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Value Added Tax (VAT) in United Arab Emirates: What You Need to Know
Following the implementation of VAT from January 1st, 2018 in UAE, The Ministry of Finance (MoF) of United Arab Emirates has updated the Value Added Tax (VAT) FAQ section, which provides an official confirmation of the information given in the workshops awareness delivered a few months ago.
Please find below a selection of some useful information you need to know about the VAT:
What is VAT?
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on the purchase and sale of most supplies of goods and services.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while 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 while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
Why is the UAE implementing VAT?
The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
What will be the VAT rates in UAE?
The UAE VAT will be at the standard rate of 5%.
Will VAT cover all products and services?
VAT, as a general consumption tax, will apply to the majority of transactions of goods and services unless specifically exempted or excepted by law.
How should a business determine the place of supply?
- Supply of goods: The place of supply should be the location of goods when the supply takes place. There are special rules for certain categories of supplies (e.g. water, energy and cross border supplies).
- Supply of services: The place of supply should be where the supplier is established with special rules for certain categories of supplies (e.g. cross border supplies between businesses).
Businesses will be able to register as a VAT group subject to the certain conditions covered in the VAT legislation.
Bad debt relief
Businesses will be allowed to reduce their output VAT liability by the amount of VAT that relates to bad debt which has been written off by the VAT registered business.
VAT will be applicable on the importation of goods. In cases where the recipient in the UAE (importer) is VAT-registered, VAT will be applicable on a reverse charge mechanism.
If the recipient in the UAE is not registered for VAT, then VAT will be required to be paid before the goods are released to that recipient.
Supplies made to and by government entities will typically be subject to VAT.
Emirate level reporting
Entities will have to report revenues earned in each Emirate on their VAT return.
VAT on Financial Services
Fee based financial services will be taxed. However, margin based products are likely to be exempt.
What sectors will be zero rated?
VAT will be charged at 0% in respect of the following main categories of supplies:
- Exports of goods and services to outside the GCC;
- International transportation, and related supplies;
- Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
- Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
- Newly constructed residential properties, that are supplied for the first time within 3 years of their construction;
- Supply of certain education services, and supply of relevant goods and services;
- Supply of certain Healthcare services, and supply of relevant goods and services.
What sectors will be exempt?
The following categories of supplies will be exempt from VAT:
- The supply of some financial services (clarified in VAT legislation);
- Residential properties;
- Bare land; and
- Local passenger transport
Will VAT be paid on imports?
VAT is due on the goods and services purchased from abroad.
In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.
In case the recipient in the State is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC. Such VAT will typically be required to be paid before the goods are released to the person.
Will Businesses have to report on their business in each of the Emirates?
It is expected that businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate. Guidance will be provided to businesses with regards to this.
It is expected that the rules will be relatively straightforward for most businesses and will be based, for example, for B2C transactions, on the location of the transaction (e.g. in a retail environment, the location of the shop).
Will the goods exempt from customs duties also be exempt from VAT?
Not necessarily. Some goods that are imported may be exempt from customs duties but subject to VAT.
For the complete list of the FAQs, follow the link: www.mof.gov.ae/en/budget/pages/vatquestions.aspx
Maria Evangelou received her education at Birmingham City University in Birmingham, United Kingdom, where she received a BA (Hons) in Accounting and Finance and later completed her Master Degree in Financial Management at the University of Edinburgh in Edinburgh, Scotland.
Her professional career started in 2014 as an Associate in the Audit and Assurance services department at PricewaterhouseCoopers Ltd. In 2017, she joined the Infocredit Group as a Business Advisory Consultant and in March 2017 joined The CORPRO Ltd as a Corporate Services Manager.
Maria is also member of the Association of Chartered Certified Accountants and the Institute of Certified Public Accountants of Cyprus.