United Arab Emirates has Announced the Implementation of Value Added Tax for January 2018
President His Highness Shaika Khalifa Bin Zayed Al Nahyan of the United Arab Emirates decreed that a Value Added Tax (the official title of the decree is Federal Decree-Law No.(8) of 2017) of 5% will be applied to the import and supply of goods and services to the UAE starting January 1st, 2018. A Value Added Tax (VAT) is a tax that is applied on goods and services at each stage of the supply chain. The addition of the VAT means that consumers will pay for the tax via price increases and businesses will serve as intermediaries to collect the tax.
Businesses will be responsible for documenting all income and costs associated with the implementation of VAT. Registered businesses and traders will charge VAT to all their customers at the prevailing rate and incur VAT on goods and/or services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
How does VAT work? Let’s make it easy with a simple example.
- Wholesaler price is AED 100, wholesaler pays 5% VAT; AED 5 is collected
- Distributor sells it to the retailer for AED 200 (a 100% markup) and 5% VAT is charged on the markup; another AED 5 is collected.
- Retailer sells it for AED 500 (a 250% markup), VAT 5 is charged on the markup; AED 15 is collected
- Consumer buys a product for: AED 500, AED 25 from VAT has been assessed.
There are some exceptions to the new law and are classified as supplies of goods and services that are subject to Zero Rate. Some of these exceptions include investment precious metals, crude oil and natural gas, educational services, preventative and basic health care services, and aircrafts or vessels designated for rescue and assistance by air or sea. Click on the UAE’s Ministry of Finance website for more details.
Companies should keep the following points in mind when preparing themselves for the VAT registration:
- Educate and train all the stake holders in the businesses regarding VAT and implications;
- Make sure that the supplier invoices have assessed the VAT ID and the VAT % and Amount correctly;
- Examine existing and ongoing contracts and ensure procurement has made the appropriate adjustments and/or amendments;
- Know that, per the new law, VAT invoices must be retained for 5 years;
- File VAT submissions by established deadlines, businesses will incur huge penalties for late filings;
- Make existing electronic financial, procurement, or other IT systems VAT-compliant;
- Maintain VAT details with respect to each emirate; and
- Examine and/or check for the applicable VAT rules for business with GCC countries.
VAT is good for the UAE’s economy, but could be little tedious for the businesses and consumers. Learning how to apply the levy and, most importantly, account for VAT for regulatory reporting and filings will help make this process a smooth transition for all key stakeholders.