2018 heralds a new era in the United Arab Emirates and the GCC with the introduction of Value Added Tax or VAT. The region is relatively unfamiliar with such a visible tax and this represents a significant shift in monetary policy, which has been pretty much devoid of large-scale tax collection mechanisms.
A VAT is a broad based consumption tax levied on value added to goods and services along each step in the production or delivery of the good or service. It is the consumer of the good or service that ultimately pays the tax and should not be confused with a tax on a business (such as income tax). In most cases, the tax is passed through the business to the end user and the business plays the role of tax collector for the Government of the country in which it resides.
As basically a tax collection agent, it is important that businesses understand their obligations in respect of the registration and compliance issues that will be mandatory and for which heavy fines could exist for non-compliance.
Several pieces of legislation have now been release by the UAE Federal Government that will govern the implementation and administration of VAT. These are:
- Common VAT Agreement of the States of the Gulf Cooperation Counci (GCC).
- Federal Decree Law No.(13) of 2016 Concerning the Establishment of the Federal Tax Authority.
- Federal Decree Law No.(7) of 2017 on Tax Procedures.
- Federal Decree Law No.(8) of 2017 on Value Added Tax.
Together, these pieces of legislation provide the framework for how VAT will operate in the UAE and wider GCC.
In summary, the legislation allows for:
- VAT in the UAE will commence on 1 January 2018.
- The initial rate of VAT will be 5%.
- There will be very few exemptions and zero rated items which include but not limited to some financial services, residential properties, exports of goods and services outside the UAE and greater GCC and the supply of educational services.
- Businesses earning or incurring expenses greater than AED 375,000 will need to be registered for VAT as a mandatory requirement under the Law. Businesses earning or incurring expenses greater than between AED 187,500 and 375,000 will have the option of registering.
- Registration for VAT is expected to commence on the 15th September 2017 upon announcement by the Authorities. Registration and submission of VAT returns will be done electronically, together with the payment or refund of any VAT amount.
Businesses will need to start preparing for VAT sooner rather than later. There may be significant changes or enhancements required to the record keeping and accounting procedures depending upon the current procedures in place. Any business that does not already have formalized accounting software will need to source and implement it ASAP. Those that already have systems will have to assess its current software to ensure that it will be able to accommodate the recording requirements that will allow the VAT obligations to be easily and efficiently calculated.
In terms of VAT preparedness, questions about your business you will need to understand are:
- Will my business be subject to mandatory registration for VAT?
- If so, does it fall into to any special VAT classification? E.g. Zero Rated or VAT Exempt?
- If not, is there any advantage to be obtained by voluntary registration? e.g. Claiming Vat on allowable business expenses that may generate refunds of VAT incurred?
- Will my customers require me to be VAT registered or do you demand that your suppliers are registered? What are the consequences of each?
- Are there any peculiar situations where my business operates? For example, do you collect funds well in advance of the service or supply of the good and how is this treated?
- What changes will be needed to my record keeping procedures to ensure efficient compliance with the obligations of the VAT Laws?
For all businesses who transact on a business to business basis, VAT on sales will have a nullified or pass through effect, meaning charging to a customer on sales will be of no deficit to them or the customer. The customer (being VAT registered themselves) would simply claim this back via their VAT return submission.
TLB is at the forefront of VAT advice in the UAE. Our staff are experienced with VAT (or similar tax such as a GST – “Goods and Services Tax”) in Australia, New Zealand, United Kingdom, Singapore, South Africa and Philippines. Our Partners have a wealth of VAT experience over many years. Grant Bateman worked on internal committees and advised clients in Australia when GST was first implemented in 2000. Tom Pearson operated his own tax and compliance practice in the UK prior to moving to the UAE in 2014 and currently manages our global clients that have VAT obligations in other parts of the world.
If you are a client of ours, we will schedule a meeting with you in the very near future to discuss the potential impacts of VAT on your business. If you currently use Xero Accounting, then you are a long way down the track in terms of your record keeping requirements and the transition will be relatively seamless.
If you are not a client and would like further information on what VAT means to your business and how Xero Accounting can substantially ease the future burden of VAT administration, please contact us at firstname.lastname@example.org
VAT will represent a significant change to your business and the potential penalties for non-compliance can be damaging. Let us ensure that your business is VAT ready for the expected start date of 1 January 2018.