The UAE government implemented value added tax (VAT) in the country from January 1, 2018 at a standard rate of 5% and applies to most goods and services, with some goods and services subject to a 0% rate or an exemption from VAT (subject to specific conditions being met).
The UAE has one of the lowest VAT rates in the world.
VAT for Businesses
Businesses must register for VAT if their taxable supplies and imports exceed AED 375,000. Businesses may join the register voluntarily if they do not meet the AED 375,000 limit – if they meet a threshold of AED 187,500. Generally, VAT-registered businesses must:
- Charge VAT on the taxable goods they supply.
- Reclaim VAT on any business goods and services they purchase.
- Keep records for government purposes.
Foreign businesses may recover VAT costs while in the UAE.
Zero or No VAT on certain goods and services in UAE
Federal Decree-Law Number 8 of 2017 for VAT has been issued by President His Highness Sheikh Khalifa bin Zayed Al Nahyan. The law laid out a couple of exemptions and zero-VAT on certain goods and services.
Any goods and services are subject to zero-rated when those are exported to a Gulf Cooperation Council (GCC) country that hasn’t implemented VAT just yet. This includes the passengers and goods that are transported internationally, as well as a transfer that starts or even ends in the UAE or cross any part of its region.
Difference Between Zero-Rated VAT vs Exempted VAT
Simply put, a zero-rated VAT is a supply of goods and services that are taxable, but VAT is imposed at 0%. VAT-registered businesses that produce zero-rated supplies/services have the right to claim their input tax deductions that they have obtained while producing the taxable supplies. On the other hand, an exempt VAT is the supply of goods or services that are not subjected to any VAT rate.
Good and Services Under Zero Rated Tax
Based on Article 45 of Federal Decree-Law Number 8 of 2017, 14 goods and services are subject to zero-rated VAT.
- Direct or Indirect Exports – The first on the list is the direct or indirect export outside the UAE to states in the GCC that do not implement VAT, as clearly stated in the Executive Regulation of this Decree-Law.
- International Transport – International airfares will be under the zero rate as it is stated that goods and services that are transported internationally starting or ending in the UAE or crossing any part of its region, which includes services related to such transport, will have zero rates applied on them.
- Air Passenger Transport – As mentioned on the third number in Article 45, the transport of air passenger in the country is also included “if it is considered an ‘international carriage’ pursuant to Article (1) of the Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air 1929.”
- Supply of Air, Sea and Land Means of Transport – In accordance with the Executive Regulations of this Decree-Law, the supply of air, sea, and land means of transport for the transportation of passengers and goods are also under zero rate.
- Goods and Services related to the Supply of the Means of Transport – The supply of goods and services for the operation, repair, maintenance, or conversation of the means of transport are zero-rated.
- Aircraft and Vessels for Rescue – Aircrafts, and vessels that are intended for rescue and assistance by air or sea will have zero rates applied on them.
- Supply of Goods and Services Related to the Transfer of Goods or Passengers – The goods and services for consumption onboard, or anything at all that is meant to be consumed by any means of transport, any installations, or addition thereto or any other use during transportation shall be included in this application as well.
- Investment in Precious Metal – The eight on the list is the supply or import of investment precious metals. In accordance with the Executive Regulation of this Decree-Law, it will specify the precious metals as well as the basis of the standards by which the aforementioned goods are classified as for investment purposes.
- Sale of the Residential Building – In accordance with the controls specified in the Executive Regulations of this Decree-Law, residential buildings in its first three years of completion, may it be for sale or lease in whole or in part, shall be under zero rate.
- Charitable Building Supplies – If the buildings are the purpose of being used by charities, the first supply shall have zero rates applied to them (sale or lease).
- First Supply for Residential Building – Buildings that are converted from non-residential to residential will be under zero rate as well in its first supply (sale or lease).
- Oil and Gas – Crude oil and natural gas are under zero rate as the number 12 on the list.
- Educational Services – As per the Executive Regulation of this Decree-Law, zero rates shall apply on educational services and related goods and services for nurseries, preschool, elementary education, and higher education institutions that are owned or funded by the federal or local government.
- Healthcare Services – The Executive Regulation of this Decree-Law, the supply of preventive and basic health care services and related goods and services.
Click here to view the E-learning module on Zero Rated Goods and Services
Goods and Services Exempted from VAT
Article 46 of the Federal Decree-Law Number 8 of 2017 four items listed as exempt from VAT:
- Financial services that are specified in the Executive Regulation of this Decree-Law
- Supply of residential buildings through sale or lease, other than that which is zero-rated according to Clauses (9), (11) of Article (45) of this Decree-Law
- Bare land supply
- Supply of local passenger transport
Click here to view the E-learning module on Exempt Goods and Services
For more information on VAT click here .
Preparation for VAT implementation is crucial for all businesses and the time to act is now.The consequences of not implementing VAT on time can cause major disruption which include fines, penalties and investigations from tax authorities if not carried out properly.
The main areas of change for VAT implementation would be the IT and/or Accounting systems. If current systems are not supported or unable to transition to VAT then new systems may be required to be implemented.
Understanding the full scope of changes required for businesses early is essential. This can be done by engaging with a VAT expert or an Accounting firm if the existing Accountant does not have the technical ability to do so.
Once a plan has been established, there should be a person responsible for the implementation who can ensure that all steps are taken and all challenges are addressed for a successful implementation.
Prepare now for VAT in UAE and get ready for invoices with tax, filing of returns and maintaining records.
Click the links below for detailed information.
Preparing for VAT involves
- Returns filing
- The total value of its taxable supplies made within the UAE exceeds the mandatory registration threshold of AEED 375,000 over the previous 12 months, or
- It anticipates making taxable supplies with value exceeding the mandatory registration threshold of AEED 375,000 in the next 30 days
- If a business does not meet the threshold mentioned above then it is required to keep records which will enable the FTA to identify the details of the business activities and review transactions. The specifics regarding the documents which will be required and the time period required for keeping them can be found in Federal Law No (7) of 2017 on Tax Procedures and its executive regulation.
The business preparedness for VAT hovers around the four key pillars:
This is applicable for organizations having multiple legal structures. The organization needs to review its various legal structure and shareholdings and make the decision whether it wishes to register as a Group. The extent of intercompany dealings and the seamless process and systems available for Group reporting is also critical in making this decision
VAT implementation is from an effective date. However, there might be contractual implications prior or subsequent to the implementation date. The organization needs to review contracts to ensure that these implications are addressed well in advance.
Process and Systems
VAT impacts the daily transactions of sales, purchase, and expenses, as a result it is important to review the process to incorporate VAT capturing and reporting. Also, the IT systems play a critical role in enabling the organization to be VAT compliant. The extent and plan for system changes should be implemented so that the organization is ready prior to VAT scheduled date.
It is critical that all staff who are involved with VAT transactions are trained. This is to provide staff the knowledge to constantly evaluate the VAT impact on transactions within their domain.
The implication of VAT on inventories needs to be analyzed and corrective measures are taken to minimize the initial impact of slow-moving and obsolete stock. Regulations may permit to off-set VAT credit losses on stock however business must prepare to soften the impact of VAT on the sale price.
How do you know if you have to register for VAT?
The UAE opened its VAT Registration Portal on Oct 1, 2017.
Businesses can register through the e-services portal on the FTA website, www.tax.gov.ae. You can contact the FTA Call center at 600-599-994 for any further assistance.