What is the VAT on discounts and reductions?
The Federal Tax Authority (FTA) has said that the final reduced prices for goods on promotional offers must include the 5 percent Value Added Tax (VAT), which is to be calculated as included in the new price after reductions by the sales outlets or service providers themselves.
In a new awareness message issued today targeting consumers and service recipients in the UAE, the FTA said that in cases of discounts on regular sale prices, or during seasonal discounts and “buy one get one free” promotions, VAT must be included in the final amount to be paid after deduction includes VAT as per the reduced amount.
What is VAT all about?
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods, and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore, and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on the tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
We can draw link to our animated explanation of VAT here
Will zero-rated supplies count for the registration threshold?
Yes, the taxable supplies including zero-rated supplies count for the registration threshold. However, note that it might be possible that some GCC member states will allow, under certain conditions, a company which only makes zero-rated supplies to be excluded from the mandatory registration on request. The UAE and KSA have indicated that they may allow such exclusions in certain cases.
Which countries will implement VAT on 1 January ?
The issue of local laws in the KSA and United Arab Emirates (UAE) confirms earlier announcements by these countries that VAT will be introduced domestically in January 2018. It is unclear when the rest of the countries will implement currently but this is expected to progressively happen through 2018.
Do you think that there will be much variance in application of the rules between member states?
There will be a level of variance in application of the rules across the GCC member states. Similar to the EU, there are some provisions which are compulsory, and others which are optional, and others where there is a choice to be made on treatment at a local level. How each member state approaches the implementation of these provisions is likely to depend on their individual policy settings, economy, etc.
Can we ‘VAT group’ establishments in different GCC states?
We do not expect that it will be possible to ‘VAT group’ entities across GCC member states (e.g. grouping a KSA and a UAE entity), however, we do expect the majority of member states to adopt local VAT grouping provisions as best practice.
Which supplies will be subject to standard rate?
The standard rate of 5% VAT will be applied across all six of the countries. This is expected to apply to substantially all of the domestic supplies made in the normal course of business.
Where can I view more information about VAT in consumer business?
You may view the VAT Awareness presentation released by the MoF to provide information about the implementation of VAT in consumer business by clicking here.
Is there any document by the Government providing general information about VAT?
The MOF has released a document providing information about VAT, how it is implemented in the UAE and the role of the MOF.
You can download the document by clicking here.
What is the difference between VAT and Sales Tax?
A sales tax is also a consumption tax, just like VAT. For the general public there may be no observable difference between how the two types of taxes work, but there are some key differences. In many countries, sales taxes are only imposed on transactions involving goods. In addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.
Many countries prefer a VAT over sales taxes for a range of reasons. Importantly, VAT is considered a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
How will the government collect VAT?
Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
Will VAT cover all products and services?
VAT, as a general consumption tax, will apply to the majority of transactions of goods and services unless specifically exempted or excepted by law.
Will the cost of living increase?
The cost of living is likely to increase slightly, but this will vary depending on the individual’s lifestyle and spending behaviour. If your spending is mainly on those things which are relieved from VAT, you are unlikely to see any significant increase.
What sectors will be zero rated?
VAT will be charged at 0% in respect of the following main categories of supplies:
- Exports of goods and services to outside the GCC;
- International transportation, and related supplies;
- Supplies of certain sea, air and land means of transportation (such as aircraft’s and ships);
- Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
- Newly constructed residential properties, that are supplied for the first time within 3 years of their construction ;
- Supply of certain education services, and supply of relevant goods and services;
- Supply of certain Healthcare services, and supply of relevant goods and services.
What sectors will be exempt?
The following categories of supplies will be exempt from VAT:
- The supply of some financial services (clarified in VAT legislation);
- Residential properties;
- Bare land; and
- Local passenger transport
How will insurance be treated?
Generally, insurance (vehicle, medical, etc) will be taxable. Life insurance, however, will be treated as an exempt financial service.
How will financial services be treated?
It is expected that fee-based financial services will be taxed but margin based products are likely to be exempt.
How will Islamic finance be treated?
Islamic finance products are consistent with the principles of sharia and therefore often operate differently from financial products that are common internationally.
To ensure that there are no inconsistencies between the VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products will be aligned with the treatment of similar standard financial services.
How will Government Entities be treated for VAT purposes?
Supplies made by government entities will typically be subject to VAT. This will ensure that government entities are not unfairly advantaged as compared to private businesses.
Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. It is likely certain government entities will be entitled to VAT refunds – this is designed to avoid budgeting issues and provide a level playing field between outsourced and insourced activities.
For the supplies provided for government entities, the treatment of such supplies shall depend on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard tax rate, the treatment would remain the same even if it is provided to a government entity.