VAT Law in UAE
UAE President issues VAT Decree-Law
President His Highness Sheikh Khalifa bin Zayed Al Nahyan has issued the Federal Decree-Law No. 8 of 2017 for Value-Added Tax, with one of the lowest rates in the world.
A preliminary step to implementing VAT in the UAE as of January 2018, the 5% tax is set to be imposed on the import and supply of goods and services at each stage of production and distribution, including what is deemed to be a supply.
“The Federal Decree-Law issued by H.H. Sheikh Khalifa bin Zayed is the bedrock of the UAE’s planned tax system, which was designed to meet the most stringent of standards and best practices,” said H.H. Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai, UAE Minister of Finance and Chairman of the Federal Tax Authority.
“The Value-Added Tax, which is set to be implemented across all GCC countries over the next two years, will bring a new revenue stream for the national economy and GDP. This, in turn, will ensure consistency in the high quality of government services, to mirror the UAE’s advanced position on several global competitiveness indexes.”
“The new tax system will provide extra support for the Government to implement the vision of the UAE leadership and build a diversified and productive knowledge economy,” H.H. Sheikh Hamdan added.
“The newly introduced Value Added Tax that shall be implemented in the GCC depending on the readiness of each member State between 1 January 2018 and 1 January 2019 pertaining to the Common VAT Agreement of the States of the GCC, will have positive results on the economy, far exceeding its 5% rate, given that revenues will be redistributed to development projects that benefit society at large and accelerate progress until the UAE reaches the top of global rankings across all sectors.”
The Decree-Law provides that all supplies of goods and services are subject to VAT at a standard rate of 5% with the exception of specific supplies subject to the zero rate and what is exempted as specified in the Decree-law. Tax imposed shall be the responsibility of a Taxable Person who makes taxable supplies or what is deemed to be a supply or on import.
According to the Decree-Law, a supply of goods includes the transfer of ownership of the goods or the right to use them as an owner from one Person to another and an entry into a contract between two parties triggering the transfer of goods at a later time. A supply of service is any supply that is not considered a supply of goods.
The Decree-Law made two exceptions as to what constitutes a supply: the issuance or sale of any Voucher unless the received Consideration exceeds its declared monetary value; and the transfer of whole or an independent part of a Business from a Person to a Taxable Person for the purposes of continuing such Business that was transferred.
A Government entity is regarded as making a supply if said entity was not performing activities in sovereign capacity or if its activities are in competition with the private sector. The Cabinet – upon the suggestion of the Minister – issues a decision determining specific Government entities whose activities are considered as “activities in sovereign capacity” and instances where these activities are considered not in competition with the private sector.
A supply is considered “Deemed” if the supply of goods or services was all or part of a taxable person’s assets, but no longer considered to be as such (provided the supply was made without consideration).
Similarly, the supply is Deemed if implemented through a transfer by a Taxable Person of Goods forming part of his business assets from the UAE to another VAT-implementing GCC state, or from the Taxable Person’s business in a VAT implementing GCC state to his business in the implementing state, unless, in either case, that transfer: is treated as temporary under the Customs Legislation, or is made as part of another Taxable Supply of these Goods.
The same applies to the supply of goods or services for which Input Tax may be recovered but was used, in part or whole, for purposes other than Business, but only to the extent of non-Business use, as well as for Goods in the ownership of the Taxable person as at the date of Tax Deregistration.
Every person who has a place of residence in the UAE or in a VAT implementing GCC state must register for VAT according to the Decree-Law if at the end of any month his taxable supplies for the previous 12 months exceeded the mandatory registration threshold or he expects to exceed the mandatory registration threshold in the next 30 days.
The Decree-Law stipulates that two or more persons conducting business may apply for tax registration as a tax group if all of the following conditions are met: Each Person has a place of establishment or fixed establishment in the UAE; the relevant Persons are related parties, and one or more Persons are conducting business in a partnership that controls the others.
The legislation also includes provisions prohibiting any Person conducting business from having more than one tax registration number,TRN, unless otherwise decided by the Executive Regulation. If related parties do not apply for Tax Registration as a Tax Group, the Authority may assess their association based on their economic, financial and regulatory practices in business and register them as a Tax Group if the association has been proved according to the controls and conditions specified by the Executive Regulation. The Authority has the right to make changes to the Persons registered as a Tax Group by removing or adding Persons based on the instances mentioned in the Executive Regulation or as requested by the Taxable Person.
Any Person who is not obligated to apply for Tax Registration may apply if, at the end of any given month, the total value of taxable supplies or expenses which were subject to Tax incurred during the previous ’12’ month-period exceeded the Voluntary Registration Threshold. The same applies in the event where it is anticipated that the total value of taxable supplies to be made or expenses which were subject to Tax to be incurred will exceed the Voluntary Registration Threshold during the coming ’30’ day period.
A non-resident Person may not take the value of goods and services imported into the UAE for the purpose of calculating whether they are entitled to apply for tax registration if the charging of tax for such goods or services is the duty of the Importer, as defined in the Decree-Law.
To determine whether a person has exceeded the mandatory registration threshold and the voluntary registration threshold, the total sum of the following is calculated: The value of Taxable Supplies made by the Person; the value of concerned goods and concerned services received by the Person; the value of the taxable supplies made by the acquired whole or part of the business, if a Person acquires a whole or part of another business; and the value of taxable supplies made by related parties.
A registrant must apply to the Authority for tax deregistration if he no longer makes taxable supplies; or if the value of the taxable supplies made over a period of 12 consecutive months is less than the voluntary registration threshold. They may also apply for tax deregistration if the value of taxable supplies during the past 12 months was less than the mandatory registration threshold.
Zero-rating applies when goods and services are being exported to outside a VAT-implementing GCC state, as well as to international transportation of passengers or goods including a transfer starting or ending in the UAE or passing through its territory. Air transfer of passengers in the UAE also incurs zero rates if it is considered an “international carriage” as per article (1) of the Warsaw International Convention for the Unification of Certain Rules Relating to International Carriage by Air 1929.
Zero-rating also applies to the supply of air, sea and land means of transport used to transport passengers and goods, as well as the supply of goods and services related to the supply of the means of transport, which are for operating, repairing, maintaining or converting them; the supply of aircraft or vessels designated for use in the assistance or rescue by air or sea; the supply of goods and services related to the transfer of goods or passengers aboard land, air or sea means of transport, designated for consumption on board; or anything consumed by means of transportation, any installations or addition thereto or any other uses during transportation.
The supply or import of investment-precious metals, as well as the first supply of residential buildings within (3) years of its completion, either through sale or lease in whole or in part, is equally subject to a zero-rate. The first supply of buildings specifically designed to be used by charities and buildings converted from non-residential to residential shall also be taxable at the rate of zero.
Also subject to the zero rates is the supply of educational services and related goods and services for nurseries, preschool, elementary education, as well as higher educational institutions owned or funded by the Federal or local government, as specified in the Executive Regulation; and, finally, the supply of preventive and basic healthcare services and related goods and services, as specified in the Executive Regulation.
The Decree-Law outlines that certain supplies shall be exempt from tax, namely: the supply of certain financial services as specified in the Executive Regulation, the supply of residential (non-zero-rated) buildings either by sale or lease, the supply of bare land, and the supply of local passenger transport.
As per the Decree-Law, Payable Tax for any Tax period is calculated as the total Output Tax (i.e. the tax that the taxable person has charged on his supplies) during the said period less the total Input Tax recoverable by that Taxable Person over the same Tax Period (i.e. the tax that he has paid on supplies to him or imports by him).
The Taxable Person must submit a Tax Return to the Authority at the end of each Tax Period in accordance with the timeframes and procedures specified in the Executive Regulation of the Decree-Law declaring all supplies made and received which during that Tax Period.
The Executive Regulation of the Decree-Law shall specify the timeframes and procedures of payment of tax declared in the Tax Return as payable.
If a Taxable Person acquires or imports a Capital Asset, the Taxable Person must assess the period of use of that asset and make the necessary adjustments to the Input Tax paid pursuant to the Capital Assets Scheme.
Taxable Persons are mandated by the law to retain the records relating to Capital Assets for at least ten years. A registrant making a taxable or deemed supply shall issue an original tax invoice and deliver it to a recipient of goods or services or keep it in his records in the event of a lack of recipient. Any person who receives an amount as Tax pursuant to any document issued by the Person must pay this amount to the Authority. A registrant shall issue a tax invoice within 14 days of the date of supply.
The Decree-Law specifies that the Executive Regulation shall include the information to be included in the Tax Invoice; conditions and procedures required to issue an electronic Tax Invoice; instances where the Registrant is not required to issue a Tax Invoice to the Recipient of Goods or Services; instances where other documents may be issued in place of the Tax Invoice, as well as their specifications and the information to be included therein; and instances where another Person may issue a Tax Invoice on behalf of the Registrant supplier.
Accounting Records and Commercial Books
Submission of Tax Returns, information, records, and documents to FTA must be in Arabic. In case they are in any other language a translation might be needed at the expense of the taxpayer.
- Taxable Persons must apply for Registration.
- Use of Tax Registration Number (TRN) in all communications with FTA
- Changes in taxable person’s information affecting its Tax record must be communicated within 20 business days
- Appointment of Legal Representative must be communicated to FTA within 20 business days from appointment
- Incomplete Tax Returns are considered will be treated as not having been received.
- Taxable Person is responsible for the accuracy of the Tax Return data.
- Payment less than the Payable Tax amount will trigger the issue of a Tax Assessment by the FTA and the relevant penalties.
The Law is allowed to provide voluntary disclosure correcting errors in Tax Returns and Tax Refund Applications.
- Tax Agents are persons appointed to act on behalf of a Taxable Person with regard to its Tax affairs with the FTA.
- Tax Agents must meet certain conditions and be registered with the Authority.
- Tax Audit can be performed at FTA office or at the place of business of the Taxable Person.
- In case of an audit at the place of Business, FTA has to inform the business 5 business days in advance.
- In certain cases, FTA can shut for 72 hours any place where the Business carries its business, stores its goods, or keeps its records subject to the prior written consent of Director General.
- Audited Person has the right to:
- request the Tax Auditors show their job identification cards.
- obtain a copy of the Tax Audit Notification
- attend the Tax Audit which takes place outside the Authority
- obtain copies of any original paper or digital documents seized or obtained by FTA
A number of violations are prescribed in the Law, where an Administrative penalty will be issued. The amount and the procedure will be issued by the Cabinet, but it will not be less than AED 500 and more than 3 times the amount of Tax in respect of which the Administrative penalty was levied.
Tax Evasion Penalties
Tax evasion carries penalties of monetary penalty not exceeding five times the amount of evaded tax and/or imprisonment. More severe penalties applicable under any other law (e.g criminal) might also apply.
In the Law is set the framework for resolving disputes between the Taxable Person and the FTA. The steps are:
- Apply to FTA to reconsider. If rejected or reconsideration is not satisfactory than appeal to:
- Tax Disputes Resolution Committee.
- For total Tax and Administrative penalties up to AED 100.000, its decision is considered final.
- The committee’s decisions can be challenged at the competent court.
Refund and Collection of Tax
The Law sets some procedures relevant to the application for Tax Refund and collection of payable taxes.
- 5 years from the end of the relevant Tax Period, for cases where there is no tax evasion.
- 15 years in case tax evasion is proven.
- 15 years in case of non-registration for Tax purposes.