On the 23rd of August 2017, Federal Decree Law No. 8 of 2017 on VAT (Value Added Tax) was issued to officially introduce the implementation of Value Added Tax, a form of indirect tax on the supply of goods and services in the UAE. The law is derived from the agreed upon principles laid out in the GCC VAT framework agreement that was signed by the member states in 2016. The tax was implemented in order to increase the quality of the provision of public services and to reduce dependence on revenue streams reliant on oil and other hydrocarbons. The law will apply to the supply of goods and services in the UAE and also includes imports. However, there are specific categories of goods and services that are exempt as mentioned in the law.
Supporting the VAT law, Federal Law No.7 of 2017, named the ‘Tax Procedures Law’ was also issued to provide further clarification regarding the collection and administration procedures of taxes and is also instrumental in defining the enhanced role of the FTA. The law also sets out the various penalties a taxpayer is liable for if found guilty of evasion practices.
VAT imposition is dependent on the supply location and will apply only if supply is made within the UAE. In regards to the supply of goods, the place of supply should be the location of goods when the supply takes place with certain categories such as water and energy having special rules. As for the supply of services, the place of supply will be determined according to where the supplier is established with certain special rules set for particular categories. There is also a ‘reversible charge’ mechanism in place to ensure fairness with respect to domestic supplier wherein imported supplies from outside the UAE will require the recipient to pay VAT. While the law has not yet clarified its stance on the imposition of VAT in free-zones, business in the zones are nevertheless recommended to assess their financial management and ready their entities for any change in the law.
The law is deemed to come into effect on 1st January 2018 and businesses that exceed the mandatory registration threshold are to have been registered by the date on the system through the E-services provided. Further, VAT returns must be filed on a periodic basis decided by the FTA and within 28 days from the end of the tax period.
The standard rate of the VAT is 5% to be applied to any supply or import of goods and services. There are certain goods that have been imposed a zero-percent tax such as: exports outside the GCC, international transportation and related supplies, supplies of certain sea, air and land means of transportations, certain investment grade precious metals, supply of certain educational and healthcare services including supply of relevant goods and services, newly constructed residential properties that are supplied for the first time within 3 years of their construction.
The legislation also exempts some specific limited categories of goods and services from the VAT: financial services, supply of residential buildings, supply of bare land and supply of local passenger transport
The tax will be collected from registered businesses and traders charging VAT to all their respective customers, these businesses themselves will also be charged VAT on goods and services they buy from suppliers. To ensure compliance, companies are requested to assess VAT impacts on transactions and make adjustments where required in their financial frameworks in order to meet the taxation requirements. The legislation also sets out some practical solutions for specific circumstances such as VAT groupings. Businesses that meet certain requirements as per the legislation will be able to register as a VAT group that would serve as a useful tool to simplify the accounting processes for VAT. There are also options available for companies in bad debt to seek relief and reduce output tax liability with the conditions and limitations laid out in the legislation.
The law sees the creation of an external authority known as the Federal Tax Authority (FTA) that will oversee the construction and regulation of the new tax infrastructure. A Tax Disputes Resolution Committee has also been set up to handle objections to revised decisions of the FTA.
The tax is imposed on any supplier of goods and services, importers of taxable goods and a taxable person registered for VAT who acquires these goods. Also, VAT shall be payable by the importer in addition to the already existing customs duties and shall be calculated on the value that includes the customs duties.
Businesses whose taxable supplies and imports exceed AED 375,000 in value need to be registered for VAT. There are voluntary registrations open for companies that weren’t registered due to their annual earnings not exceeding the limit but have exceeded the voluntary registration threshold of AED 187,500. This can also be availed by entities whose expenses exceed the threshold even without any turnover, particularly startups.
In order to facilitate registration the FTA has set up a website wherein businesses can create an account and proceed to registering their businesses for VAT (https://www.tax.gov.ae/index.aspx). Business that have signed up through the E-Services Portal on the website will be greeted by a ‘Getting Started Guide’ equipped with all the necessary information they may require during registration.
Self-assessment is a key feature of the law and will encourage business to assess and accurately report their VAT obligations in terms of their business transactions.