Thursday, Apr 13, 2017
Dubai: The UAE government is going full steam ahead with the implementation of a value added tax (VAT) in the country from January 1, 2018. The Federal National Council (FNC) approved the draft law last month and the final law is waiting for the presidential approval.
With the imminent VAT implementation, tax practitioners, technology consultants and relevant government departments are gearing up for the new tax regime in the country. The Ministry of Finance has begun countrywide awareness campaign to educate various stakeholders on the collection of value-added tax (VAT).
In preparation for the GCC-wide implementation of VAT, each member state of the GCC will establish their own separate national legislation concerning VAT and as such the detailed compliance requirements and set of rules will be outlined in respective legislation. The GCC VAT Framework Agreement allows member states until 1 January 2019 to implement the tax. The UAE government is expected to release domestic VAT legislation by mid-2017 with detailed regulations.
VAT we know so far
The final law and regulations may be a few weeks or months away. Although the market is not short of speculative theories on the new tax regime, its impact on businesses, consumers and the economy, but only the final law and regulations will spell out what it means.
Meanwhile the UAE Ministry of Finance has put out some information on various aspects of VAT including its definition and who should be getting ready for the implementation at its website.
What is VAT? (box)
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
All we know so far from official sources (Q&A)
What is covered under VAT?
VAT is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.
Why is the UAE implementing VAT?
The UAE Federal and Emirate governments provide citizens and residents with many different public services — including hospitals, roads, state schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide the r country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
When will the VAT go into effect?
According to the UAE Ministry of finance VAT is likely to be introduced across the UAE on January 1, 2018.
What will be the rates?
The rate will be likely to be 5 per cent.
How will the government collect VAT?
Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
Will VAT cover all products and services?
VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of reliefs may be granted. But the final list will be known only after the regulations are finalised.
Will the cost of living increase?
The cost of living is likely to increase slightly, but this will vary depending on the individual’s lifestyle and spending behaviour. If your spending is mainly on those things which are relieved from VAT, you are unlikely to see any significant increase.
When will more details on VAT be available?
We anticipate that more detailed information will be available in the near future.
Who needs to register with the government for VAT?
No, not all businesses will need to register for VAT. In simple terms, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT. That is, many small businesses will not need to register for VAT.
What are the VAT-related responsibilities of businesses?
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case we need to establish whether they should be registered.
What does a business need to do to prepare for VAT?
Concerned businesses will have time to prepare before VAT will come into effect. During that time, businesses will need to meet requirements to fulfil their tax obligations. Businesses could start now so that they will be ready later. To fully comply with VAT, businesses may need to make some changes to their core operations, their financial management and book-keeping, their technology, and perhaps even their human resource mix (e.g., accountants and tax advisors).
When businesses need to register for VAT?
Registration for VAT is expected to be made available to businesses that meet the requirements criteria three months before the launch of VAT. Businesses will be able to register online using eServices.
How often are registered businesses required to file VAT returns?
Registered businesses will be expected to submit VAT returns on a regular basis. It is expected that the default period for filing VAT returns will be three months for the majority of businesses. Registered businesses will be able to file their returns online using eServices.
Kind of records are businesses required to maintain, and for how long?
Businesses will be required to keep records which will enable the authorities to identify the details of the business activities and review transactions. The specifics regarding the documents which will be required and the time period for keeping them will be communicated in due course.
Will tourists also pay VAT?
Yes, tourists are a significant source of revenue for the UAE and will pay VAT at the point of sale. Nevertheless, we have set the VAT rate deliberately low so that VAT is a limited burden on all consumers.
Will visiting businesses be able to reclaim VAT?
It is intended that we will allow foreign businesses to recover the VAT they incur when visiting the UAE. This is important as it encourages them to do business and also, because a lot of other countries have VAT systems, it protects the ability of UAE businesses to recover VAT when visiting other countries.
Status of the UAE VAT law
UAE VAT law is currently being finalised, and will be published once approved. Announcements regarding the Tax Law will be made to the press and details will be published on the Ministry of Finance website. The primary source of information regarding the UAE VAT Law is the Ministry of Finance website.
What other taxes is the UAE considering?
As per global best practice, the UAE is exploring other tax options as well. However, these are still being analysed and it is unlikely that they will be introduced in the near future. The UAE is not currently considering personal income taxes, however.
Will this impact economic growth of the UAE?
Our analysis suggests that it will help the country strengthen its economy by diversifying revenues away from oil and will allow us to fund many public
What are the penalties for non- complying to VAT regulations?
The government is currently in the process of defining the exact fees and penalties for non-compliance.
(All information used in this report are from official sources. For more information and updates see https://www.mof.gov.ae/En/Pages/default.aspx)
By Babu Das Augustine Banking Editor
Gulf News 2017. All rights reserved.