as the region. Like most countries across the world, businesses in the Gulf region also will now have to adhere to stringent VAT regulatory and statutory compliances and report the same on a periodic basis. The challenge for business community in the Gulf will be to understand its new VAT Law and implement the same well before its due date.
1. Lack of understanding of VAT rules & regulations.
2. Compliance issues
3. Lack of resources (Availability of experts)
4. Improper book keeping system
The following are the services that we offer in regards to VAT:
1. VAT implementation and preparation of Chart of accounts in your current accounting software.
2. Assistance for VAT registration.
3. VAT Accounting.
4. Assistance for monthly VAT Payment.
5. Assistance for quarterly VAT return filing.
6. Assistance for VAT auditing
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:
1. must charge VAT on taxable goods or services they supply;
2. may reclaim any VAT they’ve paid on business-related goods or services;
3. 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.
Noncompliance will lead to the imposition of penalties.
Penalties may be caused by the following actions:
1. Failing to register for VAT if required;
2. Failing to submit a VAT return or settle a payment before the deadline;
3. Failing to retain the records required by the legislation; and
4. Tax evasion offenses caused by the intention to violate the terms of the tax legislation.
Taxpayers should keep a track of issued and received VAT invoices for a minimum of five years. VAT in real estate sector. It will be applicable only for commercial properties. All commercial properties transactions, sales, and leases alike will be subject to 5% VAT. Residential properties are exempt by law for the time being to offset additional amount to the irrecoverable cost paid by the buyers upon acquiring a new property. Real estate developers will be zero-rated for a period of three years of residential property construction. It will allow securing the market on the residential side. Zero- rated goods and services are VAT taxable but the actual tax charges are zero.
It is an accountability of the companies to document thoroughly their business revenue and expenses along with associated VAT charges. A prevailing VAT rate will be applied by registered businesses and traders to all of their customers to bear the VAT costs on goods and services bought from suppliers. The difference between these figures can be reclaimed or paid to the government. VAT is a consumption-based tax, it will be applied to the most of the transactions of goods and services except those that are exempt by law.Exemption from VAT
Following sectors are exempt from VAT
1.Financial services listed in VAT legislation;
2 Residential properties;
3. Land without any assets; and
4. Local passenger transport.
VAT will be applied at 0% rate for the following categories:
1. Exports of items and services to the markets outside of GCC region;
2. International transportation and other relevant goods and services;
3. Aircrafts, ships, and other air, sea, and land means of transportation;
4. Investment grade precious metals such as gold, silver of 99% purity;
5. New residential properties for the period of three years of their construction supplied for the first time;
6. Education services and other related goods and services; and Healthcare services and other related goods and services.
Businesses with taxable supplies worth more than AED375,000 need to register for VAT. Moreover, businesses with taxable supplies worth more than AED187,500 and less than the mandatory registration threshold of AED375,000 may opt for voluntarily registration for VAT. This option is developed to give the opportunity for start-up businesses to register for VAT whilst they still haven’t generated the revenue.
If the Annual Turnover of the company is more than AED 375,000/, it is mandatory for the company to register under UAE VAT before the end of the year 2017. If the Annual Turnover is between AED 187,500 & AED 375,000/, it is optional for the company to be registered under UAE VAT law. Further, if it is less than AED 187,500/, the company need not register under this law.
For the startups, if the VAT attracted expenses are more than AED 187,500/, (USD 50K) such
companies have to be registered under the UAE VAT law.
The threshold mentioned above will be calculated as follows:
1. The total value of supplies made by a taxable person for the month in which he is applying for VAT registration and the previous eleven months.
2. The total value of supplies of the subsequent 30 days on which he is applying for VAT registration. If in any of the above two options, the turnover is more than AED 375,000/- the company has to register for VAT.
For arriving the turnover for VAT registration purpose, value of exempted supply will not be considered.
Taxable Person means any person who is conducting an economic activity for the purpose of
1. Such person is registered or obliged to register for VAT as per the registration threshold in a member state.
2. Taxable person can include businesses located outside the GCC territory.
3. Taxable person can be any individual person conducting an economic activity.
A taxable person as per the UAE VAT law can register in the third quarter of the year 2017. It is mandatory to get registered by every taxable person under the VAT registration platform before the end of the year 2017.What is Tax Group / VAT Group?
Member State may allow 2 or more persons that are residents of the same member state to
register for VAT as a Tax Group. Such group will be treated as a single taxable person for
compliance of UAE VAT law. Entities can register as VAT Group if:
1. Each person has a place of establishment or a fixed establishment in the UAE.
2. The persons are “related parties” and
3. Either one person controls others, or two or more persons from the partnership control the others.
Entities within one VAT Group are treated as one entity for the UAE VAT purpose. Supplies made between members of a VAT Group will not be considered as a transaction under UAE VAT. Further, one entity cannot be part of more than one VAT group.
It is mandatory for every taxable person to maintain books of accounts under UAE VAT law. In
addition to that the authority can ask for additional documents such as, annual accounts,
general ledger, purchase day book, invoices issued, invoices received, credit notes, debit notes,
VAT Ledger etc.
Under the UAE VAT law the books of accounts and records are to be maintained for five years.
Tax is a compulsory contribution by individuals and corporate to the national Exchequer by means of which
government authority finances their expenditure for public services.There are mainly two types of taxes:
A direct tax – collected by the government from the person on whom it is imposed (e.g., income tax, corporate tax).
Indirect tax – collected by an intermediary (e.g. a retail or wholesale store etc.) from the person that ultimately pays the tax (e.g., VAT, Sales Tax, GST, etc.) and paid to the government.
An indirect tax – a tax paid to the government by one entity in the supply chain, but it is passed on to the consumer as part of the price of a good or service. The consumer is ultimately paying the tax (e.g., VAT, Sales Tax, GST, etc.) by paying more for the product.
Value Added Tax (VAT) is an indirect tax. It is a type of general consumption tax that is collected
incrementally, based on the value added, at each stage of production or distribution/sales. It is usually
implemented as a destination-based tax. It is also known as goods and services tax (GST) in some
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT all over the world. It includes all the 28 countries who are members of the European Union (EU) apart from Britain, Canada, New Zealand, Australia, Singapore, and Malaysia. USA does not have VAT.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost. The Businesses act as tax collector for the government authorities. They collect, account and pay the tax to the government.
A business pays the government the net of the tax. I.e. the net amount after deducting the tax paid to the suppliers from the tax collected from the customers. This net result is that tax revenue to a government authority that reflects the ‘value added’ throughout the supply chain.
For the public, there may not be any noticeable difference between the VAT & Sales Tax. But there exist some key differences. In many countries, sales taxes are only imposed on transactions involving goods. Further sales tax is imposed only on the final sale to the consumer. This contrast with VAT is that it is imposed on goods and services in an incremental manner and is charged throughout the supply chain, including on the final sale. In other words, VAT is levied on both producer and consumer where as Sales Tax is levied only on the end consumer. VAT is also imposed on imports of goods and services and hence it ensures that business interest on price levels of the domestic providers of those same goods and services are considered. VAT needs strict accounting practices and system in the business where as Sales Tax doesn’t need require such strictness. The chance of tax evasion is much less in case of VAT as compared to Sales Tax where tax evasion is rampant and difficult to detect.4.Which tax system is preferred by Governments in different countries? VAT or Sales Tax? And why?
Many countries prefer VAT over sales taxes for a variety of reasons. One of the main reasons is that VAT is considered as a more sophisticated approach to taxation in addition businessmen acts as tax collectors on behalf of the government and thereby generates good revenue for the government. Further VAT significantly reduces tax evasion.5.What will be the rates of VAT in UAE?
The proposed rate of VAT in the UAE will be up to 5%.6.What will be the mechanism of Government to collect the VAT from each customer?
The significance is that each VAT registered business entity becomes automatically the agent of the government to collect from customers and pay it back to the Government Authority. VAT is charged at each stage of the ‘supply chain’. Ultimate consumers generally bear the VAT cost. The Businesses act as tax collector for the government authorities. The difference between the VAT charged on customers and the VAT paid to suppliers will be either paid to or reclaimed from the government.7.Why VAT is going to be implemented in UAE?
One of the main objectives of the UAE Federal Government as well as the respective Emirate Governments for introducing VAT is to generate more revenue for providing enhanced support to the citizens and residents by offering various types of public services – including medical facilities like hospitals, good roads and transportation facilities like metro services, public schools, parks, waste control etc. The expenses of these services are borne by the government from its public funds which are earmarked in the budgets. VAT will provide a new source of non oil revenue for the Emirates which will increase the revenue towards the Government exchequer. The will help the Government for providing better and high-quality public services in the future thereby enhancing the living standard of the public. VAT will also result in the increase in the government non oil revenue which is estimated to be around 2% of the GDP.8.When will VAT be implemented in UAE?
The Federal Government has tentatively decided to introduce VAT in the UAE by 01 January 20189.Will UAE VAT cover all products and services?
VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. Some specific items like the sale of bare land, local transport etc. are exempted from VAT.10.Whether the cost of living will increase in UAE?
The hike in price depends upon the sector of the product and services which are taken into account for
consideration. The burden of VAT or any other form of taxation needs to be borne by someone – either the
business or consumers or both. The market will decide whether the consumer will bear the cost or the
trader/manufacturer. Naturally, in the case of sellers’ market, the traders will impose the tax burden
to the end consumers and to that extent the cost of living of the individuals is likely to increase.
But, in the case of buyers’ market, the cost of VAT will automatically borne by the trader/manufacturer
to some extent. They cannot pass it to the consumers fully.
In short, there is a likelihood that the cost of living may go up in the UAE. But this will vary depending upon the individual’s spending pattern and lifestyle.
As per information available from the official site of the Ministry of Finance, UAE, registration for VAT will be opened to the business entities in the third quarter of the year 2017. Business entities will have the option to use online registration service.12.When are the VAT returns to be filed?
As per the official site of Ministry of Finance, UAE, majority of the business entities will be required to file the VAT returns on quarterly basis, within one month/28 days from the end of the respective quarter.13.Whether UAE tourists also have to pay VAT here?
Every customer, irrespective of the fact whether he is a resident or a tourist, has to pay UAE VAT if he is consuming the VAT applicable goods or services.14.Who will all come under VAT registration?
The requirement of VAT registration is based on the annual turnover of each company. It is mandatory for a business enterprise to register for VAT if its annual turnover is above $ 100,000/ (Hundred thousand USD). However, the registration for VAT is optional in case of business units having annual turnover between USD 50,000/ and USD 100,000. The Government has made this decision to safeguard small businesses from the cumbersome procedure of extensive documentation and reporting system that is going to be implemented under UAE VAT.15.What are the responsibilities of business entities once VAT is implemented?
All business entities in UAE:
a) Registered for UAE VAT or not should maintain proper records of their business transactions and ensure that all financial records are accurate and up to date.
b) Should register under UAE VATif they are coming under eligibility criteria based on turnover.
c) All UAE VAT registered business entities should charge VAT on taxable goods or services they supply.
d) All UAE VAT registered business entities may reclaim any VAT they have paid on goods or services within the country.
e) Should maintain correct and accurate business records for government scrutiny to ensure that that business entities adhere to the mandatory requirement stipulated by the UAE VAT Law.
f) All VATregistered business entities must report the amount of VAT they collected and the amount they paid to the government on a regular basis. The Tax authority will open an online portal for submitting this record on a periodic basis (called VAT return).
If VAT charged on customers are more than the amount charged by the supplier and service providers, then the excess amount collected has to be paid to the VAT authority. Similarly, if the amount of VAT on the purchases and service providers are more than the amount charged on customers, the refund can be claimed for the difference
Every business unit in the UAE should get prepared well in advance before the due date of VAT
a) Check whether they come under the mandatory VAT registration category or not.
b) For complying with the VAT requirements, every organization has to make necessary changes to their existing financial management and accounting system, accounting software, and sometimes even to their core operation style.
c) Human resource training will be necessary to update and upgrade the staff to equip themselves to the new UAE VAT regulatory requirements.
As per the information available from media, the UAE government is not considering of introducing personal income tax in the country.18.What will be impact on UAE economy once VAT is implemented?
a) VAT implementation will strengthen UAE’s economy. It is expected to contribute around 2% of the GDP of
the country in the first year of implementation.
b) It is a bold move on the part of the authorities of the country and will bring about a paradigm shift in the revenue stream of the country i.e. from oil sourced revenue to non oil sourced revenue.
c) It will be additional revenue for the government to meet its future social service requirements.
d) Inflation in the country may go marginally up.
The total VAT amount charged by the business entity from its customers (output VAT) are to be reconciled with the total VAT amount paid/payable by it, to the suppliers on a periodical basis. The excess amount charged over the paid/payable amount is the VAT liability for the business entity and are to be paid to the government within stipulated time; one month from the end of the quarter.20.What are the VAT exempted items in UAE?
From the information, available from the ministry of finance, bare land, local transport, sale of residential property (second sales onwards), residential lease rent etc. are exempted from VAT in the UAE.21.Whether UAE VAT is applicable in the service sector?
Yes, it will be applicable in service sectors as well.22.Is VAT applicable in Export?
In the case of exports, VAT will be zero rated.23.Is VAT applicable for the construction industry?
VAT is applicable to the Construction industry in the same way as they are applicable to the other industries.24.What is the effect of VAT in existing long Contracts?
The contracts already signed before the date of implementation of VAT and which are likely to be extended to the period in which VAT is applicable are to be revised to take into account of VAT impact.25.How to take refund from VAT?
The registered entities who are eligible to get VAT refund (When input VAT is more than output VAT) can submit the VAT returns to the authority by disclosing the same.26.Who is a Tax Agent in the UAE?
Tax agent in the UAE is a person who is listed in the Register of Tax Agents at the Authority. For this purpose, he should be licensed from the Ministry of Economy and from the competent local authority from each emirate. All matters related to the professional conduct of a tax agent will be filed with the Register of Tax Agents. A taxable person can appoint a Tax Agent in the UAE and such Tax Agent will be acting on behalf of the Taxable person on all his tax matters with the Federal Tax Authority.27.How to file a Tax Return in the UAE?
As per Article (8) of Federal Law No. (7) of 2017 on tax procedures, every taxable person shall prepare and submit the tax return for each tax period to the authority and need to settle the payable tax within the time frame specified in the tax law. Return filing must be done through online portal. The time frame for filing the VAT Return will be mentioned in the UAE VAT Regulations/ UAE VAT Law. We Emirates chartered accountants Group will support the businesses to file Tax Return / VAT Return.