(A quote in the second paragraph has been amended to reflect that Khalid Al Bustani said businesses should register before December 3).

The director-general of the new Federal Tax Authority (FTA) of the United Arab Emirates has warned businesses eligible for the new value-added tax that they need to register within the next few weeks to avoid being liable for paying the tax themselves.

Speaking at a media briefing revealing details of the new VAT on Wednesday, FTA director-general Khalid Ali Al Bustani said: "Businesses should really register before the third of December because the FTA by law has to respond [to their application] within 20 business days," he said.

"Businesses have to register, otherwise if they don't register on time they will face penalties."

Saeda Al Qayoumi, a consultant working for the FTA, explained that if businesses do no submit registration before December 4, they may not receive their registration on time.

This would mean that "they will not be able to charge their customers on 1 January... which would mean they will have to pay it (VAT) from their own pockets,” Al Qayoumi added.

Al Bustani said that the implementing regulations spelling out the final details of how and when VAT will be charged in the UAE was signed by the country's cabinet yesterday, and that a draft of the regulations is expected to be published on the FTA and the Ministry of Finance's website soon. He added that he could not give an exact date for when the final draft will be released.

Zero rated vs VAT-exempt

In general, the FTA said that anything that is not already classified in Article 45 of the UAE VAT law (which was approved in late August) as being zero-rated or in Article 46 as being exempt from VAT will have the tax applied at the standard rate of five percent. 

The zero rate allows businesses to reclaim VAT paid on business costs, while businesses providing exempt services will not be allowed to reclaim VAT paid on their own input costs.

Goods and services listed as being zero rated in Article 45 include international passenger transport, crude oil or gas, residential buildings for the first three years of their lifespan and certain educational goods or services. VAT-exempt items listed in Article 46 include some financial services, other residential buildings for sale or lease, land and local passenger transport.

The FTA also confirmed on Wednesday details on how VAT will be implemented for certain key categories.

Al Qayoumi confirmed that VAT “will be applied on jewelry items". The VAT law said that VAT on 'investment precious metals' will be zero-rated.

Officials from the gold and diamonds industries had urged UAE authorities in a press conference last month to apply a zero rate VAT on the sector.

The FTA also said that although specified financial services will be exempt from VAT, the tax will be applicable to explicit fees, such as fees levied by stock market brokers on transactions.

In terms of the tax treatment of free zones, the FTA said that transactions involving goods between designated and non-designated zones would all be taxable, but that goods moving from one designated zone to another for consumption within the designated zone would be zero-rated.

Goods within designated zones set for export will also be zero-rated. All services within designated zones (other than those being exported) will be subject to VAT.

Designated zones were classified under the VAT law as areas that "shall be treated as being outside the state". The details of what comprises such zones will be made available in the executive regulations, the law added.

Businesses “need to prepare”

Al Bustani said that the authority had now finished its series of workshops explaining the regulations and will soon begin the process of licensing tax agents who can help businesses to understand the law and how to prepare for its implementation.

“Private businesses will need to prepare [themselves] through specialists,” he said. “Now, our role will be supervising to make sure that the law is applied.”

All six Gulf Cooperation Council (Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Oman and Qatar) countries agreed last year to introduce a new five percent rate of VAT on an array of goods and services, as part of attempts to diversify government revenue sources away from a reliance on hydrocarbons.

However, as yet only Saudi Arabia and the UAE have agreed to implement VAT from January 1, 2018. Saudi Arabia published its VAT implementing regulations in September.

In the UAE, any business with revenues of more than 375,000 UAE dirhams ($102,104) needs to be registered for value-added tax payments, although voluntary registration will be considered for companies with revenues of more than 187,500 dirhams to allow them to reclaim business costs incurred through VAT payments.

For Zawya’s special coverage on VAT, click here.

(Reporting by Yasmine Saleh and writing by Michael Fahy)

© ZAWYA 2017