Introduction of VAT in the United Arab Emirates

Introduction of VAT in the United Arab Emirates

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Re-think is a boutique outsource service company providing client focused accounting, VAT advisory, audit, compliance, human resource, payroll and business advisory services in Dubai, Abu Dhabi and across the UAE.

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Published 09 December 2017
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INTRODUCTION OF THE VALUE ADDED TAX (‘VAT’) IN THE UNITED ARAB EMIRATES
1. What is VAT?
VAT is an indirect tax on consumption which will apply to most goods and services effected within the United Arab Emirates (‘UAE’). Although VAT is collected by businesses on behalf of the Government, it is ultimately borne by the final consumer.
2. Why is VAT being introduced?
The introduction of VAT in the GCC is one step forward in reducing dependency on oil and other hydrocarbon products as a source of revenue. A well organized and executed VAT system can be a great instrument to create a significant stream of income for the Government. It is important to note that VAT is a GCC wide project, mea ning that common GCC framework is the basis for the local VAT legislations of the GCC countries.
3. When will VAT be effectively implemented in the GCC region?
Six GCC countries have agreed to implement VAT in the period commencing from January 1, 2018, and by latest January 1, 2019, and have entered into a Unified Agreement for VAT of the Cooperation Council for the Arab States of the Gulf (‘GCC VAT Agreement’). This GCC VAT agreement shall form the basis for the country spe cific VAT legislation. The GCC framework agreement is already publicly available on the website of Ministry of Finance, UAE.(View agreement)
4. What are the recent updates for VAT in UAE?
On 27 August 2017, the Honorable President of the UAE, issued the ‘The Federal Law No. (8) of 2017 on Value Added Tax (‘UAE VAT Law’). The UAE VAT law provides the legal framework for the UAE introduction of VAT on the 1st January 2018. The release of the UAE Vat law is only one part of the puzzle, the VAT Executive regulations should follow shortly to provide a full picture on the UAE’s VAT implementation and are expected to be released during Quarter 4 of year 2017. Thelinkto the UAE VAT Law.
The Federal Tax Authority (‘FTA’) of the UAE has also launched a separate taxwebsite– for tax administration across the UAE.
A couple of weeks earlier, the Honorable President of the UAE, issued ‘The Federal Law No. (7) of 2017 on Tax Procedures’ (‘Tax Procedures Law’). The Tax Procedure Law sets the foundation for regulating the administration and collection of taxes and clearly defining the role of the FTA. Thelinkto the Tax Procedure Law.
The Tax Procedures Law defines a set of common proce dures and rules to be applied to all tax laws in the UAE, namely, VAT and Excise tax laws, and sets the rights and obligations of the FTA and the taxpayer. It covers tax procedures such as audits, objections, refunds, collec
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tions, and obligations, which include tax registration, tax return preparation, submission, payment and voluntary disclosure rules, in addition to tax evasion and general provisions.
5. Who will charge VAT?
Businesses, any person (natural or legal) registered for VAT will be able to charge VAT.
6. What about freezone companies (Designated zones)?
The UAE VAT law has referred to a word ‘Designated zones’. The UAE VAT Law does not state which areas will be considered as a Designated zone. Whether the Designated zones would include fenced freezone, unfenced freezone, offshore companies?
We will have to wait for the VAT Executive Regulations and a clarification to be issued by the Ministry of Finance to provide more clarity on what would be considered as ‘Designated Zone’.
At present, the UAE VAT law provides that the Designated zone will be treated as outside UAE for the VAT purposes. The transfer of goods from one Designated zone to ano ther can be done without any VAT being due.
The VAT Executive Regulations will provide for business conducted within Designated zones to be within scope of VAT subject to conditions which would be provided by the VAT Executive Regulations.
7. How does VAT work?
VAT registered businesses will have to charge VAT on their taxable supplies. This is known as output VAT. Similarly, VAT will be suffered on most goods and services pur chased by the business. This is known as input VAT.
Output VAT is being collected from the customer by the business on behalf of the Government and should be paid to the FTA which is expected to be on quarterly basis (or for a shorter period, if required under the UAE VAT legis lation). The input VAT charged on the goods and services purchased can be deducted from the amount of output tax owed. In simple words VAT payable / (Recoverable) is the difference between Output VAT and Input VAT.
8. What will be the applicable rate?
The UAE VAT law has confirmed the standard VAT rate will be 5% on supplies that are standard rated. Some supplies will however either be zerorated or exempted.
9. What would be the treatment when the goods and ser vices are supplied simultaneously by the business?
The supplies involving both the supply of goods and ser vices has been recognized in the UAE VAT Law. However, the tax treatment will be set out in the VAT Executive Regulations.
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10. What will VAT be charged on?
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VAT is a broad tax and it should be charged on most goods and services at each step of the supply chain of which the ultimate consumer generally bears the VAT cost. Transactions may be subject to VAT because they are carried out against payment or by law.
Regarding the first type of VATable transactions, they must be connected with an economic activity. In addi tion, the transaction should be subject to VAT if it involves a consideration (monetary or nonmonetary). However, it is irrelevant whether the transaction generates a profit or a loss. Finally, the transaction must be carried out by a taxable person (roughly speaking a person conducting an economic activity). Some specific transactions shall be compulsorily subject to VAT, as per the law. These include deliveries of goods or services to oneself or at zero value such as gifts, samples.
11. Who will need to register for VAT and when?
Businesses must register for VAT if their annual VAT taxable turnover exceeds the mandatory registration threshold of AED 375,000. A voluntary registration for VAT will be possible, if the turnover is below the mandatory registration threshold, but exceeds the amount of AED 187,500.
The value of supplies should be computed for the previous 12 months period. Furthermore, where it is anticipated at any given point that the threshold will be exceeded in the next thirty days, registration would be required.
The VAT registration process for UAE will commence from midSeptember 2017.
The registration processes will begin first with bluechip companies, as well as companies that produce and import excise goods. The registration processes will be conducted through eServices on the FTA’s website and will offer all the relevant information on the UAE taxes.
12. What is a VAT Group?
Businesses may register as a VAT Group provided the following conditions are met:
Each business should have a place of establishment or fixed establishment in the UAE
The relevant persons shall be Related Parties
One or more persons conducting business in a par tnership shall control the other
13. Why register as a VAT Group?
The companies forming part of a common group (such as companies under common control) typically have inter company transactions. This implies that VAT will need to be charged, unless exempt or outside the scope of VAT.
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In most cases, the VAT charged by one company (as out put VAT) will be reclaimed by the other company (as an input VAT). Hence, the VAT is not a true cost. However, this intercompany VAT is more of a cash flow issue as output VAT liability will have to be discharged when the VAT return is due for filing (quarterly/ monthly) in most of the cases, irrespective of the fact whether the payment for that invoice is received or not.
So rather than having to pay and recover VAT each time and to release the burden on cash flow, businesses have the option to register all the businesses under a common control as a VAT group. There will be only one common VAT registration number and VAT return for all the businesses under the same VAT group. This of course, makes it easier on the group’s cash flow and reduces the amount of work on VAT returns.
However, there could be other commercial considerations that one needs to evaluate before making a decision to register as a VAT group, such as joint liability towards the Government for VAT liabilities.
14. What is the difference between zerorated and exempt transactions?
There is a one ma jor difference between zerorated and exempt supplies and this difference is essential. Businesses that make zerorated supplies may be entitled to register for VAT and recover VAT on their purchases. This is not the case for exempt transactions. Businesses with exempt supplies will not be able to recover VAT on their purchases and hence, it will increase their cost for doing business.
15. Which transactions are to be zerorated and exempt from VAT?
The following transactions/ sectors would benefit from the zerorated treatment:
International transportation and related supplies;
Exports of goods and services outside GCC States where the VAT is implemented;
Supplies of certain sea, air and land means of trans portation (such as aircrafts and ships);
Certain investment grade precious metals (for example: gold, silver, of 99% purity);
Supply of certain education services, and supply of relevant goods and services;
Supply of certain Healthcare services, and supply of relevant goods and services.
The exempt treatment shall apply to the following tran sactions:
Bare land;
Local passenger transport.
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16. How VAT would be impacting the real estate business?
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The table below provides the VAT treatment of supplies for real sector:
Sectors
Real Estate
Treatment for VAT
Rental of property: Residential Rental: Exempt All other real estate: Taxable
Sale of property: First sale of the new residential property for first time within 3 years of their completion: Zerorated Sale of commercial property: Taxable
Other transactions: First sale/rental supply of buildings specifically designed to be used by Charities  Zerorated First sale/rental of buildings converted from nonresidential to residential  Zerorated
17. Will there be any reporting obligations?
The returns would have to filed at the end of each Tax period. The VAT Executive Regulations will provide for what is a Tax period. However, it is expected that busi nesses will need to submit quarterly VAT returns.
The initially selfassessed VAT due should be paid to the Government. Tax returns shall be filed online.
Although VAT will be levied at the federal level, businesses will be required to report in their tax returns revenue for each emirate. This will result in an additional compliance burden and businesses will need to ensure that their sys tems record their transactions accordingly.
18. What kind of records are businesses required to main tain?
Tax payers should be required to keep full records, inclu ding invoices, credit notes, adjustment/ corrections of all business transactions which affect their VAT position. Most likely, such records should be kept for 5 years. The VAT Executive Regulations shall specify the time limits up to which the records are expected to be maintained.
The records must be sufficiently detailed to enable the tax administration to check the VAT calculation, if neces sary.
19. Will there be penalties in case of noncompliance?
There will be strict penalties for noncompliance. The tax authorities will also have the power to conduct VAT audits with a prior notice, unless fraud is suspected.
Examples of actions and omissions that may give raise to penalties include:
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A person failing to register when required to do so;
A person failing to submit a tax return or make a pay ment within the required period;
A person failing to keep the records required under the UAE VAT legislation;
Tax evasion offences where a person performs a deli berate act or omission with the intention of violating the provisions of the UAE VAT legislation.
20. Can businesses offset customs duty against VAT pay ments?
VAT shall be payable in addition to the custom duties paid by the importer of the goods and cannot be deducted. VAT shall be computed on the value that includes the customs duties.
21. Will the goods exempt from customs duties also be exempt from VAT?
This may not be the case. Some goods that are imported may be exempt from customs duties but subject to VAT.
22. Will there be any special schemes for SMEs?
There will not be any special rules for SMEs. However, the Government will provide materials and resources for these entities to assist them in their enquiries.
23. What would be the treatment for VAT on existing contract?
The UAE VAT legislation will have special rules to deal with various situations that may arise in respect of supplies that span the introduction of VAT.
Some of the scenarios could be:
Scenarios
Where a payment is received in respect of a supply of goods / services before the introduction of VAT but the goods are actually delivered / services are rendered after the introduction of VAT
Where a contract is concluded prior to the introduction of VAT in respect of a supply which is wholly or partly made after the introduction of VAT, and the contract does not contain clauses relating to the VAT treatment of the supply
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Treatment for VAT
VAT will have to be charged on such supplies
Consideration for the supply would be treated as inclusive of VAT
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24. What actions should businesses consider now?
Rethink ME Ltd (ADGM) Office 2442, Al Sila Tower Abu Dhabi Global Market Square Al Maryah Island, Abu Dhabi, UAE
As the VAT Law is now released, it is crucial for businesses to start the preparation process early. An early unders tanding on the potential impact on business will reduce friction in the ongoing process.
Steps to be taken at this point are:
Map which business activities will be impacted by VAT;
Analyze contractual arrangements that require action;
Develop a strategy to successfully implement VAT;
Create a timetable to execute the implementation strategy in time.
Who we are
25. How can we help?
Rethink ME Ltd (Dubai Branch) Floor 8, Al Gurg Tower 3 Baniyas Road, Rigga Al Buteen PO Box 186549, Dubai, UAE
We can assist you in reviewing your current business lines and flag the potential impact of the new VAT legislation and advise on possible ways to optimize your VAT position.
We can also help you to adapt your current IT system as well as corporate and business documentation that may be impacted by the new rules.
Finally, we can help you to complete and file your VAT returns and assist you in solving any disagreements that may arise with the Government on the application of the new rules.
Re/Think is a boutique accounting, audit, advisory, compliance andVAT advisory in Dubai, focused on providing busi nesses of varying sizes with timely, proactive, and customized business solutions from startup and early development to the latest stages of a business lifecycle.
We offer tailored regulatory expertise and focus on guiding clients to reduce the risk of noncompliance across a wide range of compliance services and regulatory advice. While we focus on compliance consultancy services including advisory, training and process improvement, we do not just tell you what to do, we give you practical ways to make things work for your business.
Who will assist you
Greg Shippee, Managing Partner
Over sixteen years of corporate finance experience in the US, Europe, and Middle East & Africa regions. Multidimensional expertise and vast experience in strategy consulting, family office controlling, acquisition due diligence and financial planning, budgeting and control.
Jay McKinnon Director, Indirect Tax (VAT, Customs & Excise)
Jay is Head of Indirect Tax and is responsible for advising clients on the most VAT and Duty ways to structure their business, liaising with the tax authorities on behalf of clients and advising on complex international transactions. Jay has over 13+ years in Indirect Tax advisory, compliance and consultancy gained across all businesses with particular experience in Construction, Land & Property, Oil & Gas Sector, Charity and NotforProfit Sector and in
Patrick Sulzer, Partner and Group Operations Director
Fifteen years of broad international experience in various sectors (industrial, consulting, legal and financial services) with a deep and comprehensive knowledge of the Middle East. Extensive practice in operations management, strategic implementation and business development.
www.rethinkhq.com The information contained herein is solel y for informational purposes and not for onward distribution without our express consent. It should not be considered legal advice, nor a substitute for legal counsel, nor advertising or solicitation. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of this document and we suggest to seek legal advice from our experts on a casebycase basis to ensure compliance with all legal, tax, accounting and regulatory issues.