The UAE will start implementing a value added tax (VAT) at a rate of five per cent from 1January 2018. The UAE, similar to other GCC States, have prepared a draft law which will be published this year. It is expected that basic food items, healthcare and education will be exempt from VAT.
The main aim is to diversify the country’s income away from oil revenues. While the rate of VAT is much lower than other countries worldwide which charge between 17-25% VAT, the tax will generate extra revenue for the UAE government.
Impact on Businesses
Whilst the official framework of the law in relation to VAT is awaited, the Ministry of Finance has given the below guidelines.
In order to register for VAT a business must sell taxable goods or services and the business must meet the minimum annual turnover. The exact amount of the minimum annual turnover is to be confirmed; however this may safeguard small businesses from registering for VAT.
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.
All companies in the UAE (whether subject to VAT or not) will still be obliged to maintain their financial records in order to evidence their VAT position to the government if required.
Businesses will charge VAT to all of their customers at the prevailing rate and incur VAT on goods & services that they buy from suppliers.
A business subject to VAT registration pays the government the tax that it collects from the customers while it will receive a refund from the government on tax that it has paid to its suppliers.
Businesses should understand VAT registration obligations. Staff and management should be trained and fully acquainted with the requirements, including understanding exemptions and collection and payment processes.
Registration for VAT is expected to be made available online using a UAE government E services portal, three months before the launch of VAT.
All foreign companies will be allowed to recover the VAT they incur when visiting the UAE. This encourages foreign companies to do business in the UAE.
As the introduction of VAT in the UAE is upcoming it is important to keep up to date with changes and regulations in order that the transition to taxation is smooth.
The Ministry of Finance has re confirmed the grace period of 18 months to implement VAT, during this time businesses will be required to meet the requirements to fulfill their tax obligations.
Written by Sonam Trehan
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