VAT in the UAE
Implementation of VAT in the UAE
At the beginning of 2017, all the member countries of the Gulf Cooperation Council (GCC) mutually agreed to introduce VAT in January 2018. The member countries of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. However, only the UAE and Saudi Arabia have implemented VAT from 1st January 2018 and the remaining GCC countries have decided to implement VAT at a later stage.
The decision to implement VAT in the UAE was to provide the country with a new source of revenue which will contribute to the provision of high quality public services, improved infrastructure and boosting the economy. The VAT rate has been set to five percent and the UAE has ruled out an increase of the tax rate for the next five years. This was published in the Khaleej Times on 11th February 2018, No VAT, excise tax increase over next five years in UAE by Waheed Abbas.
The Federal Decree-Law No. (8) of 2017 on Value Added Tax and the Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax, stipulates all the rules and regulations concerning the registration, the tax treatment of goods and services, penalties, etc.
In addition to releasing the above legislation, the FTA has released various publications and videos to assist the community in understanding their obligations. They have also extended the period of the first VAT return and subsequently the deadlines for lodging the returns.
If a business makes supplies in the UAE and has not yet registered for VAT, it may be required to register with the Federal Tax Authority (FTA) for VAT. The FTA announced on 28th February, that businesses and individuals now have till the 30th of April to register for VAT and also be exempted from any administrative penalty for non-registration of VAT till this date.
VAT Features (UAE)
Businesses whose taxable sales and imports turnover (for a period of twelve months) exceeds or is expected to exceed AED 375,000 are required to register. Businesses may voluntarily register if their turnover is more than AED 187,000.
Businesses whose expenses exceed AED 187,000 can also register. This is designed to enable start-up businesses with no sales turnover to register for VAT.
There are two types of supplies for VAT: taxable supplies and exempt supplies. Supplies can either be taxed at the standard rate of five percent or at a rate of zero percent. A list of the zero rated and exempt supplies by the Federal Tax Authority can be found below.
Zero rated Supplies
- International transport of passengers and goods, and services related to such transport Certain supplies of means of transport, and related goods and services
- New residential buildings
- First supply of charity related buildings
- First supply of non-residential buildings converted to residential, either through sale or lease
- Exports of goods and services outside the GCC
- Certain educational services
- Investment in precious metals (gold, silver and platinum) >= 99 percent purity and is in a tradable form.
- Certain healthcare services
- Crude oil and natural gas
Exempt Supplies– not subject to any VAT rate
- Certain financial services
- Supply of residential buildings through sale or lease, other than that which is zero-rated
- Bare land
- Local passenger transport.
(Taken from the Federal Decree-Law No. (8) of 2017 on Value Added Tax)
An interesting area of the legislation is the special treatment for ‘designated zones’. As per the Federal Decree-Law No. (8) of 2017 on Value Added Tax, a designated zone is defined as a specific fenced geographic area that has security measures and customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area. The Designated Zones align with some of the Free Zones located in the geographical area of the UAE. Specifically, there are 20 designated zones identified in the Cabinet Decision No. (59) of 2017 on Designated Zones. The special rules that apply to designated zones are:
- Supply of goods between businesses within the designated zone – no VAT applies
- Supply of services between businesses within the designated zone – normal VAT rules applies ignoring the location
- Supply of goods and services to non-designated free zones – normal VAT rules applies ignoring the location
- Supply of goods and services from mainland to designated zones or designated zones to mainland - normal VAT rules applies ignoring the location
DIY House Builder’s Scheme
Another interesting part of the legislation is the DIY House builder’s scheme. This is a scheme set up to allow Nationals of the UAE who are building their own residence, to reclaim VAT spent on building materials and some other services. This is intended to put a person in the same VAT position as if they had purchased a newly completed residential building (i.e. VAT would apply to that purchase at 0 percent).
VAT Refund Schemes
There is also a business VAT refund scheme for foreign businesses which allows repayment of tax on expenses incurred in the UAE by a foreign entity, which has no place of establishment or fixed place of establishment in the UAE, and is not a taxable person. There are also other requirements that need to be met before a foreign business can make a claim.
The cabinet is in the process of introducing legislation and processes regarding tax refunds for tourists. The UAE are still working on this and have said that it will be implemented in line with international best practices. This was published in Gulf News on 11 April 2018, Tourists in UAE to get VAT refunds soon by Ed Clowes.
An essential factor to be aware of is that the FTA will issue substantial penalties to dissuade people from doing the wrong thing. The UAE have also stipulated distinct legislation in relation to this. Fines and penalties will be imposed if a business is not registered on time; tax evasion; not submitting a tax return; not paying on time and for failure to keep proper records.
The implementation of the Value Added Tax to the UAE and subsequently to the GCC region is a sign of economic development and a movement away from revenue generated only from state owned entities. More revenue for the governments mean further developments in the infrastructure and public services, increasing the quality of life and attractiveness of the region to nationals and expatriates alike. However, it should be noted that this is a newly implemented law, it has to be seen how this legislation will evolve.
If you require more information or assistance in relation to the VAT implementation in the UAE, please contact our office on +971 4 425 3533 or email us on email@example.com We will be glad to assist you.