UAE introduces Value Added Tax in 2018

Burj Khalifa sunset
The introduction of the Value Added Tax (VAT) in the UAE follows the signing of the Unified GCC Agreement for VAT by the GCC countries on 27 November 2016 (“Agreement”), which was ratified by the UAE on 16 April 2017 by Federal Decree No. 31 of 2017. Each party to the Agreement is expected to issue its own VAT legislation implementing the agreed common principles. The KSA is the first country to publish a draft VAT law and call for public consultation.

The UAE is yet to publish the legislation setting out the details of how the VAT will be applied, but the UAE Ministry of Finance (MoF) has been publishing answers to VAT-related frequently asked question on its website, thereby helping businesses to prepare for the introduction of the tax.

The VAT is expected to be an additional source of income for the UAE that otherwise remains largely a tax free jurisdiction. The MoF has indicated that this move is part of the government’s vision to reduce the dependence of the UAE economy on its hydrocarbon resources. To further this goal, the Federal Law on Tax Procedures (Federal Law No. 7 of 2017) was issued in June 2017 to set the framework for the taxation system in the country.

Key facts

The VAT is expected to be introduced on 1 January 2018. The rate will be set at 5% for the supply of all goods and services other than those exempt or taxed at zero rate. Under the Agreement, the states have some flexibility as to whether particular supplies will be exempt or zero rated. The difference between exempt and zero-rated supplies is important, as the supplier providing supplies of exempt goods or services (in contrast with zero-rated supplies) cannot recover the input VAT (the VAT they have paid ) in relation to such supplies, which means that the input VAT becomes an expense affecting the supplier’s profits margin.

The MoF has indicated that the following categories of supplies will be exempt from VAT:

  • The supply of some financial services (to be clarified in VAT legislation, but it is expected that fee-based financial services will be taxed, whilst margin-based products will be exempt);
  • Life insurance (generally, other types of insurance will be taxable);
  • Residential properties;
  • Bare land; and
  • Local passenger transport.

There will also be certain categories of supplies where VAT will be charged at 0%. So far, the MoF has indicated that the zero-rated supplies will include:

  • International transportation and related supplies;
  • Certain sea, air and land means of transport and related supplies;
  • Certain precious metals of at least 99% purity;
  • Newly constructed residential properties that are supplied for the first time within three years of their construction;
  • Certain education services and related goods and services;
  • Certain healthcare services and related goods and services.

Registration

Any business with annual taxable supplies exceeding AED 375,000 must register for VAT with the Federal Tax Authority (“FTA”). If the annual taxable supplies are below that threshold but exceed AED 187,500, a business may choose to register for VAT.

A business may choose to register for VAT voluntarily

  • if their supplies and imports are less than AED 375,000, but exceed AED 187,500; or
  • if their expenses exceed AED 187,500.

All businesses must be registered and ready to charge VAT by the expected implementation date of 1 January 2018. The MoF has initially announced that electronic registration for VAT will be open from the third quarter of 2017 on a voluntary basis and from the final quarter of 2017 on a compulsory basis. However, it appears that the registration system is not yet active and is now expected to open in October 2017.

VAT compliance

In addition to the registration requirements, businesses in the UAE will have to make themselves fully compliant with the VAT legislation by the time the tax enters into force. The responsibilities for businesses will include charging VAT, recording all financial transactions accurately and maintaining up to date financial records. The VAT tax returns should be filed with the FTA within 28 days after the end of the tax period, which will be specified in the VAT legislation, and can be filed online.

The Federal Law on Tax Procedures sets out a list of administrative violations and corresponding penalties for breaching the VAT or any other tax legislation.

Cross-border issues

Exports of goods and services from the GCC countries to the rest of the world will be generally subject to zero-rate VAT.

VAT will be charged on imports of goods into GCC at the time and place of import. Where goods or services are provided to a taxable person in the UAE by a person outside the GCC, the taxable person shall be treated as having supplied such services for himself and shall be required to pay the due tax on behalf of the supplier (reverse taxation mechanism).

Non-residents that make taxable supplies in the UAE will be required to register for VAT unless there is a UAE resident tax representative who is responsible for accounting for VAT on these supplies. The MoF has clarified that this exclusion will apply to imports under the reverse taxation mechanism, thereby avoiding the need for the overseas seller to register for VAT in the UAE.

Comment

The Agreement and the clarifications issued by the MoF are helpful in understanding the VAT framework that will soon be implemented in the UAE. It is worth noting that there are over 40 free zones in the UAE and it is expected that the VAT legislation will provide much awaited clarity as to application of the VAT regime in these free zones.

It is hoped that the legislation will be issued as soon as possible ahead of the impending implementation date of 1 January 2018, thereby reducing the period of uncertainty and enabling businesses to adapt to the new system. In the meantime, businesses should focus on bringing their financial reporting up to date, ensuring that they are meeting the standards for accounting and record keeping and ensuring that they have a good grasp of VAT procedures. From a commercial point of view, it would also be sensible to review the impact of the new VAT on supply chains and pricing.

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