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Global (عربي)
Since its introduction in 2018, Value Added Tax (VAT) has become a cornerstone of the UAE's fiscal framework.
VAT understanding is of great importance both to businesses and consumers in making their businesses and their lives comply with financial requirements.
This detailed how-to covers the basics of VAT in UAE with an introduction to the typical investor and the readership who has an interest in this subject.
VAT is a value-added tax levied at any stage of production or distribution of goods or services; at value addition.
In the UAE, VAT is applicable at a 5% standard rate on most commodities and services. The end consumer ultimately bears the tax, while businesses act as intermediaries, collecting and remitting VAT to the Federal Tax Authority (FTA).
The United Arab Emirates (UAE) implemented Value Added Tax (VAT) on January 1, 2018, at a standard rate of 5%.
This was a radical departure in the nation's fiscal policy, an effort to diversify sources of revenue away from oil and to benchmark globally on taxation practices.
The introduction of VAT was formalized through Federal Decree-Law No. (8) of 2017 on Value Added Tax, which outlined the tax's structure, scope, and application. The UAE Ministry of Finance published the law on 01/01/2018 with effect.
The goal of introducing VAT in the UAE was:
-Revenue Diversification: The Institution of a stable and sustainable source of income, and by doing so, reducing their dependence on oil income.
-Fiscal Sustainability: Improving the capacity of the government in delivering good quality public services like healthcare, education, and infrastructure.
-Economic Alignment: Bringing the tax system in the UAE in line with international standards and practices, promoting more transparency and a powerful economic environment.
The adoption of VAT required drastic changes such as:
- Registration: All businesses that have a taxable supply over AED 375,000 have been declared to register for VAT.
- Compliance: It became compulsory to keep proper records, issue tax invoices, and make VAT returns, at regular intervals.
- Pricing Strategies: Businesses were forced to re-price to factor in VAT consequences without undermining demand.
To consumers, VAT created a marginal increment on the costs of goods and services, which had an impact on their consumption and spending.
Businesses are required to register for VAT mandatorily when:
- They are UAE resident businesses making taxable supplies in the UAE.
- Their taxable supplies and imports are beyond the compulsory registration threshold for the preceding year.
- They expect that total value of taxable supplies and imports will rise above the mandatory registration threshold in the following 30 days.
This condition ensures that businesses that are a great source of income for the economy are tax compliant.
Businesses can register for VAT voluntarily when;
-They fail to pass the mandatory registration test.
- Their taxable supplies and imports or taxable costs during the preceding financial year exceed the threshold for voluntary registration.
- They expect the number of their taxable supplies and imports or taxable costs over the next 30 days to be greater than the voluntary registration threshold.
A voluntary registration is beneficial to startups and small enterprises that want to claim input VAT and increase their business credibility.
The forced registration level is AED 375,000. Entering this level requires a business to register for VAT and do everything that is required of it. The level of voluntary registration is AED 187,500.
Registering for VAT in the UAE is a structured process facilitated through the Federal Tax Authority's (FTA) EmaraTax portal.
The following is a complete reference to allow businesses to follow the registration process.
Step-by-Step UAE VAT Registration Process
1- Create an EmaraTax Account: Go to the FTA's official portal, create an EmaraTax account by supplying your email and typing a secure password. You will get a verification email to verify registration.
2- Log In and Get the VAT Registration Form: When you have verified your account, log in to the EmaraTax portal. Go to "Taxable Persons" and click the "Register for VAT" option.
3 -Complete the VAT Registration Form
Enter the valid business information, such as:
- Legal entity name.
- Trade license information.
- Business activities.
- Contact details.
- Bank account information.
- Estimated taxable turnover.
3- Upload Required Documents for Registration
Create and upload the required documentation, like:
- Trade license copy.
- Passport copies of business owners/partners.
- Emirates ID copies.
- Proof of business address.
- Bank account details.
- Financial statements.
- Customs registration (if applicable).
4- Review and Submit the Application:
Review everything that is entered and the documents that were uploaded. When confirmed, send the application through the portal.
5- Await Approval and Receive TRN
The FTA will normally process VAT registration within 20 business days. Upon approval, you'll receive a Tax Registration Number (TRN), which must be included on all VAT-related documents and invoices.
The conventional VAT rate in the UAE stands at 5% but charges a basic rate to most goods and services, including business-to-business, imports, and commercial sales.
Some goods and services have a 0% VAT rate, i.e., VAT is charged at 0%, and businesses can recover input VAT. Examples include:
- Exports of goods and services.
- International transportation.
- Certain educational services.
- Certain healthcare services.
-The first supply of residential buildings in three years of completion
VAT is not charged for exempt supplies, and the businesses cannot reclaim input VAT for such supplies. Examples include:
- Certain financial services.
- Residential properties (subsequent sales).
- Local passenger transport.
A failure to comply with VAT regulations can attract large penalties. Common violations and penalties include;
- Failure to register for VAT: AED 20,000.
- Late submission of VAT returns: AED 1,000 for the first offence; AED 2,000 for the second offence within 24 months.
- Failure to maintain proper records: AED 10,000 for the first offence, and subsequent offences: AED 50,000.
- Incorrect tax invoices: AED 5,000 per incorrect document.
Timely registration and accurate record keeping, as well as the timely filing of returns will ensure one is not against such penalties.
When the UAE introduced a 5% Value Added Tax (VAT) in January 2018, it marked a significant shift in the nation's economic landscape.
To the consuming population, the shift had a clear increase in the prices of goods and services, on which spending habits and financial planning had to be altered.
i - Increased Price Sensitivity:
Consumers became more price-conscious despite VAT, which wasn't that high. The extra cost redefined the behaviors of many people; people were thinking first about necessities, while bypassing discretionary purchases. Such a shift was most pronounced in middle-income households whose budgets are more vulnerable to change in the cost of living.
ii -Impact on Consumer Behavior:
The implementation of VAT had various effects on consumers' behavior:
- Reduced Disposable Income: The extra tax burden proved an actual decrease in consumers' disposable income, and dragged down expenditure.
- Shift to Savings: Due to the rise in the cost of living, most consumers have decided to save more, hence cutting down on non–essential items.
- Altered Purchasing Patterns: There was a clear tendency towards buying less expensive brands and asking for discounts as consumers tried to offset the influence of VAT on their budgets.
iii- Long-Term Adjustments:
Consumers have, over the past, adjusted to the VAT-inclusive price structure. Although the first rollout created a phase of adjustment, many have adopted the tax into their financial plans.
Businesses, in turn, have also revised to give promotions and pricing strategies to keep customer loyalty.
1- How can tourists claim VAT refunds?
Entitled tourists can claim back the VAT they paid for their purchases in the UAE by having their purchases verified on designated refund points at the point of exiting the Country. The approved operator of the FTA, Planet, ensures the refund process.
2- What are zero-rated supplies?
Zero-rated supplies are charged at 0%, which enables the companies to recover input VAT. Examples of these are exports, international transportation, and specific educational and healthcare services.
3- What are exempt supplies?
Exempt supplies are not liable for VAT, and the businesses are not in a position to recover the input VAT on exempt supplies. Examples include certain financial services, residential property sales (excluding the first sale), and local passenger transport.
4- What is a Tax Registration Number (TRN)?
TRN is a unique number of 15 digits that is assigned to the business by FTA and registered for VAT. It is applied to all the transactions and communications regarding VAT.
5- What is the VAT registration threshold?
It is compulsory for those who sell/import taxable goods, which totaled more than AED 375,000 in the last 12 months. The voluntary registration limit is AED 187,500.
6- How does VAT apply to overseas online purchases?
The VAT tax is paid on the online purchases made from abroad if the goods are brought to the UAE. VAT is normally charged when goods are imported.
7- What is the VAT treatment for Free Zones?
The Free Zones are classified as Designated Zones and non-Designated Zones. The designated zones are considered to be outside the UAE for VAT purposes, having certain conditions, whereas the non-designated zones are subject to the standard VAT rules.
8- What is Input VAT?
Input VAT is the VAT that a company incurs on its purchases and running costs. Businesses can reclaim input VAT if it qualifies as a taxable supply.
References
https://tax.gov.ae/en/taxes/Vat/vat.topics/registration.for.vat.aspx?
https://vatregistrationuae.com/vat-rate-list-in-uae/
https://vatregistrationuae.com/list-of-vat-penalties-and-fines-in-uae/
https://www.dsc.gov.ae/en-us/About-Us/Pages/VAT.aspx
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
