VAT or Value Added Tax is an indirect tax referred to as general consumption tax imposed on most supplies of goods and services that are bought and sold.
It is one of the most common types of consumption tax prevailing around the world. More than 150 countries have implemented VAT or Goods and Services Tax (GST) including European Union members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each stage of the ‘supply chain’. The end consumers ultimately bear the VAT cost while businesses collect and account for the tax, acting in the capacity of a tax collector on behalf of the government.
A taxable business collects the tax from the customers on taxable supplies of goods and services and also pays the tax to its supplier on taxable purchase of goods or services. The difference of these two is paid to government. This net amount of tax result reflects the ‘value addition’ throughout the supply chain.
What is the difference between VAT and Sales Tax?
Likewise, VAT, a sales tax is also a consumption tax. However, there are some key differences. In many Tax Regime countries, sales tax is imposed only on supply of goods but not on services. Apart, sales tax is only imposed on the final sale to the consumer. On the Contrary VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also applicable on imports of goods and services so as to be competitive in price for domestic providers of those same goods and services.
Most of the countries prefer a VAT over sales taxes for a various reason. Importantly, VAT is considered a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
Why is the UAE implementing VAT?
The UAE delivers excellent public services to its citizens and residents, including healthcare, education, public transportation, and social services including hospitals, roads, public schools, parks, waste control, and police services. All these services are funded from the government budgets. With The introduction of VAT in UAE which will help the government to diversify their sources of income and continue to ensure a good standard of living for UAE residents. VAT will also be an additional source of income and will also help government move towards its long term vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
Why does the UAE need to coordinate VAT implementation with other GCC countries?
UAE is a member of the GCC group of nations that are closely connected through “the Economic Agreement Between the GCC States” and the “The GCC Customs Union”. All the GCC countries has historically worked together in designing and implementing new public policies as they recognize that such a collaborative approach is best for the region, therefore they framed a VAT agreement for all the member states. Being a member, UAE need to coordinate VAT implementation with other GCC countries.
What is the standard rate of VAT in the UAE?
The standard rate of VAT in the UAE is 5%.
How does the government collect VAT?
The Government collect VAT through the registered businesses periodic VAT RETURNS. All Taxable Businesses are responsible for carefully documenting their taxable supplies and taxable purchases and associated VAT charges. Registered businesses and traders 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.
Does VAT apply to all goods and services?
VAT, as a general consumption tax, is applied at 5% to all transactions of goods and services unless specifically exempt in Article 46 of the Federal Decree-Law No. (8) of 2017 on Value Added Tax or subject to a rate of 0% as per Article 45 of the Federal Decree-Law.
What measures does the government take to ensure that businesses do not use the VAT implementation as an excuse to increase prices?
VAT is intended to help improve the economic base of the country. Therefore, there are rules that require businesses to be clear about how much VAT you are paying for each transaction. Consumers should have the required information to decide whether to buy something or not.
How can one object to the decisions of the Authority?
Any person is able to object to a decision of the Federal Tax Authority.As a first step, the person shall request the FTA to reconsider its decision. Such request of reconsideration has to be made within 20 business days from the date the person was notified of the original decision of the FTA, and the FTA will have 20 business days from receipt of such application to provide its revised decision.If the person is not satisfied with the revised decision of the FTA, it will be able to object to the Tax Disputes Resolution Committee which will be set up for these purposes. Objections to the Committee will need to be submitted within 20 business days from the date the person was notified of the FTA’s revised decision, and the person must pay all taxes and penalties subject of objection before objecting to the Committee. The Committee will typically be required to give its decision regarding the objection within 20 business days from its receipt.As a final step, if the person is not satisfied with the decision of the Committee, the person may challenge its decision before the competent court. The appeal must be made within 20 business days from the date of the appellant being notified of the Committee’s decision.
How do I include my Customs Registration in my records at the FTA?
Log into the FTA e-Services portal via E-SERVICES, and go to EDIT on the VAT section and enter your Customs Registration Number. This will automatically update your records.
I am not able to download or print my Tax Registration Certificate…
If you have been allocated a “Provisional TRN” and this has been communicated to you by email, you will receive the Tax Registration Certificate after the FTA has fully reviewed your application.
What is a residential building for VAT purposes?
A residential building is a building or part thereof that is intended and designed for occupation by individuals, and mainly includes buildings which can be occupied by any person as main place of residence. It does not include:
• Any place that is not a building fixed to the ground and can be moved without being damaged.
• Any building that is used as a hotel, motel, bed and breakfast establishment, or hospital or the like.
• A serviced apartment for which services in addition to the supply of accommodation are provided.
• Any building constructed or converted without lawful authority.
What is a commercial building for VAT purposes?
A commercial building is any building or part thereof that is not a residential building. Examples would be offices, warehouses, hotels, shops, etc.
What is a supply in relation to real estate?
A supply of real estate may include the sale, lease or giving the right in any real estate.
Is a residential building subject to VAT?
The first supply of a new residential building within the first three years of it being constructed is zero-rated. All subsequent supplies are exempt, even if within the first three years.
Is commercial real estate subject to VAT?
All supplies of commercial properties are subject to VAT at 5%, and this includes all buildings or parts thereof that are not residential buildings.
Does the owner of real estate have to register for VAT?
The owners of residential buildings who only make exempt supplies do not have to register for VAT if they do not have any taxable business activities. Where owners have taxable business activities, they should consider their obligations further. The owner of any building that is not residential, will have to register if the value of the supplies over the preceding 12 months exceeds AED 375,000 or it is expected that they will exceed AED 375,000 over the coming 30 days.
Can a real estate owner recover VAT paid in relation to real estate?
An owner of a residential building is not able to recover VAT in respect of expenses related to the exempt supply of the residential building. An owner of a commercial building is generally able to recover VAT in respect of expenses related to the supply of the commercial building.
How is a mixed-use building (residential and commercial) treated for VAT purposes?
The rent or sale of a residential part of the building shall be treated as zero-rated or exempt, depending on whether this is a first supply within the first three years of completion of construction or a subsequent supply. The rent or sale of a commercial part of the building shall be treated as subject to VAT at 5%. Tax that cannot be directly attributed to exempt supplies or taxable supplies should be apportioned, and only the portion relating to the taxable supplies (at 0% and 5%) may be recovered.
Will VAT be charged on the property I am renting?
The rent of a residential building will generally be exempt from VAT. The rent of a commercial building will be subject to VAT at 5%.
Who can or will be able to register for VAT?
A business must register for VAT if its taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. Furthermore, a business may choose to register for VAT voluntarily if its supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500. Similarly, a business may register voluntarily if its expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
What are the VAT-related responsibilities of businesses?
VAT-registered businesses generally:
• must charge VAT on taxable goods or services they supply;
• may reclaim any VAT they have paid on business-related goods or services;
• keep a range of VAT related business records (e.g. Tax invoices);
• report their taxable supplies and purchases in periodic VAT returns.
What does a business need to do to prepare for VAT?
Businesses will need to meet certain requirements to fulfil their tax obligations. To fully comply with VAT, businesses will need to consider the VAT impact on their core operations, financial management and book-keeping, technology, and perhaps even their human resource mix (e.g., accountants and tax advisors). It is essential that businesses try to understand the implications of VAT and make every effort to align their business model to government reporting and compliance requirements.
When are businesses supposed to start registering for VAT?
A Person required to register for VAT needs to submit a registration application to the FTA within 30 days of being required to register.
Registration applications shall be submitted via the e-Services Portal on the FTA website www.tax.gov.ae
When are registered businesses required to file VAT returns?
Taxable Persons must file VAT returns with the FTA on a regular basis, within 28 days of the end of the Tax Period.
The Tax returns shall be filed online using e-Services.
What kind of records are businesses required to maintain, and for how long?
Businesses are required to keep records which will enable the Federal Tax Authority to identify the details of the business activities and review transactions. The documents which are required and the time period for keeping them are prescribed in Federal Law no. (7) of 2017 on Federal Tax procedures and the Cabinet Decision No. (36) of 2017 on the Executive Regulation of the Federal Law No. (7) of 2017 on Tax Procedures.
How long must a taxable person retain VAT invoices for?
Any taxable person must retain VAT invoices issued and received for a minimum of 5 years.
How should a business determine the place of supply?
The place of supply will determine whether a supply is made within the UAE (in which case the UAE VAT legislation will apply), or outside the UAE for VAT purposes.
For a supply of goods, the place of supply should be the location of goods when the supply takes place with special rules for certain categories of supplies (e.g. water and energy, cross border supplies).
For the supply of services, the place of supply should generally be where the supplier is established with special rules for certain categories of supplies (e.g. for the supply of catering services, the place of supply shall be where the services are actually performed).
Can businesses offset customs duty against VAT payments?
No. VAT is payable in addition to applicable customs duties. VAT is computed on the value that includes the customs duties.
How will real estate be treated?
The VAT treatment of real estate will depend on whether it is a commercial or residential property.
Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%).
On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties (through sale or lease) within 3 years from their completion will be zero-rated.
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 transport (such as aircraft 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 are the categories of exempt supplies?
The following categories of supplies will be exempt from VAT:
• The supply of some financial services
• Residential properties (excluding the first supply of newly constructed residential property which qualifies for the zero-rating treatment);
• Bare land; and
• Local passenger transport.
Will there be VAT grouping?
Businesses that satisfy certain requirements covered under the Legislation (such as being resident in the UAE and being related/associated parties) will be able to register as a VAT group. VAT grouping would generally simplify accounting for VAT.
Will there be bad debt relief?
VAT registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to bad debt which has been written off by the VAT registered business. The legislation includes the conditions and limitations concerning the use of this relief.
Will there be a profit margin scheme?
To avoid double taxation where second hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second hand goods with reference to the difference between the purchase price of the goods and the sale price of the goods (that is, the profit margin). The VAT which must be accounted for by the registered person will be included in the profit margin. Further details of the conditions to be met in order to apply this mechanism can be found in the Executive Regulations of the Federal Decree-Law No.(8) of 2017 on Value Added Tax.
How will partial exemption work?
Where a VAT registered person incurs input tax on its business expenses, this input tax can be recovered in full if it relates to a taxable supply made, or intended to be made, by the registered person. In contrast, where the expense relates to a non-taxable supply (e.g. exempt supplies), the registered person may not recover the input tax paid.
In certain situations, an expense may relate to both taxable and non-taxable supplies made by the registered person (such as activities of the banking sector). In these circumstances, the registered person would need to apportion input tax between the taxable and non-taxable supplies.
Businesses will be expected to use input tax (ratio of recoverable input tax to total input tax incurred) as a basis for apportionment in the first instance although there will be the facility to use other methods where they are fair and agreed with the Federal Tax Authority.
What are the cases that would lead to the imposition of penalties?
Penalties will be imposed in cases of non-compliance with tax legislation.
Examples of actions and omissions that may trigger penalties include:
• A person failing to register when required to do so;
• A person failing to submit a tax return or to 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.
Will there be any special schemes for SMEs?
No special rules are planned for small or medium sized enterprises. However, the FTA is providing through its website material and resources for these entities to assist them with their enquiries.
What are transitional rules?
There are special rules that deal with various situations that may arise in respect of supplies that span the introduction of VAT. For example:
• Where a payment is received in respect of a supply of goods before the introduction of VAT but the goods are actually delivered after the introduction of VAT, this means that VAT will have to be charged on such supplies. Likewise, special rules apply with regards to supplies of services spanning 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, then consideration for the supply is treated as inclusive of VAT. There are, however, special provisions that allow suppliers to charge VAT in situations where the recipient is able to recover the VAT even if there is no VAT clause in the contract.
How will insurance be treated?
Generally, insurance (vehicle, medical, etc.) is taxable. Life insurance, however, is an exempt service.
How will financial services be treated?
Fee based financial services are subject to VAT while margin-based products are exempt.
How will Islamic finance be treated?
Islamic finance products are consistent with the principles of sharia and therefore often operate differently from financial products that are common internationally.
To ensure that there are no inconsistencies between the VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products is aligned with the treatment of similar standard financial services.
Can UAE nationals claim VAT incurred on building new residences?
A scheme has been introduced to allow UAE nationals to reclaim VAT paid on goods and services relating to constructing new residences which will be privately used by the person and his family. This will allow the recovery of VAT incurred on such expenses including contractor’s services and building material.
How quickly will refunds be released?
Refunds will be made after the receipt of the application and subject to verification checks, with a particular focus on avoiding fraud.
Will FTA issue rulings or provide tax advice?
In the course of its interaction with taxpayers, the FTA may provide its views on various matters in the law. Taxpayers may choose to challenge these views. It should be noted that penalties may be imposed on taxpayers who are found to violate any tax laws and regulations.
Will it be possible to issue cash receipts instead of VAT invoices?
A registered taxable person must issue a valid VAT invoice for its taxable supplies. To be considered as a valid VAT invoice, the document must include certain particulars as mentioned in the legislation. In certain situations the supplier may be able to issue a simplified VAT invoice. The conditions for the VAT invoice and the simplified VAT invoice are mentioned in the legislation.
Under which conditions will businesses be allowed to claim VAT incurred on expenses?
VAT on expenses that were incurred by a business can be deducted in the following circumstances:
• The business must be a taxable person.
• VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
• The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
• The goods or services acquired are used or intended to be used for making taxable supplies.
• VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply
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.
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 need to be paid before the goods are released to the person.
How will Government Entities be treated for VAT purposes?
Supplies made by government entities will typically be subject to VAT. This will ensure that government entities are not unfairly advantaged as compared to private businesses.
Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. It is likely that certain government entities will be entitled to VAT refunds.
For the supplies provided for government entities, the treatment of such supplies shall depend on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard rate, the treatment would remain the same even if it is provided to a government entity.
Will businesses have to report their business activities in respect of each Emirate?
Businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate.
Further detail on this can be found in the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax.
Will the goods exempt from customs duties also be exempt from VAT?
No. Imported goods may be exempt from customs duties but still be subject to VAT.
Can restaurants register?
Yes, if a restaurant sells goods that are eligible under this scheme, they can register
Will tourists also pay VAT?
Purchase of goods and services by tourists in the UAE will be subject to VAT. However, tourists will be eligible to reclaim the VAT incurred on their purchase of goods under the Tax Refunds for Tourists Scheme subject too meeting certain conditions.
Is there a special refund for business visitors?
Yes. Further details are available in the VAT refund for business visitor’s user guide.
How can someone access UAE Tax legislation?
All Federal Tax Laws, Executive Regulations and Cabinet Decisions are published under the “Legislation” section on the FTA website.
What other taxes is the UAE considering?
As per global best practice, the UAE is exploring other tax options as well. However, these are still being analyzed and it is unlikely that they will be introduced in the near future. The UAE is not currently considering personal income taxes, however.