When is Excise Tax due?

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 goods are imported into the UAE;
• Excise goods are released for consumption in the UAE (e.g. manufactured and released from a designated zone/excise warehouse etc); or
• Excise goods are acquired by a stockpiler, where tax has not previously been paid on these goods.

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.

Are refunds of Excise Tax available?

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:

• When excise tax has been paid on an excise good, which is then produced in to a ‘new’ excise good, on which excise tax is again due;
• When excise tax has been paid on an excise good that is then exported outside the UAE; or
• When amounts have been paid to the FTA in error.

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:

• Where excise tax has been paid by certain international governments, diplomatic missions and international organisations in the course of their official activities, where a reciprocal agreement is in place between the UAE and the entity’s home country; and
• Where excise tax has been paid in the UAE by a person who is registered for excise tax in another GCC country that is implementing excise tax and who has then exported the excise goods out of the UAE and paid excise tax in that other GCC country. 

A refund request form will be available on the FTA website that can be used to request refunds.

Who can or will be able to register for VAT?

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.

What does a business need to do to prepare for VAT?

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. 

How should a business determine the place of supply?

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).

What sectors will be zero rated?

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 transport (such as aircraft 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 3 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.

How will partial exemption work?

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.

What are the cases that would lead to the imposition of penalties?

Penalties will be imposed in cases of non-compliance with tax legislation.

Examples of actions and omissions that may trigger penalties include:

• A person failing to register when required to do so;
• A person failing to submit a tax return or to make a payment within the required period;
• A person failing to keep the records required under the issued tax legislation;
• Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.

What are transitional rules?

There are special rules that deal with various situations that may arise in respect of supplies that span the introduction of VAT. For example:

• Where a payment is received in respect of a supply of goods before the introduction of VAT but the goods are actually delivered after the introduction of VAT, this means that VAT will have to be charged on such supplies. Likewise, special rules apply with regards to supplies of services spanning the introduction of VAT.
• Where a contract is concluded prior to the introduction of VAT in respect of a supply which is wholly or partly made after the introduction of VAT, and the contract does not contain clauses relating to the VAT treatment of the supply, then consideration for the supply is treated as inclusive of VAT. There are, however, special provisions that allow suppliers to charge VAT in situations where the recipient is able to recover the VAT even if there is no VAT clause in the contract.

Under which conditions will businesses be allowed to claim VAT incurred on expenses?

VAT on expenses that were incurred by a business can be deducted in the following circumstances:

• The business must be a taxable person.
• VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
• The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
• The goods or services acquired are used or intended to be used for making taxable supplies.
• VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.

How will Government Entities be treated for VAT purposes?

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.

What is a residential building for VAT purposes?

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:

• Any place that is not a building fixed to the ground and can be moved without being damaged.
• Any building that is used as a hotel, motel, bed and breakfast establishment, or hospital or the like.
• A serviced apartment for which services in addition to the supply of accommodation are provided.
• Any building constructed or converted without lawful authority.

How is a mixed-use building (residential and commercial) treated for VAT?

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.

What is Tax?

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.

• A direct tax is collected by a government from the person on whom it is imposed (e.g., income tax, corporate tax).
• An indirect tax is collected for a government by an intermediary (e.g. a retail store) from the person that ultimately pays the tax (e.g., VAT, Sales Tax).