10 July 2017

The United Arab Emirates (UAE) finance ministry on Monday released updated information on its plans for the introduction of a new 5 percent value-added tax (VAT) on various goods and services from January, 2018.

The six members of the Gulf Cooperation Council (GCC), which includes the UAE, agreed in 2016 to introduce VAT as a means to diversify government revenue sources and reduce reliance on hydrocarbon exports after the oil prices’ sharp drop that started in mid-2014.

Younis Al Khouri, under-secretary at the finance ministry told Zawya in an interview last February that a 5 percent VAT is expected to be implemented simultaneously across the GCC starting January 1, 2018. He said VAT would apply to companies with annual revenues exceeding 375,000 dirhams ($100,000) and anticipated a compliance rate of around 95 percent for companies in the initial stage.

The official also said some sectors, such as education, healthcare, renewable energy, water, space, transport and technology, might get special VAT exemptions or reductions.

Below is a summary of the latest updates:

Real estate:
The 5 percent VAT on real estate will be applied on the sale and leasing of commercial properties.
Residential properties will “generally” be exempt from VAT. Newly built homes will be zero-rated during the first three years after the property’s completion to allow developers to recover VAT on construction costs, but subsequent sales will be subject to tax.

VAT will be imposed on goods and services purchased from abroad. The new tax will be in addition to any custom duties paid by importers. VAT will be calculated on the total value of the goods, including all custom duties. However, imported goods that are exempt from customs duties could still be subject to VAT.

Goods and services subjected to a zero percent VAT:
Businesses will be able to reclaim VAT paid on some costs and services, including the following:
- Goods and services exported outside the GCC
- International transportation
- Certain investments made in precious metals, such as gold and silver

Goods and services that will be exempt from VAT:
Companies will not be able to reclaim VAT back on the following services:
- Some financial services
- Empty lands
- Local transportations

No special rules are planned for small or medium-sized enterprises. However, a newly established Federal Tax Authority will provide material to assist SMES in their enquiries in due course.
The ministry said businesses may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold of 375,000 dirhams, but exceed 187,500 dirhams. It also said businesses may register voluntarily if their expenses exceed 187,500 dirhams, which could allow them to later reclaim their business costs.

Government entities:
In general, good and services supplied by government entities will be subject to VAT. However, certain supplies that are solely provided by the government and are not offered by the private sector will be excluded from the VAT framework.

Transition rules:
Special rules will be provided to deal with various situations that businesses could encounter during the early implementation of VAT, such as when a payment for a supply of goods is received before the introduction of VAT but the goods are actually delivered after the introduction of VAT.

Penalties will be imposed on actions that show non-compliance such as:
- A person failing to register when required to do so
- A person failing to submit a tax return or make a payment within a set deadline
- A person failing to keep records required for VAT accounting procedures

The UAE’s Federal National Council (FNC) approved a draft law regarding the introduction of taxation procedures at a meeting in March.

The President of the United Arab Emirates (UAE), Sheikh Khalifa bin Zayed Al Nahyan, is expected to ratify the law to introduce the VAT to the UAE by the end of this month or next month.

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