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 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:
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 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 the government reflect the "value add" throughout the supply chain.
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.
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%.
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.
Registering for VAT
A business must register for VAT 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.
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.
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.
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.
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.
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.
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