Value Added Tax in the UAE – initial guidance for UAE businesses
This note is designed as a short, manageable, summary of issues that businesses in the UAE will need to consider in order to be ready for the introduction of Value Added Tax as from 1 January 2018.
Introduction to Value Added Tax (VAT) The UAE will introduce VAT on supplies of goods and services at the standard rate of 5% commencing 1 January 2018. The tax will normally be collected by the vendor of the goods or services and accounted for to the Federal Tax Authority (FTA) through an online system. Returns will normally be due quarterly (within 28 days of the end of the quarter).
Registration for VAT If your business has, or is expected to have an annual turnover of more than AED 187,500 it may register for VAT with the FTA. If it has or is expected to have an annual turnover of more than AED 375,000 it must register for VAT. VAT registration has commenced.
Corporate Group Registration A VAT Group can be formed by two or more related corporate persons who are residents of the same member state. The precise conditions for VAT grouping should be checked in the regulations. Intra Group transactions will not attract VAT.
Exemptions and zero rating of Goods and Services? A few, but not many, categories of goods and services are exempt from VAT, or may be zero rated. Exemption and zero rating both mean no charge to VAT but only in the case of zero rating will the supplier be able to recover VAT on its related costs. If you think either exemption or zero rating may apply to your business then further detailed research is recommended so as to determine the extent of the exemption, or zero rating. Most businesses will not be exempt or zero-rated. Government is generally not exempt. Government will charge VAT if the activity in question is effectively a private sector activity or competing with the private sector, and will pay VAT in the normal way. If you invoice the Government: then invoice for VAT if the standard rate applies.
Zero rating may apply to: certain categories of education, transport, healthcare and residential property. Exemptions may arise for: some financial services, residential property, bare land and local passenger services. Further detailed review of the regulations will be required.
How will you charge VAT on invoices issued and reclaim VAT on costs paid? Having registered for VAT your business will need to be ready to issue VAT invoices containing the required information recording the place of supply, the date, the amount of the invoice in AED and the amount of the VAT in AED from 1 January 2018. Your accounting system must be capable of supplying VAT invoices for UAE transactions and you must keep records. Your accounting software must adequately record the amounts charged, converted if necessary into UAE Dirham according to the exchange rate approved by the Central Bank at the date of supply) and report that to the FTA in your VAT Return. You will also need to record and then if possible reclaim VAT on related costs (which in turn offsets the VAT you have charged, leaving the balance payable to the FTA).
How will you price your goods or services? The basic rule will be that for retail sales to consumers, quoted prices should include VAT and this will be the default position in the case of the "advertised price". In all business to business contracts if it is agreed that the price is exclusive of VAT you will need to ensure that you have clearly and explicitly added VAT to the price. Therefore:
- Goods for sale to consumers need to be priced inclusive of VAT Contracts (other than straight-forward consumer contracts) for the sale of goods or services within the UAE should expressly contain a provision to make clear whether the quoted price is exclusive of VAT and that VAT will be added at the prevailing rate, or is inclusive of VAT
- A contract for the sale of services within the UAE should also expressly contain a provision that in the event that you are adding expenses or third party costs to your invoices, VAT will be added to those expenses or third party costs (where applicable, and not, for example, in the case of an exempt or zero-rated supply)
- A contract for the sale of goods or services to customers outside the UAE other than in relation to land or construction in the UAE will not include VAT, but note that there could be VAT in the customer's market and this would be payable by the customer under what is known as the "reverse charge"
Transition We await the regulations on contracts for goods and services that span the date for the introduction of VAT but it would be advisable to address the issue now and provide a clear pricing structure. Where a supply arises after 1 January 2018, VAT will be due and therefore advance payment is not likely to be effective unless the supply is also before the date of introduction.
Imports If your business includes importing goods from overseas, you must pay the VAT on the import price unless zero rating applies. If you re-supply the imported goods you must then charge VAT both on your services and on the price of those goods. You can offset the tax paid on the import against the tax invoiced to determine your overall tax liability. Your contracts with customers should clearly state (if it is the agreed position) that you will add VAT to the cost of the goods supplied.
Accounting for VAT VAT charged will be paid to the FTA following the next accounting date after the supply. These will be in respect of each calendar quarter (31 March, 30 June etc) and the return made within 28 days. The payment to the FTA is due irrespective of whether your VAT invoice has actually been paid by your customer. VAT will be levied on the amount shown in the invoice. If there is a discount on the price it should be shown before the VAT calculation. The VAT on related costs which you pay to your suppliers should be credited as a deduction when accounting for VAT to the FTA. Subject to conditions, it should be possible to get back as a credit VAT charged on subsequently reduced, or written off invoices though the detail of how this will happen will depend upon the regulations. All returns will be made through an online system.
VAT generally becomes payable to the FTA on the next due payment date following the earliest of:
- the supply of the goods or services
- full or partial payment for the goods or services
- the date of issue of the VAT invoice
VAT will impact your cash flow if you do not promptly collect payment of your invoices, including the VAT, because the tax is due on the prior supply/invoice and not on payment. Bad debt relief can be obtained but will not be immediate - the regulations will indicate how relief will be granted.
Records VAT records have to be kept for at least 5 years. In the case of real estate (including construction) they must be kept for 15 years.
A Short Summary of obligations to charge VAT Normally, your business will likely be required to charge VAT as follows:
- At 5% to every customer in the same country as the invoicing office unless you encounter an exempt person defined as such in the law (this will include United Nations entities but will not include UAE Government entities)
- At 5% to every customer where the goods or services concerns a real estate transaction* (in the same country as the invoicing office (whether or not the customer is in country). Please note that real estate includes construction contracts but *the first supply of new residential property by sale or lease is zero-rated within the first 3 years of its construction
- At 0% to every customer outside the GCC, save as above regarding real estate (including construction)
- Not in the case of services supplied to a customer in another GCC country because generally they will have to reverse charge themselves and pay where they are based
This briefing note is not intended to be exhaustive. This is a complex area of law and the practice is yet to be developed.
The Ministry of Finance of the UAE has a helpful website containing a lot of information presented in a user-friendly fashion.