In the past few years, the United Arab Emirates has witnessed a transformative shift in Taxation laws and policies, and the introduction of VAT Tax is one of them. With the implementation of 5% VAT in the UAE region, registered businesses and traders in all taxable services and goods are liable to pay Value Added Tax on their products, however, certain essential items like education, healthcare, and food will come under zero rate. In this article, we have compiled the 10 must-know things about VAT implantation in UAE with all the much-needed details.
Those who don’t know recently the Federal Tax Authority UAE has launched the Corporate Tax Law for all startups and well-established companies, who gain a profit of more than AED 375,000 in a year are liable to pay a 9% corporate tax on their total income earned. You can find the complete Corporation Tax Overview here.
Implementing VAT Tax in UAE has come into force by January 2018 and it draws a significant change in the country's taxation system. Currently, a 5% VAT has been levied on the country’s supplied goods and services, except for a few ones that we are going to discuss in the following guide.
Here are 10 key things you must know about VAT implementation in the United Arab Emirates:
When it comes to learning about indirect tax imposed on most goods and services, VAT comes straight to the mind. VAT aka Value Added Tax is the most common consumption tax applied all across the world with different percentages. Currently, more than 150 countries including 29 European Member states, as well as Australia, Malaysia, Canada, Singapore, and New Zealand have implemented VAT and charged it at each step of the supply chain.
On the other hand, tax registration can only be done across the UAE through the Federal Tax Authority’s website. You can access the VAT registration portal 7 days a week anytime. To get the steps below we have broken it down for easy understanding;
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For those who are new to the subject, the standard VAT rate in the UAE is 5%, and this rate applies to most goods and services, with some exemptions and zero-rated supplies. This means that for every eligible transaction, 5% of the transaction's value is added as tax. For example, if you purchase a smartphone for AED 1,000, the VAT you pay would be AED 50 (5% of AED 1,000). Similarly, if you purchase a laptop for AED 2,000, you would pay an additional AED 100 in VAT (5% of AED 2,000).
On the other hand, businesses with annual taxable supplies exceeding AED 375,000 must register for VAT. If your business's taxable supplies are below this threshold, registration is optional but can be beneficial for claiming input tax credit. Taxable supplies refer to the total value of goods and services on which VAT is applicable. If your business's taxable supplies for the year amount to AED 400,000, you must register for VAT.
All the registered businesses can easily claim input tax credits on their paid VAT. This helps prevent double taxation and reduces the overall VAT liability. For instance, if a restaurant buys AED 500 worth of ingredients with AED 25 VAT, they can deduct this AED 25 from the VAT they collect from customers. Similarly, if a car rental company buys a fleet of vehicles for AED 200,000 with AED 10,000 in VAT, they can offset this AED 10,000 against the VAT Tax they collect from renting out the cars.
Some goods and services are exempt from VAT, meaning the Value Added Tax is not applied to their sale. Businesses providing exempt supplies cannot claim input tax credits, such as residential property rentals and local passenger transport. You can say that residential property rentals are typically exempt from the Tax in UAE, for instance, if you rent an apartment for AED 3,000 per month, there is no VAT charged on the rent.
Zero-rated supplies are subject to 0% VAT but still allow businesses to claim input tax credits for the tax they’ve paid on related expenses. The export of goods and international services are typically zero-rated. If a UAE-based electronics manufacturer exports smartphones to Europe, they charge 0% VAT on the invoice. However, they can still claim input tax credit for VAT paid on manufacturing components.
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Businesses are accountable for paying taxes to a government that they have collected from all their consumers, however, in some cases, they can reclaim their paid VAT from the government. Yes, they are required to file regular VAT returns at regular intervals (usually quarterly) to report their VAT liability or claim a refund. These returns reports are collected from customers and the Value Added Tax is paid on purchases. For example, a company with VAT collected from sales of AED 10,000 and input VAT of AED 5,000 would have a net VAT liability of AED 5,000.
You can even file for VAT returns by going through the official web portal of the Federal Tax Authority on your most compatible web browser and performing the required steps.
Non-compliance with VAT regulations can result in penalties. These penalties can include fines for late filing, incorrect reporting, or failing to register when required. If a business fails to file its VAT return on time, it may incur a penalty of a certain percentage of the outstanding Value Added Tax. Hence, to avoid getting into this type of situation, you are advised to consult experts and professionals from the field.
Taking assistance from the skilled tax agents of ACE Tax Consultants can automatically fix this problem of yours and make you eligible to avoid any penalty on taxes.
Related businesses can form a VAT group to simplify VAT reporting. This allows them to consolidate their VAT liabilities and claim input tax credits as a single entity. Let’s just take a short example to understand it a bit more. Two sister companies with separate VAT registrations can form a VAT group to combine their VAT obligations and credits for a seamless process.
Value Added Tax affects consumer prices. When VAT is introduced, businesses usually pass on the tax burden to customers, causing an increase in the prices of goods and services. For example, if a restaurant's menu item used to cost AED 20 before VAT, it may now be priced at AED 21 (AED 20 + AED 1 VAT) after the introduction of VAT. Similarly, if a cup of coffee previously cost AED 10, it may now cost AED 10.50 due to 5% VAT.
VAT is applicable on imports, and businesses must pay VAT at the time of importation. Customs authorities typically collect this VAT. When goods are imported into the UAE, the customs authorities will assess and collect the applicable VAT before releasing the goods to the importer.
Businesses in the UAE need to understand these key aspects of VAT implementation to ensure compliance with the law and avoid potential penalties. Moreover, proper VAT accounting and reporting can help businesses manage their finances effectively, minimize tax liabilities, and make informed decisions.
With the standard rate of 5%, the Value Added Tax (VAT) system in the United Arab Emirates (UAE) plays a pivotal role in the country's overall development. Businesses with annual taxable supplies exceeding AED 375,000 must register for VAT, allowing them to claim input tax credits on their purchases while also fulfilling their VAT collection obligations. The UAE distinguishes between exempt supplies, such as residential property rentals, and zero-rated supplies, such as exports, each with its implications for businesses.
Therefore, understanding and complying with VAT regulations is vital for both businesses and consumers, ensuring the smooth operation of the UAE's taxation system while promoting fiscal transparency and revenue generation for the nation. If you’re questing for the Top VAT Tax Consultants in UAE, then contact us and hire our services with affordable pricing and costing. ACE Tax Consultants is happy to be your growth partner.
Value-added tax is the most popular and common form of indirect tax imposed on goods and services of a country. It is paid to the country’s ruling government at every stage in the supply chain. For countries like the United Arab Emirates, you can navigate to the Federal Tax Authority’s website for the process.
Several businesses, charities, and major financial and residential services are exempted from paying Value-added tax in the UAE region. Considering the services exempt from the taxation policy life insurance, bare land, and local passenger transport are a few examples. A business needs to focus that they can only sell VAT-exempt products if they are under the UAE VAT-exempt sector.
The registration fee of AED 500 needs to be paid via credit, debit, or e-Dirham card. After completing the payment, you can send the reference payment number to FTA via email.
