Value-added tax in the United Arab Emirates
For many years, the United Arab Emirates has drawn in international investors due to its strong base of expatriate consumers and its tax-free approach to trade. While the UAE remains an attractive haven for international trade and investment, a new value-added tax (VAT) is making trade in the Middle Eastern nation slightly more complicated.
The new VAT-associated costs aren’t related solely to the tax itself, but also the changes required to the technological and administrative infrastructure that will ensure compliance with the new tax law.
About the new VAT
For the uninitiated, the member states of the Gulf Cooperation Council (GCC) in 2015 signed the Unified VAT Agreement that proposed a VAT in all GCC countries. The UAE published the Federal VAT Law on August 27, 2017, implementing the domestics rules for VAT and introducing a standard five per cent VAT effective January 1, 2018. The stated aim is to reduce reliance on oil-generated revenue, and to invest more in the nation’s infrastructure.
A company is required to register for VAT if the value of its taxable supplies exceeded AED 375,000 (around US$ 100,000) over the previous 12-month period. Businesses are also expected to register if their supplies and imports are expected to exceed AED 187,500 annually. These registration thresholds apply irrespective of whether the business is onshore or based in a free zone where businesses are typically exempt from payment of import duty.
Opportunity for exemption
Although the standard VAT rate is charged on most business products and services, several goods and services considered vital to the economy do not incur VAT. They are either zero rated or exempted from the VAT. Suppliers of goods and services that are zero rated can reclaim VAT they have paid on inputs into their business. Suppliers of exempt goods and services do not have to register for VAT but, they cannot reclaim VAT they have paid on inputs.
Goods and services that are zero rated include basic food items, education, medical equipment, health care and the supply of commercial aircraft and buses; and the exports of goods and services to countries outside the Gulf Cooperation Countries (GCC). International transport services (for both passengers and goods), certain investment grade precious metals, newly constructed or converted residential properties, crude oil and natural gas are also zero rated.
Exempted goods and services include rent on residential buildings, local public transport services and some financial services including life insurance and margin-based products such as loans and fixed deposits. General insurance and fee-based financial services, such as on-line transfers are subject to VAT.
To make sure the VAT is being collected correctly and to submit quarterly VAT reports, businesses have had to incur the cost of updating IT and internal systems, training employees in VAT processes and employing the services of accounting/tax specialists. As the collection and remittance process of VAT is mostly self-assessed, businesses fear that errors may lead to penalties or at the very least, time consuming exchanges with tax authorities, and disruptions to business operations.
New administrative requirements
Businesses are legally required to prepare and keep a range of business records for a period of five years so the government can ensure the tax has been collected and remitted accurately, and that input reclaims are genuine. Annual accounts, general ledgers, purchase day books, and invoices issued and received, as well as credit and debit notes, must be maintained and capable of being presented at short notice to the authorities.
Potential for future VAT increases
There is a concern that the government may increase the five per cent rate. In addition, there are concerns zero-rated products will be brought under the tax umbrella although exempt categories are likely to remain exempt. This prospect creates uncertainty for both businesses and consumers, who will naturally be worried about increased costs being passed on to them.
Businesses must ensure they are compliant with the new regulations and may need the support of external consultants to better plan the collection of VAT and reclaims of input VAT. At the same time, the introduction of VAT creates challenges in the pricing of products and impacts profit margins as it may not be possible to pass on all additional costs incurred in the management of VAT to the final consumer without affecting the market share of a business. An increase in the market price of a product to account for VAT-related costs may also lead to a reduction in market share.
The introduction of the VAT introduces several challenges to businesses in the UAE, the likes of which haven’t been seen in several years in the traditionally tax-free regime. A fresh look at sourcing, manufacturing & processing costs, and final pricing to consumers will be necessary to stay viable and profitable under the new regime. A re-assessment of internal human resource skills and supplements required from external consultants will likely also be required.