17 point guidelines for businesses to help companies in the UAE to transition to the new tax system

The UAE Federal Tax Authority (FTA) has issued a guideline to the local businesses for a smooth and effective imposition of the Value Added Tax System.

The newly-introduced VAT system is scheduled to go into effect on 1st January 2018, in accordance with the highest international standards.

The FTA said that the businesses must be aware of the following things before registering for the VAT system.

1. VAT is an indirect tax imposed on the supply of the goods and services. It is already implemented in over 150 countries, including all the 29 European Union states as well as Canada, New Zealand, Australia, Singapore, and Malaysia.

2. VAT is ultimately charged by the end consumers as it is charged at each step of the supply chain. Businesses only collect the tax on behalf of the government.

3. Businesses only pay the government the tax that they collect from their consumers. They may also reclaim from the government the VAT they had paid to suppliers.

4. VAT will provide the government a new source of income which will be used for the provision of various high-quality public services, including hospitals, roads, public schools, parks and civil services. The tax will also help the authorities to reduce its reliance on oil thereby building a stable and sustainable knowledge economy.

5. VAT rate has been fixed at 5 percent in the United Arab Emirates and is levied on the supply of all goods and services, including food, commercial buildings, and hotel services if no explicit provision is made to impose a zero rate or an exemption.

6. VAT’s zero rates is implemented on some goods and services, including health and education, gold for investment, the first supply of residential buildings, and the supply of international transport of passengers, goods, and exports.

7. VAT doesn’t apply to activities such as bare land, local transportation of passengers, the supply of residential buildings and the supply of some financial services.

8. Businesses involved in the supply of goods and services, which are subject to a zero rate, must register for VAT, but they can recover the VAT they incurred on their purchases. The businesses which supply exempt goods or services can’t recover VAT incurred on their purchases.

9. All those businesses must register for VAT whose taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.

10. A business may register voluntarily for VAT if their supplies and imports are below the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.

11. A business with expenses exceeding the voluntary registration threshold may also register voluntarily for the VAT. This offer has specifically designed for the start-up businesses with no turnover yet to register for VAT.

12. All the businesses must apply for registration at the earliest. Failing to register by January 1, 2018, will result in fines as stipulated in Cabinet Decision No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE.

13. Businesses can register for VAT through the Federal Tax Authority’s website, which is available 24 hours a day, seven days a week.

14. Businesses can also form Tax Group which will be a useful tool to simply accounting for VAT. In this regard, the businesses that satisfy certain requirements covered under the Legislation – such as having a place of residence in the UAE and being related or associated parties – can form a Tax group.

15. Businesses are not allowed to impose VAT on any of their goods or services before January 1, 2018.

16. All the businesses must retain business records like Balance Sheet, Profit, and Loss, and records pertaining to fixed assets, payroll, inventory and stock levels as well as accounting records, including payments, receipts, purchases, sales, revenues, and expenses.

17.  On their way to register for VAT, many businesses may be required to amend their core operations, financial management practices, the procedures they use to keep accounting books and records, and the technology they use in their accounting practices, in addition to changes in their human resources.