Value Added Tax (VAT) is set to be applied in the six-nation GCC block in 2018 as a strategy to diversify income sources in the context of the fall of oil prices.
What is VAT?
VAT is a tax on consumption charged at each step of the ‘supply chain’.
Ultimate consumers generally bear the VAT cost while businesses pay the government the tax that they collect from the customers. They may also receive a refund from the government on tax that they have paid to their suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
When will VAT be implemented?
UAE will introduce VAT at the rate of 5% starting from January 1, 2018 and it is estimated that it will generate more than Dh 12 billion additional revenues in the first year of its implementation.
How does it work?
Not all the companies will be affected by VAT.
Only the businesses that report annual revenues over Dh 3.75 million will be obliged to be registered under the GCC VAT system.
For the companies whose revenues fall between Dh 1.87 million and Dh 3.75 million, there is an option to register for VAT during the first phase of the VAT implementation.
What will be taxed?
All the electronics, smart phones, cars, jewelry, watches, restaurants and entertainment will be subject to VAT. On the other hand, some food items (a number equivalent to 100), health, education and social services will be exempt, as government announced.
Anyway, UAE will remain essentially a tax-free country as there is no income tax on salaries, and in the free zones there is 100% corporate tax exemption (for more information about UAE free zones benefits, visit http://www.uaestablishment.com/en/benefits-of-free-zones-in-uae/ and to consult the list of UAE free zones click on http://www.uaestablishment.com/en/list-of-free-zones-in-uae/).
Will VAT be a cost to the business?
If the company is providing goods or services that fall under VAT category, it’s required to reclaim VAT that incur on costs.
If the business is involved in the supply of goods or services that are exempt from VAT, there is no need to reclaim VAT incurred on costs but VAT might be a cost for the business, as the suppliers may charge VAT that cannot be reclaimed.
What are the VAT-related responsibilities of businesses?
The companies subject to VAT need to:
- Charge VAT on taxable goods or services they supply
- Reclaim any VAT they have paid in regards to the provision of goods or services
- Record business records and ensure they are up to date, to let government verify the accuracy of the claim and information provided
- Report the amount of VAT charged and the amount of VAT paid to the government
In case the business charged more than what it has been paid, the difference has to be paid to the government. If the business paid more VAT than the one that has been charged, difference can be reclaimed.
What does a business need to do to prepare for VAT?
Before VAT comes into effect, businesses should understand the implications of VAT and make every effort to align their business model in compliance with VAT requirements. This might imply to make some changes to their core operations, financial management and book-keeping and even their manpower.
How and when are businesses supposed to start registering for VAT?
The registration process can be done online through government e-services three months before the launch of VAT.
How often are registered businesses required to file VAT returns?
The registered companies should submit VAT returns on a regular basis, estimating a default period of three months for the majority of businesses.
What kind of records are businesses required to maintain, and for how long?
The businesses should maintain all the financial records that will enable authorities to identify the business activities and review transactions within a time period to be defined by the government in due course.
For more information about VAT in UAE, ask us on firstname.lastname@example.org
Mara Di Marco
General Manager, UAEstablishment