VAT is a transaction-based indirect tax which is levied at each step of the supply chain. End consumers generally bear the VAT cost while registered businesses collect and account for the tax, in a way acting as a tax collector on behalf of the Federal Tax Authority.

 

VAT is used in more than 180 countries around the world. All OECD countries except for the US have VAT (or a variation). While it feels exactly the same as a general sales tax to end-consumers, VAT is a more sophisticated tax and overcomes many challenges that affect the general sales tax.

 

Value Added Tax (VAT) was introduced in the UAE on 1 January 2018. The rate of VAT is 5 per cent. VAT will provide the UAE with a new source of income which will be continued to be utilised to provide high-quality public services. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

 

 

Rate

VAT will be introduced across the UAE on 1 January 2018 at a standard rate of 5%.

 

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.

 

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

 

 

Registration For VAT

A business must register for VAT if the taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. Furthermore, a business may choose to register for VAT voluntarily where the total value of its taxable supplies and imports (or taxable expenses) is in excess of the voluntary registration threshold of AED 187,500.A taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%.  Imports are also taken into consideration for this purpose, if a supply of such goods or services would be taxable if made within the UAE.

 

Types of Registration

Any business which exceeds mandatory or voluntary registration thresholds may be required or may be able to register for VAT.

 

1.Mandatory Registration

A BUSINESS MUST REGISTER IF:

The total value of its taxable supplies and imports exceeds the mandatory registration threshold over the previous 12 months, or The business anticipates that the total value of its taxable supplies and imports will exceed the mandatory registration threshold in the next 30 days.

The mandatory registration threshold is AED 375,000. This threshold is not applicable to foreign businesses.

 

2.Voluntary Registration

A BUSINESS MAY APPLY TO REGISTER IF IT DOES NOT MEET THE MANDATORY REGISTRATION CRITERIA AND:

The total value of its taxable supplies and imports or taxable expenses in the previous 12 months exceeds the voluntary registration threshold, or the business anticipates that the total value of its taxable supplies and imports or taxable expenses will exceed the voluntary registration threshold in the next 30 days.

The voluntary registration threshold is AED 187,500.

 

Overseas businesses must register VAT with the local tax bureau within 30 days of their first sale in the UAE, or they will be fined Dhed10,000.

 

How is VAT collected?

VAT-registered businesses collect the amount on behalf of the government; consumers bear the VAT in the form of a 5 per cent increase in the cost of taxable goods and services they purchase in the UAE.

 

UAE imposes VAT on tax-registered businesses at a rate of 5 per cent on a taxable supply of goods or services at each step of the supply chain.

 

Tourists in the UAE also pay VAT at the point of sale.

 

Filing a return for VAT

At the end of each tax period, VAT registered businesses or the ‘taxable persons’ must submit a ‘VAT return’ to Federal Tax Authority (FTA).

 

A VAT return summarises the value of the supplies and purchases a taxable person has made during the tax period, and shows the taxable person’s VAT liability.

 

Liability of VAT

The liability of VAT is the difference between the output tax payable (VAT charged on supplies of goods and services) for a given tax period and the input tax (VAT incurred on purchases) recoverable for the same tax period.

 

Where the output tax exceeds the input tax amount, the difference must be paid to FTA.  Where the input tax exceeds the output tax, a taxable person will have the excess input tax recovered;  he will be entitled to set this off against subsequent payment due to FTA.

 

How to file VAT return?

You must file for tax return electronically through the FTA portal: eservices.tax.gov.ae.  Before filing the VAT return form on the portal, make sure you have met all tax returns requirements.

 

Uae VAT declaration cycle:

Quarterly declaration, 4 times/year.

Return and pay tax by the 28th of following month.

 

When are businesses required to file VAT return?

Taxable businesses must file VAT returns with FTA on a regular basis and usually within 28 days of the end of the ‘tax period’ as defined for each type of business.  A ‘tax period’ is a specific period of time for which the payable tax shall be calculated and paid.  The standard tax period is:

 

quarterly for businesses with an annual turnover below AED150 million

monthly for businesses with an annual turnover of AED150 million or more.

The FTA may, at its choice, assign a different tax period for certain type of businesses.  Failure to file a tax return within the specified time frame will make the violator liable for fines as per the provisions of Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE .

 

 

Implications of VAT

Implication of VAT on individuals

VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of exemptions may be granted.

As a result, the cost of living is likely to increase slightly, but this will vary depending on an individual's lifestyle and spending behaviour. If an individual spends mainly on those things which are relieved from VAT, he is unlikely to see any significant increase.

 

The government will include rules that require businesses to be clear about how much VAT an individual is required to pay for each transaction. Based on this information, individuals can decide whether to buy something.

 

Implication of VAT on businesses

Businesses will be responsible for carefully documenting their business income, costs and associated VAT charges.

Registered businesses and traders will 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.

VAT-registered businesses generally:

1.must charge VAT on taxable goods or services they supply

2.may reclaim any VAT they have paid on business-related goods or services

3.keep a range of business records which will allow the government to check that they have got things right.

 

VAT-registered businesses must report the amount of VAT they have charged and the amount of VAT they have paid to the government on a regular basis. It will be a formal submission and reporting will be done online.

 

If they have charged more VAT than they have paid, they have to pay the difference to the government. If they have paid more VAT than they have charged, they can reclaim the difference.

 

What is difference between VAT and Sales Tax?

A sales tax is also a consumption tax, just like VAT. For the general public there may be no observable difference between how the two types of taxes work, but there are some key differences. In many countries, sales taxes are only imposed on transactions involving goods. In addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.

 

Many countries prefer a VAT over sales taxes for a range of reasons. 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.

Update policy

Recently, the UAE Federal Tax Authority (FTA) has issued a new policy allowing VAT taxes on imports to be deducted at the time of VAT declaration using a third-party agent tax number.

(1) Even if the freight forwarder's tax number is used for customs clearance instead of your own tax number, it can also be deducted when declaring VAT;

(2) The forwarder cannot deduct this part of import value-added tax paid by the seller

 

The seller's preconditions for deducting this tax:

1. Declaration shall be made within 180 days after delivery of the goods, and only VAT charges related to the goods can be deducted.
2. Ensure that the tax number provided by the forwarder is valid, and require the forwarder to provide corresponding invoices and customs clearance documents as proof.
3. The forwarder issues a letter of declaration to the seller, which contains at least all the following details:
4. The agent's name, address and tax registration number;
5. The date on which the statement was issued;
6. Date of import of the relevant goods;
7. Description of imported goods;
8. Taxes paid by agents to authorities on imports.

 

In summary, the UAE Tax Authority has issued a new policy to allow importers who use the forwarder's tax number for customs clearance declaration to deduct the tax when declaring VAT.

The seller needs to negotiate relevant matters with the forwarder to ensure smooth customs clearance and declaration and avoid unnecessary disputes and losses.

UAE VAT Updates: 13 Key Changes in 2023

There have been some changes to specific provisions of the UAE Value Added Tax (VAT) regime announced by the UAE Ministry of Finance. The Federal Decree-Law No. 18 of 2022 introduces 24 changes.

 

VAT  is a type of indirect tax based on general consumption. Most countries impose VAT on most purchases and sales of goods and services, making it one of the most common types of consumption tax.

 

Effective Date

The UAE introduced VAT at 5% in January 2018. There have been a few amendments to the Value Added Tax (VAT) provisions, which took effect in 2018. Changes will be effective on 1 January 2023.

 

Significant Amendments

Some amendments are clarifications, while others state changes in tax positions. Generally, these amendments have both technical and administrative implications. Here are some of the most important amendments:

 

1. Definitions – Article 1

VAT law amendment introduces new definitions for the following crucial VAT law terms:

• Relevant Charitable Activities
• Pure Hydrocarbons
• Tax Evasion
• Tax Audit
• Tax Assessment
• Voluntary Disclosures, and
• Tax Procedures Law

 

2. Supply of Goods – Article 5

It makes clear that, among other things, the supply of goods is the entry into a contract between more than two parties involving the transfer of goods at a later date.

 

3. Other out-of-scope transactions – Article 7

VAT Law Amendment introduced a new clause allowing the Executive Regulations to specify other transactions outside the scope of VAT.

 

4. Registration Exceptions – Article 15

If all your supplies are zero-rated and/or you no longer make any other supplies besides zero-rated supplies, you may be eligible for an exception from VAT registration.

 

5. Cases of Tax Deregistration – Article 21

The FTA has the power to deregister registered persons forcibly, when necessary, under Article 21. Deregistration of taxable persons does not prevent the FTA from claiming tax obligations or administrative penalties.

 

6. Special Date of Supply – Article 26

Tax invoices will be issued 14 days after the supply date under Article 26.

 

7. Place of Supply of Goods (continuous supply) – Article 27

This article of the VAT Law currently describes three scenarios in which the supply takes place in UAE, but includes exportation.

 

8. Place of residency (Agent/Principal) – Article 33

Under Article 33, the principal’s place of residence becomes the agent’s place of residence.

 

9. Recovery of Recoverable Input Tax in the Tax Period (Imports) – Article 55

This amendment permits the taxable person to recover VAT paid or declared on goods and services imported before registration (upon meeting certain conditions).

 

10. The mechanism for Output Tax Adjustment – Article 62

To adjust output tax, the taxpayer must issue a Tax Credit Note within 14 days of issuing the tax invoice.

 

11. Conditions and Requirements for Issuing Tax Invoices (obligation to pay VAT) – Article 65

The FTA will require the taxable person to pay VAT if he or she issues a tax invoice stating VAT or receives VAT.

 

12. Reverse Charge – Article 48

Reverse charge mechanisms apply to the supply of hydrocarbons in any form under clauses (3) and (5) of Article 48 of the current VAT Law.  

The amended VAT Law restricts it to only Pure Hydrocarbons. Furthermore, Article 48 now contains Clause (8), which allows the Cabinet to issue a Decision identifying other goods and services that are subject to reverse charges.

 

13. New Article 79 bis – Statute of Limitations

Article 79 bis of the VAT law states:

• The FTA cannot conduct a Tax Audit or issue a Tax Assessment after 5 years from the end of the relevant Tax Period, except in certain circumstances.
• It is possible for the FTA to conduct a Tax Audit or issue a Tax Assessment after the end of the relevant Tax Period if it notifies the taxable person before the end of the fifth year. However, the Tax Audit or Assessment must be completed within 4 years of the notice being given.
• A Tax Audit or Assessment may be conducted or issued by the FTA only after the 5th year of the relevant Tax Period if the Audit or Assessment relates to a Voluntary Disclosure submitted during the fifth year of the applicable Tax Period, provided that the Audit or Assessment is completed/issued within 1 year of the date the Voluntary Disclosure was submitted.
• Separate cabinet decisions may also amend the referred periods.
• Disclosures made five years after the relevant tax period end will not be acceptable.
• If Tax Evasion or Non-Tax Registration occurs, the FTA may conduct a Tax Audit or issue a Tax Assessment within 15 years of the end of the tax period in which evasion took place.