VAT came into force in the UAE on 1 January 2018. In this article, we provide an overview of the UAE VAT regime and look at the key next steps for UAE businesses.
Law and regulation
The UAE government has published five key pieces of legislation in relation to VAT:
- Decree No. 31 of 2017, approving the GCC VAT Framework Agreement (the VAT Law);
- Federal Law No. 7 of 2017 on Tax Procedures (the Tax Procedures Law);
- Cabinet Decision No. 36 of 2017 on the Executive Regulations of the Tax ProceduresLaw (the Tax Procedures Executive Regulations);
- Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE (the Administrative Penalties Resolution); and
- Cabinet Decision No. 52 of 2017 on the Executive Regulations of the VAT Law.
The VAT system will be administered by the new UAE Federal Tax Authority (the FTA). The FTA is empowered to issue further clarification and guidance regarding the implementation of the VAT in the UAE and we expect such guidance will be very much needed in the coming months, as businesses and consumers grapple with the practical impacts of the new system.
Basics of VAT
VAT is charged on:
- supplies of goods and services by a taxable person (a person who is registered or required to be registered for VAT) where the supplies are made within the UAE in the course of carrying on a business;
- imports of goods;
- exports of goods or services (although these supplies will be zero-rated); and
- the receipt of services from outside of the UAE by a VAT registered customer, by the application of a "reverse charge" mechanism (essentially, the customer charges itself VAT).
The standard rate of VAT is 5% of the value of the supply. Generally, the supply value will be the consideration paid for that supply, in cash or kind. Some supplies will be exempt or charged at the rate of 0% - known as zero rated supplies (see below).
VAT which a business is required to account for on its sales is called “output tax”. VAT which it incurs when it purchases taxable supplies of goods or services is called “input tax”. In general, if a business makes only standard rated or zero rated supplies, it is likely to be able to offset the input tax that it suffers (where it is directly attributable to buying in goods and services to make its taxable supplies) against its output tax. It must account to the FTA for the difference between its output tax and its input tax (or claim a credit or refund if the input tax exceeds its output tax). In this situation, VAT is largely a cash-flow cost for a business and the person who ultimately bears the cost is the final customer (or a business that is not large enough to register for VAT).
Exempt or zero rated?
Suppliers of zero rated goods and services recover the input VAT they pay to enable those supplies. Both for suppliers and the end consumer, this is beneficial. The base cost of the supply is reduced for the supplier by reclaiming the VAT it has paid. This reduced base cost is passed onto the customer and no supply VAT at 5% is levied on top. In contrast, VAT exempt goods and services mean that no output VAT is recorded at all, and the supplier is not permitted to recover the associated input VAT. The input VAT is therefore a real cost for the supplier which it will usually try to recover by increasing the sale costs of its goods or services.
Zero rated supplies include:
- Transportation - international transportation of goods and passengers and the means of transportation and related services.
- Residential property – for the first supply by lease or sale after construction or conversion for residential use.
- Education – school fees and fees for state funded higher education and some related goods and services.
- Preventive and basic healthcare services and related goods and services.
- Precious metals for investment
- Crude oil and natural gas
Exempt supplies include:
- Certain financial services
- Residential property – if the zero rating concession is not available, for example on a secondary sale of a residential home
- Bare land
- Local passenger transport
Registration and invoicing
The mandatory registration threshold is set at AED 375,000 of annual supplies. UAE businesses meeting this threshold should by now be registered with the FTA and have received their unique Tax Registration Number (TRN).
Such businesses should also have in place appropriate systems and processes for charging, recording and accounting for VAT. For example:
- consumer-facing businesses (e.g. in the retail and hospitality sectors) should have updated their prices to include VAT and have trained staff to deal with customer enquiries on pricing and receipts;
- business-to-business invoicing systems should be in place to ensure valid tax invoices are received and issued, including the requisite TRNs.
Any business which is registered late for VAT due to a failure to comply with the FTA announced deadlines may be subjected to a fine of AED 20,000.
Businesses may elect to register if they have an annual turnover of supplies of AED 187,500. The advantage of voluntary registration is the ability to reclaim input VAT. However, this benefit has to be weighed against the cost of preparing VAT filings and maintaining the necessary records as well as having to charge VAT on any sales.
VAT-registered businesses should be thinking ahead to ensure they are ready to prepare and submit VAT returns, including by setting up the requisite eDirham account to make payments (if they have not done so already).
It will be important to check that data submitted to the FTA is complete and accurate and that the responsible people within the businesses are available to approve the submissions. The Tax Procedures Law, Tax Procedures Executive Regulations and Administrative Penalties Regulations set out stringent penalties for breach. Tax evasion, such as a deliberate failure to pay tax, and types of tax fraud (such as deliberate understatement of liability and false records), may result in either corporate or personal liability. Penalties may include a custodial sentence and/or a fine of up to five times the amount of the relevant tax liability evaded.