What is Tax?
Value Added Tax (VAT)
Everything you need to know about VAT implementation in the UAE
This page provides general information on Value Added Tax that was introduced in January 2018 (at
a rate of 5%), its role in effective fiscal management at the federal level, and the impact it
has on individuals and businesses throughout the UAE.
THE FTA - overseeing VAT in the UAE
The Federal Tax Authority (FTA) was established under Federal Law by Decree No. 13 of 2016. The
authority takes charge of managing and collecting federal taxes and related fines, as well as
distributing tax-generated revenues and applying the tax-related procedures in the UAE.
The authority's Chairman is His Highness Sheikh Hamdan bin Rashid Al Maktoum Deputy Ruler of
Dubai, and the UAE Minister of Finance, while His Excellency Khalid Al Bustani takes up the
position of Director General directly from his role as the Assistant Undersecretary of
International Financial Affairs at MoF - a role he held for more than 37 years. FTA will work
alongside MoF in its drive to achieve economic diversification in the UAE, with a focus on
profits derived from non-oil sources. It will work towards enhancing the financial stability of
the UAE, and will provide guidance and assistance to businesses and consumers to ensure they
meet their liabilities and understand fully the application of taxation in the country.
Tax is the means by which governments raise revenue to pay for public services. Government
revenues from taxation are generally used to pay for amenities such as public hospitals, schools
and universities, as well as defense, infrastructure and other important aspects of daily life.
There are many different types of taxes, namely:
- 1.Direct Tax - which is collected by government from the person on whom it is imposed (e.g.,
income tax, corporate tax).
- 2.Indirect Tax - which is collected for government by an intermediary (e.g., a retail store)
from the person that ultimately pays the tax (e.g., VAT, Sales Tax).
Value Added Tax (or VAT) is an indirect tax. Occasionally, it might be referred to as a type of
general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods
and services that are bought and sold.
VAT JAFZA 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 DIFC 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 the government reflect the "value add" throughout the supply chain.
The difference between VAT and Sales Tax
A sales tax is also a consumption tax, just like VAT. For the general public there may be no
observable difference between how the two types of taxes work, but there are some key
differences. In many countries, sales taxes are only imposed on transactions involving goods. In
addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT
which 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.
Many countries prefer VAT over sales taxes for a range of reasons. Importantly, VAT is considered
to be a more sophisticated approach to taxation as it makes businesses serve as tax collectors
on behalf of the government and cuts down on misreporting and tax evasion.
VAT implementation in the UAE
The UAE Federal and Emirate governments provide citizens and residents with many different public
services - including hospitals, roads, public schools, parks, waste control, and police
services. These services are paid for using government budgets. VAT provides our country with a
new source of income, contributing to the continued provision of high quality public services in
the future. It also helps the government move towards its vision of reducing dependence on
income derived from oil and other hydrocarbons. VAT was introduced across the UAE on 1st January
2018 at a standard rate of 5%.
VAT implementation in coordination with other GCC countries
The UAE is part of a group of countries which are closely connected through "The Economic
Agreement between the GCC States" and "The GCC Customs Union". The GCC group of nations have
historically worked together in designing and implementing new public policies as we recognize
that such a collaborative approach is best for the region.
VAT for Businesses
Registering for VAT
A business must do Vat registration if their taxable supplies and imports exceed the mandatory
registration threshold of AED 375,000.Furthermore, a business may choose to register for VAT
voluntarily if their supplies and imports are less than the mandatory registration threshold,
but exceed the voluntary registration threshold of AED 187,500. Similarly, a business may
register voluntarily if their expenses exceed the voluntary registration threshold. This latter
opportunity to register voluntarily is designed to enable start-up businesses with no turnover
to register for VAT.
VAT-related responsibilities of businesses
All businesses in the UAE 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) are required to register for VAT.
Businesses that do not think they should be VAT-registered should maintain their financial
records in any event, in case we need to establish whether they should be registered.
VAT-registered businesses generally:
- Must charge VAT on taxable goods or services they supply;
- May reclaim any VAT they've paid on business-related goods or services;
Keep a range of business records which will allow the government to check that they have got
things right. If you are a VAT-registered business you must report the amount of VAT you've
charged and the amount of VAT you've paid to the government on a regular basis. It will be a
formal submission and it is likely that the reporting will be made online.If you've charged more
VAT than you've paid, you have to pay the difference to the government. If you've paid more VAT
than you've charged, you can reclaim the difference.
VAT in real estate
The VAT treatment of real estate depends on whether it is a commercial or residential property.
Supplies (including sales or leases) of commercial properties are taxable at the standard VAT
rate (i.e. 5%).On the other hand, supplies of residential properties are generally exempt from
VAT. This ensures that VAT does not constitute an irrecoverable cost to those who buy their own
properties. In order to ensure that real estate developers can recover VAT on construction of
residential properties, the first supply of residential properties within three years of
completion at the time of VAT introduction is zero-rated.
Zero-rated sectors
- VAT will be charged at 0% in respect of the following main categories of supplies:
- Exports of goods and services to outside the GCC
- International transportation, and related supplies
- Supplies of certain sea, air and land means of transportation (such as aircrafts and ships)
- Certain investment grade precious metals (e.g. gold, silver, of 99% purity)
- Newly constructed residential properties, that are supplied for the first time within three
years of their construction
- Supply of certain education services, and supply of relevant goods and services
- Supply of certain healthcare services, and supply of relevant goods and services
VAT- exempt sectors
The following categories of supplies will be exempt from VAT:
- The supply of some financial services (clarified in VAT legislation)
- Residential properties
- Bare land
- Local passenger transport
Partial exemption
Where a VAT registered person incurs input tax on its business expenses, this input tax can be
recovered in full if it relates to a taxable supply made, or intended to be made, by the
registered person. In contrast, where the expense relates to a non-taxable supply (e.g. exempt
supplies), the registered person may not recover the input tax paid. In certain situations, an
expense may relate to both taxable and non-taxable supplies made by the registered person (such
as activities of the banking sector). In these circumstances, the registered person would need
to apportion input tax between the taxable and non-taxable (exempt) supplies. Businesses will be
expected to use input tax (ratio of recoverable to total) as a basis for apportionment in the
first instance although there will be the facility to use other methods where they are fair and
agreed with the Federal Tax Authority.
Government Entities and VAT purposes
Supplies made by government entities are typically subject to VAT. This ensures that government
entities are not unfairly advantaged as compared to private businesses. Certain supplies made by
government entities will, however, be excluded from the scope of VAT if they are not in
competition with the private sector or where the entity is the sole provider of such supplies.
Certain government entities are entitled to VAT refunds - this is designed to avoid budgeting
issues and provide a level playing field between outsourced and insourced activities. For the
supplies provided for government entities, the treatment of such supplies depends on the same
supply and not on the recipient of the supply. Therefore, if the supply is subject to the
standard tax rate, the treatment will remain the same even if it is provided to a government
entity.
