Do you have a business in the UAE? Do you need to file your VAT return for the first time? Or do you need assistance with VAT registration? Or aren't you sure how to calculate your VAT?
Please continue reading.
What is VAT?
On 1 January 2018, the United Arab Emirates introduced a Value Added Tax (VAT). VAT is an indirect tax on consumption, applying to most goods and services. The normal rate is 5%. However, some transactions will be either zero-rated or exempted or outside the scope of the VAT framework.
VAT is levied on supply of goods and services irrespective of whether or not the transacting parties derive profits or incur losses. Simply put, it has nothing to do with the profitability of the business collecting the VAT. It is a tax on transactions that is borne by the end consumer.
How is VAT calculated?
As mentioned, VAT is a tax paid by the end consumer of a good. However, every business along the supply chain acts as a collecting agent for the Government. How does this work?
Let's say that a farmer produces 10 bottles of milk. He sells these to a supermarket for 100 AED. Of this income, 5% is subjected to VAT. This means that 5 AED needs to be paid to the government.
The supermarket now sells the milk to the end customers. In total, he makes 150 AED. 5% of this income is subjected to VAT, meaning that 7.5 AED needs to be paid to the government. However, the supermarket can the deduct the 5 AED that already has been paid by the farmer.
This way, only 5% of the final sales price is transferred to the government. 2.5 AED is paid by the supermarket, and 5 AED is paid by the farmer.
Who needs to register for VAT?
The VAT will be applicable on
all UAE resident entities, including companies registered with various free zones. However, small businesses are exempt if they have an annual turnover less than AED 375,000/- (USD 100,000/-).
In addition, non-resident entities, including UAE based Offshore/International companies such as JAFZA Offshore and RAK Offshore, do
not fall under the scope of Value Added Tax.
Products and services that are standard rated, zero rated or exempted
In the context of VAT, all goods and services would fall into one of the 4 categories:
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Standard Rated – 5% -- Supplies made to the UAE resident entities and individuals that cannot be classified as exempted or zero-rated.
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Zero Rated -- Government funded education, basic health-care, exports of goods to countries outside GCC & international air transport are amongst a few of the zero rated items. However, the business can recover Input Tax if any.
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Exempted -- Local passenger transport – cabs, metros, certain types of financial services, residential properties after first sale or more than 3 years old are some of the items that fall under the exempted activities category.
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Outside the scope of VAT – Supplies not sold to UAE resident persons and entities.
What should you do, regarding VAT?
In order to be ready for VAT, we suggest the following steps:
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Make an assessment whether your business should be registered with the FTA for VAT.
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Invoices issued for supplies made in the UAE must collect VAT @ 5%.
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Maintain accounting records as per IFRS and FTA guidelines.
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Keep your records for at least 5 years available for inspection/audit by FTA.
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Adapt IT system to the VAT.
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On-going compliance formalities – filing of VAT returns on a quarterly basis.
How to get started?
Are you in need of VAT services? Do you need someone to register for VAT, help you calculate the amount you have to pay or organize your books?
We are tax- and legal services specialists, active in Dubai since 2006. We can assess you VAT needs, help calculate your VAT obligations and make sure your books are in order so that you successfully pass an audit!
Fill in the form below to talk directly to someone who can help you understand all VAT matters in the UAE.