Membership

VAT Introduction

What is Value Added Tax (VAT)?

VAT is an indirect tax. It is one of the most common types of consumption tax found around the world with over 167 countries having implemented a VAT (or its equivalent). VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while VAT registered 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 after offsetting against the tax collected, the tax that it has paid to its suppliers on eligible acquisitions. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.

Why is VAT being introduced by the UAE Government?

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.

When will the VAT go into effect and what will be the rates?

VAT will be introduced across the UAE on 1 January 2018 at a standard rate of 5%.

How will the government collect VAT?

Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.

Will VAT cover all products and services?

VAT, as a general consumption tax, is expected to apply to a majority of transactions in goods and services consumed in the UAE. However, a limited number of exemptions have been granted by the UAE government. This could take the form of applying a ‘zero rate’ of tax or treating the supply as ‘exempt’. See Exempt and Zero Rated Conditions for further explanation.

How can someone access UAE VAT Law?

The UAE VAT Law, namely Federal Decree Law No. (8) of 2017 on Value Added Tax and Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree Law No. (8) of 2017 on Value Added Tax are accessible through the Federal Tax Authority Website. The link to access the VAT Law and executive regulation is https://www.tax.gov.ae/legislation.aspx

What are the steps required to be taken by businesses to get VAT ready?

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 Registration

Who can or will be able to register for VAT?

Only those businesses with past annual sales of taxable supplies, or future sales in next 30 days, which exceeds the 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 taxable expenditure exceeds USD 50,000.

Subject to certain eligibility criteria a number of individual businesses may be eligible to form a Tax Group. A Tax Group is then treated as a single registration for VAT purposes and can bring some administrative and cash flow savings.

When are businesses supposed to start registering for VAT?

VAT will come into force on 1 January 2018. Any business that is required to be registered for VAT and charge VAT from 1 January 2018 must be registered prior to that date.

Businesses with a turnover of over AED 150M should apply to register before 31 October 2017. Businesses with a turnover of over AED 10M should apply to register before 30 November 2017. All other businesses need to have applied by 4 December 2017 in order to be registered by the start of 2018.Registrations remain open.

Can the registration be done online or manually?

Businesses will only be able to register online using e-Services. Link to access e-services is https://www.tax.gov.ae/en

VAT Applicable FAQs

What are the VAT-related responsibilities of businesses?

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:

  • must charge VAT on taxable goods or services they supply;
  • may reclaim any VAT they’ve paid on business-related goods or services;
  • 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.

Will the services provided by DGCX and DCCC be subject to VAT?

All fees charged by DGCX and DCCC would be subject to VAT at a standard rate of 5% unless specified in a soon to be released Cabinet decision. However, the services that are supplied to a recipient who does not have a place of residence in an Implementing GCC State and who is outside the State at the time the services are performed shall be zero-rated.

For the purposes of tax invoice, DGCX members will issued tax invoice at Trade member (TM) level.

When are registered businesses required to file VAT returns?

Taxpayers must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, should the FTA decide so) within 28 days from the end of the tax period in accordance with the procedures specified in the VAT legislation. The Tax returns shall be filed online using eServices.

What kind of records are businesses required to maintain, and for how long?

The taxable person shall keep the following records of:

  • All supplies and Imports of Goods and Services.
  • Tax Invoices and alternative documents related to receiving Goods or Services.
  • Tax Credit Notes and alternative documents received.
  • Tax Invoices and alternative documents issued.
  • Tax Credit Notes and alternative documents issued.
  • Goods and Services that have been disposed of or used for matters not related to business, showing Taxes paid for the same.
  • Goods and Services purchased and for which the Input Tax was not deducted.
  • Exported Goods and Services.
  • Adjustments or corrections made to accounts or Tax Invoices.
  • Records relating to capital assets for at least 10 years
  • Tax Record that includes the following information:
  • Due Tax on Taxable Supplies.
  • Due Tax on Taxable Supplies pursuant to the reverse charge mechanism.
  • Due Tax after the error correction or adjustment.
  • Recoverable Tax for supplies or imports.
  • Recoverable Tax after the error correction or adjustment.

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.

Will non-residents be required to register for VAT?

Non-residents that make taxable supplies in the UAE will be required to register for VAT unless there is any other UAE resident person who is responsible for accounting for VAT on these supplies. This exclusion may apply, for example, where a UAE business is required to account for VAT under a reverse charge mechanism in respect of a purchase from a non-resident.

In the UAE VAT, the reverse charge mechanism is applicable while importing goods or services from outside an implementing GCC State. Under this, the businesses will not have to physically pay VAT at the point of import.

The responsibility for reporting of a VAT transaction is shifted from the seller to the buyer; under reverse charge mechanism. Here the buyer reports the input VAT (VAT on purchases) as well as the output VAT (VAT on sales) in their VAT return for the same tax period.

The reverse charge is the amount of VAT one would have paid on that goods or services if one had bought it in the UAE. The importer has to disclose the amount of VAT under both Input VAT as well as Output VAT categories of the VAT return of that quarter.

Reverse charge mechanism eliminates the obligation for the overseas seller to register for VAT in the UAE.

Is VAT charged on exports?

VAT on exports will be zero-rated and the exporter can recover all the input tax incurred in the course of his business.

What would be the VAT impact on imported goods?

VAT will be imposed on imports of goods and services at the same VAT rate had the supply taken place in the UAE so as to ensure that a level playing field is maintained for domestic providers of those same goods and services. However, in order to ensure no adverse cash flow impact upon the payment of VAT at time of importation both goods and services imported for use in the UAE will generally be by way of the reverse charge mechanism (or self-accounting for the VAT). VAT on imported goods that are to be transshipped through the UAE to another implementing GCC state will have to account for VAT at the time of importation and cannot adopt the reverse charge mechanism.

VAT applicability on paper trading companies which do not physically import or export goods.

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. Notwithstanding, to the extent that such supplies would have been taxable had they taken place in the UAE, the business may still be eligible to recover the VAT on its operating costs if registered for VAT.

Will it be possible to issue cash receipts instead of VAT invoices?

A supplier registered or required to be registered for VAT must issue a valid VAT invoice for the supply. To be considered as a valid VAT invoice, the document must follow a specific format as mentioned in the article (59) of Executive regulation of Federal Decree-law on Value Added Tax. In certain situations, the supplier may be able to issue a simplified VAT invoice.

Exempt and Zero Rated Conditions

What is the difference between exempt and zero-rated goods/services?

Zero-rated supply is a taxable supply which is charged at 0% VAT while exempt supply is a non-taxable supply (i.e. VAT cannot be charged). The difference between exempt and zero-rated goods/ services is that input tax credit (the VAT paid on your business inputs) can be recovered where such business inputs are used in making 0% supplies 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 and putting upward pressure on their pricing.

Does DGCX members qualify for Zero-rated supplies?

Members receiving supply of services from DGCX with business residence outside the VAT implementing state will be zero rated subject to article (31) of Executive regulation of Federal Decree-law on Value Added Tax. Trade Member ‘Place of residence’ shall be defined based on where their business is legally established in which significant management decisions are taken or central management functions are conducted.

Under Article 31 of Executive regulation of Federal Decree-law on Value Added Tax

  1. The Export of Services shall be zero-rated in the following cases:
    1. If the following conditions are met:
      • The Services are supplied to a Recipient of Services who does not have a Place of Residence in an Implementing State and who is outside the State at the time the Services are performed;
      • The Services are not supplied directly in connection with real estate situated in the State or any improvement to the real estate or directly in connection with moveable personal assets situated in the State at the time the Services are performed.
    2. If the services are actually performed outside the Implementing States or are the arranging of services that are actually performed outside the Implementing States.
    3. If the supply consists of the facilitation of outbound tour packages, for that part of the service.
  2. For the purpose of paragraph (a) of Clause (1) of this Article, a Person shall be considered as being “outside the State” if they only have a short-term presence in the State of less than a month, or the only presence they have in the State is not effectively connected with the supply.

What is the list of supplies that are exempt and zero rated?

Zero-rated supplies:

  • Direct or indirect export outside GCC where they leave the GCC within 3 months;
  • International and intra GCC transport of passenger and goods;
  • Supply of air, sea and land means of transport used for commercial purposes;
  • Supply of goods and services related to supply of zero rated means of transport;
  • Supply or import of investment precious metals;
  • First supply of residential buildings within 3 years of its completion, either through sale or lease subject to prescribed conditions;
  • First supply of buildings to be used specifically for charities for sale or lease/buildings converted from non-residential to residential;
  • Supply of crude oil and natural gas;
  • First supply of buildings to be used specifically for charities for sale or lease/buildings converted from non-residential to residential;
  • Supply of crude oil and natural gas;
  • Supply of educational services and related goods and services associated with a recognized curriculum and the supplier is also recognized by relevant UAE authorities and, in case of higher educational institution, the institution is either owned by the Federal or local Government or receives more than 50% of its annual funding directly from the Federal or local Government;
  • Supply of preventive and basic healthcare services and related goods and services that is generally accepted in the medical profession as being necessary for the treatment of the recipient and provided by a healthcare body or institution, doctor, nurse, technician, dentist, or pharmacy, licensed by the Ministry of Health or by any other competent authority.
  • Supply of postage stamp issued; Emirates Post Cargo unless redeemable for transport of goods outside UAE.
  • Pharmaceutical products and medical equipment to be listed in a pending Cabinet Decision.

Article (30) to Article (36) of Executive regulation of Federal Decree-law on Value Added Tax specifies the conditions for Zero-rated supplies.

Exempt supplies:

  • Financial Services where the consideration is by way of a margin (e.g. borrowing and lending transaction, sale/purchase of a security) rather than by way of an explicit fee or charge;
  • Supply of residential buildings through sale or lease, other than that which falls under the zero-rated category;
  • Supply of bare land;
  • Supply of local passenger transport.

Article (42) – Article (45) of Executive regulation of Federal Decree-law on Value Added Tax specifies the conditions and controls for exempt supplies.

What are the cases that would lead to the imposition of penalties?

Penalties will be imposed for non-compliance.

Examples of actions and omissions that may give raise to penalties include:

  • A person failing to register when required to do so;
  • A person failing to submit a tax return or make a payment within the required period;
  • A person failing to keep the records required under the issued tax legislation;
  • Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.
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