VAT in the UAE - time is running out
The six GCC Member States have committed themselves to introducing VAT as part of their efforts to diversify their economies away from natural resources. The United Arab Emirates and the Kingdom of Saudi Arabia will introduce VAT on 1 January 2018.
Although the introduction of VAT is now less than four months away, the UAE has not yet published all of its legislation. The UAE has recently issued its VAT law and three months ago it published its Federal Tax Procedures Law. Currently, the publication of the VAT implementing regulations is still pending. These are supposed to contain a lot of practical details with respect to the implementation. Their publication is expected in the month of October.
Also in October will the excise tax law enter into force, levying a tax on tobacco and tobacco products, carbonated drinks and energy drinks.
These landmark laws will massively impact businesses and consumers in the UAE and beyond.
Supplies on which VAT applies
Like in the European Union, VAT will apply on all imports of goods into the UAE and all supplies of goods and services. In other words, it does not apply to a selected list of products or services, but in principle to all.
Important to note is that VAT on all imports of goods into the UAE need to be paid in the VAT return and not to the customs authorities.
The VAT law also already confirms the policy adopted by the UAE in terms of the exceptions it will make to the rule that all supplies in the UAE are subject to the standard 5% VAT rate.
Certain supplies are subject to a zero rate instead of 0%. This is comparable to what is sometimes called an exemption with right to recover input VAT.
It entails that VAT is not calculated on the supply, but the supplier can still recover all input VAT. This applies for example for international passenger travel. Flights from Dubai to Riyadh or to a third country will not be subject to VAT.
The first supply of residential buildings within 3 years of their completion is also subject to a zero rate. Crude oil and gas will also be subject to a zero rate, although their variant at the gas station will be subject to the standard rate.
Education and basic preventive health care will also be subject to zero rate. Tuition fees will therefore not increase in price, nor will some medical services.
Certain supplies are subject to the application of an exemption for VAT purposes. This means that the supplier cannot recover any input VAT.
This is the case for certain financial services, the supply of bare land, the supply of real estate not subject to a zero rate and local passenger transport.
Registration
Not all businesses have to register for VAT purposes. The smallest businesses do not have to register. Therefore they cannot deduct any input VAT but also will not issue any invoices with VAT.
Businesses have to register when they expect to meet the mandatory registration threshold of 375,000 AED (or approximately 100,000 USD). This entails that if they have imports or sales exceeding that threshold in 2018, they need to get registered before the introduction of VAT.
The possibility to register should open as of September through tax.gov.ae. The UAE expects around 350.000 businesses to register for VAT purposes.
If a business makes supplies or incurs expenses of half that mandatory registration threshold, it can also voluntarily register for VAT purposes.
Business that register for VAT will be required to periodically file VAT returns, issue and receive compliant invoices, hold VAT book-keeping and store specific commercial and logistics documentation.
Free zones
This is without any doubt the most controversial part of the VAT legislation and the most anticipated detail. Unfortunately, the VAT law sheds only some tiny light on the VAT treatment of free zones, hinting at the application of a regime similar to that of the designated zones in the excise tax law. It would entail that supplies of goods within the free zones and from free zone to free zone remain out of scope for VAT purposes. Detail on the application of this regime is however deferred to the Implementing Regulations, which are still yet to be published.
Supplies to governments and by governments
Governments will remain out of scope for VAT purposes, unless they are not acting as a government or enter into competition with the private sector. A list will be established on the basis of which this distinction will be made and a cabinet decision will be made which governmental entities need to register for VAT.
Additionally, government entities put on a specific list will be able to reclaim VAT from the Federal Tax Authorities which they paid to their suppliers.
Business with the other GCC states
Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will have substantially different legislations to read. They will also incur substantial administrative costs due to the fact that the different laws, VAT returns and procedures, are not harmonised.
The fact that not all GCC states will introduce VAT at the same time further complicates the implementation. Businesses that have dealings with the other implementing states will have to be monitoring when they will introduce VAT, since this will again have a significant impact in terms of their treatment, reporting, invoicing and other obligations.
Time is up
Time is now really crucial for businesses, as 4 months until 1 January 2018 is a very short implementation period for businesses wanting to being compliant for VAT purposes.
Businesses must organise their core operations, financial management, book-keeping, technology/IT and human resources in order to be prepared for the introduction of VAT. The amount of work required will depend on the size and complexity of the business and it is essential to consider the impact now and determine how best to deal with it.
Thomas Vanhee Founding partner Aurifer Middle East Tax
thomas@aurifer.tax www.aurifer.tax +971 58 263 3018
