Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it 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 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.
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 a VAT over sales taxes for a range of reasons. Importantly, VAT is considered 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 from the government budgets. VAT will provide the UAE 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.
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 such a collaborative approach is best for the region.
Businesses are responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders 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.
VAT, as a general consumption tax, is applied at 5% to all transactions of goods and services unless specifically exempt in Article 46 of the Federal Decree-Law No. (8) of 2017 on Value Added Tax or subject to a rate of 0% as per Article 45 of the Federal Decree-Law.
VAT is intended to help improve the economic base of the country. Therefore, there are rules that require businesses to be clear about how much VAT you are paying for each transaction. Consumers should have the required information to decide whether to buy something or not.
Any person is able to object to a decision of the Federal Tax Authority.
As a first step, the person shall request the FTA to reconsider its decision. Such request of reconsideration has to be made within 20 business days from the date the person was notified of the original decision of the FTA, and the FTA will have 20 business days from receipt of such application to provide its revised decision.
If the person is not satisfied with the revised decision of the FTA, it will be able to object to the Tax Disputes Resolution Committee which will be set up for these purposes. Objections to the Committee will need to be submitted within 20 business days from the date the person was notified of the FTA’s revised decision, and the person must pay all taxes and penalties subject of objection before
objecting to the Committee. The Committee will typically be required to give its decision regarding the objection within 20 business days from its receipt.
As a final step, if the person is not satisfied with the decision of the Committee, the person may challenge its decision before the competent court. The appeal must be made within 20 business days from the date of the appellant being notified of the Committee’s decision
Log into the FTA e-Services portal via E-SERVICES, and go to EDIT on the VAT section and enter your Customs Registration Number. This will automatically update your records.
A residential building is a building or part thereof that is intended and designed for occupation by individuals, and mainly includes buildings which can be occupied by any person as main place of residence. It does not include:
The owners of residential buildings who only make exempt supplies do not have to register for VAT if they do not have any taxable business activities. Where owners have taxable business activities, they should consider their obligations further.
The owner of any building that is not residential, will have to register if the value of the supplies over the preceding 12 months exceeds AED 375,000 or it is expected that they will exceed AED 375,000 over the coming 30 days.
An owner of a residential building is not able to recover VAT in respect of expenses related to the exempt supply of the residential building.
An owner of a commercial building is generally able to recover VAT in respect of expenses related to the supply of the commercial building.
The rent or sale of a residential part of the building shall be treated as zero-rated or exempt, depending on whether this is a first supply within the first three years of completion of construction or a subsequent supply.
The rent or sale of a commercial part of the building shall be treated as subject to VAT at 5%.
Tax that cannot be directly attributed to exempt supplies or taxable supplies should be apportioned, and only the portion relating to the taxable supplies (at 0% and 5%) may be recovered.
The following groups are required to register for excise tax:
Businesses that are required to pay excise tax should do the following:
Excise Tax is due when goods are ‘released for consumption’ i.e. when they enter free circulation in the UAE. Excise tax is due when:
Excise tax is not a transaction-based tax, which means that goods do not need to be sold in order for the tax to be due.
A designated zone is the term used in the UAE to describe a specified area that is considered outside the UAE for excise tax purposes.
For an area to be treated as a designated zone, it must be officially registered and approved by the FTA and a warehouse keeper must be appointed as responsible over the designated zone.
A designated zone should be a fenced area intended to be a free zone that cannot be entered or exited except through a designated road and any area designated by the FTA as being subject to the supervision of a warehouse keeper.
A designated zone should be a fenced area intended to be a free zone that cannot be entered or exited except through a designated road and any area designated by the FTA as being subject to the supervision of a warehouse keeper.
Unlike VAT, excise tax is paid once in the supply chain and businesses that have purchased excise goods cannot obtain a refund of the excise tax paid on those goods.
There are a limited number of cases where a refund of excise tax will be available. Those cases are:
In the above cases, a business registered for excise tax will be entitled to a refund of the excise tax paid. The refund will be granted by allowing a deduction of the refundable amount from the tax due in the next excise tax return period.
There are also a limited number of cases where refunds will be available to people who are not registered for excise tax. Those cases are:
A refund request form will be available on the FTA website that can be used to request refunds.
Travellers entering the UAE with excise goods for non-business purposes will not be required to register as an importer of excise goods.
Travellers may need to pay the excise tax due on the goods depending on the value of the goods being imported. Where the value of the goods is below the threshold for exemption from Customs Duty as per the Customs Laws, no excise tax is due.
Where the value of excise goods exceeds the value of the exemption for Customs Duty purposes, then excise tax will be due on the total value of the goods.
Physical payment of excise tax will be required before or at the time of import. Further details on the obligations of travellers or non-registered persons bringing excise goods into the UAE can be found in the Excise Tax Importers User Guide available on the FTA's website.
Excise is not a transaction based tax so no relief will be available for suppliers that have sold excise goods to a customer and have not received payment from that customer. Excise tax is due based on the date the goods are released for consumption (i.e. enter free circulation) in the UAE, regardless of whether they are subject to an onward sale.
Goods released for consumption in a freezone will be subject to excise tax. This includes any freezone that may also be registered as a designated zone. If goods are held out for retail sale, or intended for consumption within a freezone, excise tax will need to be paid by the importer or producer that ‘released’ the goods.
Samples of excise goods that are given away for free will also be subject to excise tax. Excise tax is not a transaction based tax so tax is due on the goods when they are released for consumption (i.e. enter free circulation) in the UAE, regardless of whether or not they are intended for sale.
Manufacturers - Any UAE-based or Overseas/International Cigarette Manufacturer that sells its products via importation into the UAE for EITHER domestic sales or sales via UAE Duty free outlets (airports and ports).
Importers – ANY officially licensed IMPORTER of RECORD who purchases Cigarettes in bulk from domestic or international manufacturers and undertakes to on-sell and distribute within the UAE mainland or UAE Duty Free markets.
Distributors / Supply Chain Agents/ Warehouse keepers – ANY official distributor that will be the recipient of formally imported goods for sales in domestic market or sales via UAE Duty free outlets (airports and ports).
1st August 2019
No cigarettes will be allowed to be held out for sale, imported or produced anywhere in the UAE unless they carry a Digital Tax Stamp.
All cigarettes produced or imported into the UAE after this date must have a Digital Tax Stamp with end-to-end traceability.
All cigarettes manufactured or legitimately imported with a digital tax stamp (without end-to-end traceability) between May 1st and August 1st may remain in market beyond this date.
Timelines for other tobacco products to be added to the scheme will be communicated in due course.
There are no limitations in place, however it will be worth noting that stamps are to be delivered in specific Minimum Order Quantities (MOQs) dependent upon the format of supply required: Reels, Sheets, Bundles. The MOQ requirements for each of these formats are as below:
Reel 30,000 Stamps (per single reel)
Sheets 240 Stamps (per single sheet
Bundles 70,000 (per box of bundled stamps
A business must register for VAT if its taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if its 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 its 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-registered businesses generally:
Businesses will need to meet certain requirements to fulfil their tax obligations. To fully comply with VAT, businesses will need to consider the VAT impact on their core operations, financial management and book-keeping, technology, and perhaps even their human resource mix (e.g., accountants and tax advisors). It is essential that businesses try to understand the implications of VAT and make every effort to align their business model to government reporting and compliance requirements.
Businesses are required to keep records which will enable the Federal Tax Authority to identify the details of the business activities and review transactions. The documents which are required and the time period for keeping them are prescribed in Federal Law no. (7) of 2017 on Federal Tax procedures and the Cabinet Decision No. (36) of 2017 on the Executive Regulation of the Federal Law No. (7) of 2017 on Tax Procedures.
The place of supply will determine whether a supply is made within the UAE (in which case the UAE VAT legislation will apply), or outside the UAE for VAT purposes.
For a supply of goods, the place of supply should be the location of goods when the supply takes place with special rules for certain categories of supplies (e.g. water and energy, cross border supplies).
For the supply of services, the place of supply should generally be where the supplier is established with special rules for certain categories of supplies (e.g. for the supply of catering services, the place of supply shall be where the services are actually performed).
The VAT treatment of real estate will depend on whether it is a commercial or residential property.
Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%).
On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons 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 (through sale or lease) within 3 years from their completion will be zero-rated.VAT will be charged at 0% in respect of the following main categories of supplies:
The following categories of supplies will be exempt from VAT:
VAT registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to bad debt which has been written off by the VAT registered business. The legislation includes the conditions and limitations concerning the use of this relief.
To avoid double taxation where second hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second hand goods with reference to the difference between the purchase price of the goods and the sale price of the goods (that is, the profit margin). The VAT which must be accounted for by the registered person will be included in the profit margin. Further details of the conditions to be met in order to apply this mechanism can be found in the Executive Regulations of the Federal Decree-Law No.(8) of 2017 on Value Added Tax.
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 supplies.
Businesses will be expected to use input tax (ratio of recoverable input tax to total input tax incurred) 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.
Penalties will be imposed in cases of non-compliance with tax legislation.
Examples of actions and omissions that may trigger penalties include:
There are special rules that deal with various situations that may arise in respect of supplies that span the introduction of VAT. For example:
Islamic finance products are consistent with the principles of sharia and therefore often operate differently from financial products that are common internationally.
To ensure that there are no inconsistencies between the VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products is aligned with the treatment of similar standard financial services.
A scheme has been introduced to allow UAE nationals to reclaim VAT paid on goods and services relating to constructing new residences which will be privately used by the person and his family. This will allow the recovery of VAT incurred on such expenses including contractor’s services and building material.
In the course of its interaction with taxpayers, the FTA may provide its views on various matters in the law. Taxpayers may choose to challenge these views. It should be noted that penalties may be imposed on taxpayers who are found to violate any tax laws and regulations.
A registered taxable person must issue a valid VAT invoice for its taxable supplies. To be considered as a valid VAT invoice, the document must include certain particulars as mentioned in the legislation. In certain situations the supplier may be able to issue a simplified VAT invoice. The conditions for the VAT invoice and the simplified VAT invoice are mentioned in the legislation.
VAT on expenses that were incurred by a business can be deducted in the following circumstances:
VAT is due on the goods and services purchased from abroad.
In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.
In case the recipient in the State is a non-registered person for VAT purposes, VAT would need to be paid before the goods are released to the person.
Supplies made by government entities will typically be subject to VAT. This will ensure 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. It is likely that certain government entities will be entitled to VAT refunds.
For the supplies provided for government entities, the treatment of such supplies shall depend on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard rate, the treatment would remain the same even if it is provided to a government entity.
Businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate.
Further detail on this can be found in the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax.
A residential building is a building or part thereof that is intended and designed for occupation by individuals, and mainly includes buildings which can be occupied by any person as main place of residence. It does not include:
The owners of residential buildings do not have to register for VAT if they do not have any other business activities. Where owners have other business activities, they should consider their obligations further.
The owner of any building that is not residential, will have to register if the value of the supplies over the preceding 12 months exceeds AED 375,000 or it is expected that they will exceed AED 375,000 over coming 30 days.
An owner of residential building will not be able to recover VAT in respect of expenses relating to the exempt supply of the residential buildings.
An owner of a commercial building will generally be able to recover VAT in respect of expenses relating to the supply of the building.
The rent or sale of a residential part of the building shall be treated as zero-rated or exempt, depending on whether this is a first supply or a subsequent supply.
The rent or sale of a commercial part of the building shall be treated as subject to VAT at 5%.
The tax incurred by the owner on the building needs to be apportioned where there is an exempt supply, and the portion related to the taxable supply (at 0% and 5%) may be recovered.
Tax is the means by which governments raise revenue to pay for public services. Government revenues from taxation are generally used to pay for things such public hospitals, schools and universities, defence and other important aspects of daily life.
The FTA website includes guides, public clarifications and other references that aim at assisting persons with a better understanding of UAE tax legislation.
A telephone hotline has been set up so that you can call and speak to one of our employees directly on 600599994.
The FTA provides information and education to businesses to help them with their tax implementation. The government will not pay for businesses to buy new technologies or hire tax specialists and accountants. That is the responsibility of each business.
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