All about the Latest Value Added Tax or VAT in UAE
Taxes are an integral part of all the research that one needs to do when they want to work or conduct business in a country. The United Arab Emirates is one of the most business-friendly and promising countries not only in the Gulf Region but also in the entire developed world. And since it is not a wonder that their taxation policies are optimised to meet the needs of both – the business communities as well as the state policy.
In this article, we are putting together all the important aspects of VAT or the Value Added Tax in the UAE.
Understanding The VAT in UAE: Why Do You Need It?
Here are some ways we are going to discuss the Value Added Tax in the UAE:
- Understanding Value Added Tax (VAT)
- How Does VAT Work?
- Why Is VAT Being Introduced?
- Registering For VAT
- VAT Rates
- Impact of VAT on Business Owners
- Importance of Accounting Software
This information will help the business owenrs to get a holistic point of view about UAE’s taxation policy and help them make the right decisions.
Worry not, since the VAT policy introduced by the UAE government is not complicated and hence one needs to understand it from all its dimensions.
Our objective is to help you understand why and how VAT affects you and others who fall into its brackets and also help some of you get over the so-called “taxation anxiety.”
1) How Does VAT Work?
The first and the most obvious question is, for whom does VAT apply to? Enterprises in the Emirates that have an annual turnover above 3.75 million Dirhams will have to pay the VAT according to the GCC VAT rules, as announced by Mr. Younis Al Khoury, the Undersecretary for UAE’s Finance Ministry.
The GCC VAT rules, on the other hand, also state that any enterprise whose revenue is anywhere between 1.87 and 3.75 Dirhams are eligible to register for the tax when the first phase of VAT implementation is underway.
However, when the VAT implementation reaches its second phase, all the companies, irrespective of their annual turnover, will have to apply for the tax. All the enterprises, even if their annual incomes fall below the DH1.87 million, will be obligated to pay VAT.
Despite the VAT to be introduced, UAE will remain a tax-free country with zero income tax on your salary as well tax-free zones still being in a place with a one hundred percent ownership of foreign owners. However, in order to keep the effect of the latest Value Added Tax minimal, the government will zero-rate the tax or cover only a few commodities under it.
The government will ensure that it is only the goods bought by disposable income that will be taxed, while the basics will be exempt to protect the poor.
Therefore, the tax does not have a very significant impact on UAE’s low-tax policy.
This VAT will be applied from 1st January 2018 and implemented on commodities such as cars, electronics, smartphones, restaurants, jewelry, and entertainment, which usually fall in the bracket of commodities bought from disposable income. In addition to these, the GCC nations might also levy excise duties on alcoholic drinks and drinks with high sucrose content.
On the other hand, essentials such as health, bicycles, education, social services along with hundred basic food items will not be subjected to this tax.
2) Why Is VAT Being Introduced?
Given that the United Arab Emirates is known for its low taxes as well tax-free zones, it has been able to attract a good number of foreign investors and business, which has led to its growth and prosperity. On the flip side, the UAE government projections also show that the income gained from oil revenues has been sliding steadily over the years.
Despite all the tourism, investment and a plethora of different income generating sources, the government is not able to get enough money out of the taxes. The latest Value Added Tax (VAT) has been introduced with an aim to create an additional source of income for the government so that the dependence on oil revenues reduces gradually.
The introduction of this tax has been done with an intention to wean off the government revenue machinery from petrochemical and oil-based sources. However, the latest taxation system aims to accomplish this without affecting UAE’s “tax-free” and low tax reputation and hence levied on only those commodities and services that are expensive.
3) Registering For VAT: Who Needs To Register And How?
So, who is required by the law to register for VAT? As mentioned earlier, any business, with an annual turnover clocking over Dh150 million or above should register before 31st October 2017 and businesses that have an annual turnover that falls between Dh10 million and Dh150 million are obliged to register by 30th November 2017.
Businesses that have a turnover either more than or equal to Dh375, 000 should register for VAT either before or on 4th December 2017.
The registrations are now open to businesses of all types and categories that satisfy the given requirements.
However, the official body is also letting voluntary registrations for VAT where the annual turnover limit is Dh187, 500. Also, businesses, including small establishments and start-ups that have an annual turnover exceeding Dh187,500 and less than ordinary VAT registration amount and while dealing with taxable supplies, can voluntarily apply for VAT.
This rule pertaining to the voluntary application to VAT is to help businesses with an easy transition to the VAT.
This is why companies will be required to upload their annual financial statements or other sources that substantiate their turnover if they want to apply for VAT.
Also, the taxing body has introduced some special considerations for filling VAT requirements. If any partner of your company is engaged as a partner for some other company based in the UAE, you are required to mention the name of such a company in your VAT application.
A company applying for VAT will be required to elect a manager who will represent it in its VAT/tax matters. The application should, therefore, contain the personal and professional details of the said manager. The company will also be required to fill in the details of the bank where they have an account.
The VAT law also provides a provision for group registration, where multiple groups operating under one umbrella business or multiple enterprises that are managed by the same management body, can apply for tax registration as a group, provided they are able to establish a relationship between all the groups/entities of the body. Also, they will be required to choose one member to represent all companies.
In the application form, the company name and the name of the manager should be entered in Arabic. After successfully submitting the application form, the company will get a tax identification number or a TRN.
Read about How To Register For VAT In UAE.
4) VAT Rates
Given that the UAE is a low-tax friendly nation, the VAT rates will be no more than 5%. However, there will be certain goods and services that will be zero-rated from the VAT tax or wholly exempted.
So what is the difference between a zero-rated transaction and an exempt one? The difference is vast, but to begin with, it is enough to mention that businesses that are zero-rated can register for VAT and also recover on VAT on purchases. This rule does not apply to exempted transactions.
Given that VAT is a comprehensive tax, it applies to most goods and services. And since most of the goods and services are transacted against payments (or have been specified by the law), they are economical in nature. This is where zero-rated transactions are levied with VAT tax. Any activity not related to the economic transactions should not be taxed.
Also, VAT should be levied on a transaction if there is a consideration involved, irrelevant to whether it creates profit or loss.
As mentioned earlier, the latest tax law applies to goods and services such as watches, jewellery, cars and expensive restaurants and exempts basic goods and services such as education and one hundred designated food items.
5) Impact Of VAT On Business Owners
No wonder, businesses are going to be affected in some or another when VAT gets introduced on 1st January 2018. So let us consider the different dimensions in which VAT will affect businesses operating in the UAE.
What will be the costs?
For the supply of your VAT taxable goods and services, businesses will be allowed to get back the VAT costs incurred on their sales. Similarly, for transactions that are not applicable with VAT, you cannot reclaim VAT on what you have earned.
VAT’s Effect on Price Margins
Since VAT is levied on the prices of goods and services, an introduction of the tax will naturally increase the prices of goods and services in the marketplace. However, it depends on the service providers and good sellers whether they want to raise the prices or not and to what extent. The overall price will have VAT included in it.
What Next? How To Get Ready For VAT?
Given that it is already November 2017, there is relatively very less time at hand to make any required planning and changes to your income structure. The nature of the changes needed to be done depends on the size and extent of your business.
Therefore it is vital that you consider the implications to your business right now and plan in the shortest time as possible about any changes you would need to make to your cost structures for accommodating VAT.
Get A Good VAT-Ready Accounting Software
Almost all the companies operating in the UAE must be using accounting softwares to generate their annual financial reports. However, with the introduction of the new Value Added Tax in the country, it becomes a burning necessity to have an advanced accounting software to generate your annual reports.
Let us take a look at some benefits of having a good accounting softwares.
1) Automated Processes For VAT
One of the key features of accounting softwares is that for taxes, they have automated processes. The accountant may not need to input taxes while preparing the financial report manually. If you update your current accounting suite or buy the latest one with VAT additions, you can get the benefit of having provisions made for VAT in their reports generation format.
Naturally, your accounting team will take time to get accustomed to the rules of the VAT, so there are possibilities of errors. However, with the help of an automated VAT process in the accounting suite, tax considerations get taken care of by default.
2) Minimizes Human Errors
You cannot afford to make errors while generating a report and especially when it comes to costs and taxes. An accounting software drastically reduces chances of errors and eases the overall effort your accounting team has to put into generating the reports. This improves their efficiency and helps them work faster.
3) Saves Time
An advanced accounting software helps you save a lot of time by helping you get your work done on time. With VAT at the helm, you wouldn’t want to overwork your accounting team into going back to the basics and calculating everything right from the beginning till end.
Your reports should be generated on time so that you can focus on the core of your business.
Although the VAT is going to increase prices of your goods and services, it is less likely that it will affect the business-friendly reputation of UAE, so there is no reason to worry about international businesses not giving as much consideration to UAE based companies a second thought.
If you are a business owner, it will be a good idea to invest in VAT Accounting Software. This will help you get your business ready during the tax time.See How ProfitBooks Can Help