The UAE is due to implement VAT on 1 January 2018 at a 5% rate.
VAT is essentially a tax on consumption taking place in the UAE. If you acquire goods or services from an entity located outside the GCC and those goods and services are provided to a customer outside the GCC then that supply takes place wholly outside the UAE and VAT will not be applicable.
VAT will be charged at 0% in respect of the following main categories of supplies:
- Direct or indirect export outside GCC;
- International and intra GCC transport;
- Air passenger transport;
- Supply of air, sea and land means of transport as would be specified in the executive regulations;
- Supply of aircraft or vessels for specific purposes;
- Supply of goods and services related to transfer of goods or passengers;
- Supply or import of investment precious metals;
- First supply of residential buildings within 3 years of its completion, either through sale or lease subject to prescribed conditions;
- First supply of buildings to be used specifically for charities for sale or lease/buildings converted from non-residential to residential;
- Supply of crude oil and natural gas;
- Supply of educational services and related goods and services for specific institutions as would be specified in the executive regulations;
- Supply of preventive and basic healthcare services and related goods and services as would be specified in the executive regulations.
- Financial Services performed by authorized banks and financial institutions as would be specified in the executive regulations;
- Supply of residential buildings through sale or lease, other than that which falls under the zero-rated category;
- Supply of bare land;
- Supply of local passenger transport.
The executive regulations would specify the conditions and controls for exempting/zero rates of supplies.
- No VAT will be charged on the export of goods and services. In order to make exports competitive, VAT on exports will be zero-rated and the exporter can recover all the input tax incurred in the course of his business
- Non-residents that make taxable supplies in the UAE will be required to register for VAT unless there is any other UAE resident person who is responsible for accounting for VAT on these supplies. This exclusion may apply, for example, where a UAE business is required to account for VAT under a reverse charge mechanism in respect of a purchase from a non-resident
- VAT is due on the goods and services purchased from abroad.
- In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.
- In case the recipient in the State is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC. Such VAT will typically be required to be paid before the goods are released to the person
Penalties will be imposed for non-compliance of which are yet to be announced.
Examples of actions and omissions that may give raise to penalties include:
- A person failing to register when required to do so;
- A person failing to submit a tax return or make a payment within the required period;
- A person failing to keep the records required under the issued tax legislation;
- Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation
The VAT Executive Regulations have not been released in public domain and the complete clarity on the treatment of Free Zones is still awaited.
However, based on the available information, we understand that all entities having a taxable supply exceeding AED 375,000 would be required to register for VAT and those with taxable supply between AED 187,500 and AED 375,000 may opt to register for VAT.
Further, the Ministry of Finance has issued the following deadlines for registration:
- Before 31 October 2017 - Businesses with a turnover exceeding AED 150m should apply for registration
- Before 30 November 2017 - Businesses with a turnover exceeding AED 10m should apply for registration
- Before 04 December 2017 - All other business entities should submit their application to minimize the risk of not being registered in time for VAT go-live. The opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT
Further information is yet to be announced by the Federal Tax Authority (FTA). Nevertheless, you will need to be registered in order to claim back any VAT you pay as a business.