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INTRODUCTION OF THE VALUE ADDED TAX (‘VAT’) IN THE UNITED ARAB EMIRATES 1. What is VAT? VAT is an indirect tax on consumption which will apply to most goods and services effected within the United Arab Emirates (‘UAE’). Although VAT is collected by businesses on behalf of the Government, it is ultimately borne by the final consumer. 2. Why is VAT being introduced? The introduction of VAT in the GCC is one step forward in reducing dependency on oil and other hydrocarbon products as a source of revenue. A well organized and executed VAT system can be a great instrument to create a significant stream of income for the Government. It is important to note that VAT is a GCC- wide project, meaning that common GCC framework is the basis for the local VAT legislations of the GCC countries. 3. When will VAT be effectively implemented in the GCC region? Six GCC countries have agreed to implement VAT in the period commencing from January 1, 2018, and by latest January 1, 2019, and have entered into a Unified Agreement for VAT of the Cooperation Council for the Arab States of the Gulf (‘GCC VAT Agreement’). This GCC VAT agreement shall form the basis for the country specific VAT legislation. The GCC framework agreement is already publicly available on the website of Ministry of Finance, UAE. (View agreement)
tions, and obligations, which include tax registration, taxreturn preparation, submission, payment and voluntary disclosure rules, in addition to tax evasion and general provisions. 5. Who will charge VAT? Businesses, any person (natural or legal) registered for VAT will be able to charge VAT. 6. What about free-zone companies (Designated zones)? The UAE VAT law has referred to a word ‘Designated zones’. The UAE VAT Law does not state which areas will be considered as a Designated zone. Whether the Designated zones would include fenced freezone, unfenced freezone, offshore companies? We will have to wait for the VAT Executive Regulations and a clarification to be issued by the Ministry of Finance to provide more clarity on what would be considered as ‘Designated Zone’. At present, the UAE VAT law provides that the Designated zone will be treated as outside UAE for the VAT purposes. The transfer of goods from one Designated zone to another can be done without any VAT being due. The VAT Executive Regulations will provide for business conducted within Designated zones to be within scope of VAT subject to conditions which would be provided by the VAT Executive Regulations.
4. What are the recent updates for VAT in UAE?
7. How does VAT work?
On 27 August 2017, the Honorable President of the UAE, issued the ‘The Federal Law No. (8) of 2017 on Value Added Tax (‘UAE VAT Law’). The UAE VAT law provides the legal framework for the UAE introduction of VAT on the 1st January 2018. The release of the UAE Vat law is only one part of the puzzle, the VAT Executive regulations should follow shortly to provide a full picture on the UAE’s VAT implementation and are expected to be released during Quarter 4 of year 2017. The link to the UAE VAT Law.
VAT registered businesses will have to charge VAT on their taxable supplies. This is known as output VAT. Similarly, VAT will be suffered on most goods and services purchased by the business. This is known as input VAT.
The Federal Tax Authority (‘FTA’) of the UAE has also launched a separate tax website – for tax administration across the UAE. A couple of weeks earlier, the Honorable President of the UAE, issued ‘The Federal Law No. (7) of 2017 on Tax Procedures’ (‘Tax Procedures Law’). The Tax Procedure Law sets the foundation for regulating the administration and collection of taxes and clearly defining the role of the FTA. The link to the Tax Procedure Law. The Tax Procedures Law defines a set of common procedures and rules to be applied to all tax laws in the UAE, namely, VAT and Excise tax laws, and sets the rights and obligations of the FTA and the taxpayer. It covers tax procedures such as audits, objections, refunds, collec-
Output VAT is being collected from the customer by the business on behalf of the Government and should be paid to the FTA which is expected to be on quarterly basis (or for a shorter period, if required under the UAE VAT legislation). The input VAT charged on the goods and services purchased can be deducted from the amount of output tax owed. In simple words VAT payable / (Recoverable) is the difference between Output VAT and Input VAT. 8. What will be the applicable rate? The UAE VAT law has confirmed the standard VAT rate will be 5% on supplies that are standard rated. Some supplies will however either be zero-rated or exempted. 9. What would be the treatment when the goods and services are supplied simultaneously by the business? The supplies involving both the supply of goods and services has been recognized in the UAE VAT Law. However, the tax treatment will be set out in the VAT Executive Regulations.
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