The UAE is considering Value Added Tax (VAT) system in the new future. This was confirmed, at a press conference on 2nd June 2008, by the Dubai Customs that had been discussing the issue with International Monetary Fund (IMF) and had also participated in the studies thereto.
Dubai Customs also confirmed that draft laws have already been submitted to the UAE Federal Government for approval.
Though the actual date for enactment of relevant laws may be as far in the future as 2010, but it has been confirmed by Dubai Customs that the recommended rate for VAT will likely be 3%.
Dubai Customs also asserted that "the revenues of the new VAT system would match the customs duties which would be canceled when the new system is implemented." It further claims that "the new VAT system would not have any negative effect on the inflation rates in UAE." Although, no word is out yet as to which goods and services VAT would be imposed and given the fact that UAE has already established solid foundations in the important service sectors such as, hospitality, tourism, finance and transportation - it should be obvious that bringing such select service sectors into the tax net through imposition of VAT carries the potential to diversify revenue streams for UAE Government (or at least the Government of the Emirate of Dubai).
It is pertinent to note here that back in 2006 Dubai Customs was commissioned by UAE Ministry of Finance to study the prospects for the introduction of VAT in the country. This was done under the pretext that UAE has signed several free trade agreements (FTAs) and various terms in such FTAs require UAE to consider phasing out customs duties - thus, VAT has been advocated as an alternative. Though the pretext being cited is compulsion pursuant to international pressures, the suggestion of replacing customs duties with VAT may prove to be a very prudent move from the government perspective if the tax net of VAT will encompass both goods and services, contrary to that of customs duties that at present encompass only physical goods, thus VAT (when covering services also) would increase government revenues substantially.
VAT Defined
The above background brings us to the question: What is VAT? To put it simply, VAT is a tax on the value added to most goods and services at each stage of their production, distribution and supply to the end customers for those goods and services. Consequently, VAT will represent a tax on consumption. It is an indirect tax which is charged by VAT registered taxable persons on their supplies or acquisitions of defined goods and services within the territory of the UAE, as well as of any imported goods or services they handle.
Technical Stuff for Businesses Businesses in the UAE need to understand the VAT jargon. Listed below is a brief overview of the essential VAT concepts:
Input and Output Tax,
Taxable Activity, and
Supply.
Input and Output Tax
The tax is charged on purchases and thereafter the tax is collected on sales to customers. The tax paid to the supplier on purchases is deducted from the tax collected on sales. Thus the approach of value addition in this situation is indirect subtraction. Instead of deducting value of purchases from the value of sales to arrive at the value addition and thereafter taxing the value addition, in the VAT method the taxes are independently charged at the purchases and sales stages. The difference of the two gives the net tax liability of the trader. In the VAT parlance it is called the difference of the input and output tax. If the difference is positive - that is, the tax collected on sales is more than the tax paid to suppliers of purchases - the business will deposit that differential amount of tax with the VAT authority. However, if the difference is negative - that is, the tax paid on inputs is more than the tax paid on outputs - the difference will either be set off against the future VAT liability of the given business, or may be refundable by the VAT authority.
Taxable Activity
Next comes the concept called "Taxable Activity". In a typical VAT regime a transaction is deemed to be within the scope of VAT if it meets the following requirements:
It is a supply of goods/services,
It takes place within the defined geographical limits,
It is made by a taxable entity, and
It is made in course of furtherance of business.
Supply
Then comes the concept of "Supply".
Since VAT is a tax on supply of goods or services, therefore a most crucial concept for interpretation has always been the concept of supply. However, unfortunately most of the time the VAT legislations around the world are unable to provide a comprehensive definition to this concept and there is always plenty of room for interpretation by Courts. We will have to wait for the actual law to see the light of the day in order to explain this concept in UAE context.
How Will the VAT be Collected?
The major constituents in a VAT collection system include:
Registration,
Returns Filing, and
Input-Output Adjustment.
Thus, all the businesses that are engaged in the supply of taxable goods/ services will have to get themselves registered with the VAT authority of UAE, will have to file periodic returns with the VAT authority, and then claim input-output adjustment, as briefly highlighted in one of the paragraphs above.
By Faisal K. Daudpota IP/ IT practice
© Al Tamimi & Company 2008
