On January 1, 2018, the United Arab Emirates imposed a Value Added Tax (or, VAT) on goods and services, joining over 160 nations around the world in imposing such a tax. Understanding how the UAE VAT is structured—and how it will impact businesses looking to expand into the UAE—can help identify both challenges and opportunities in the country.
What is a Value Added Tax?
A value added tax is a form of consumption tax. Additional taxes are levied every time value is added to the product, usually at different stages of the supply chain. VAT increases the price of an item every time it is modified, added to, or moved. Essentially, the more value that is added, the higher the price becomes.
The UAE VAT
Federal Decree Law No. (8) was issued in 2017 and allowed for the implementation of VAT beginning January 1 of 2018. The standard VAT rate is 5% under the new law and VAT is now collectible on taxable goods and services throughout the UAE.
The purpose of this tax is to provide new income streams that will be used to improve and expand public services. The nation is also hopeful that VAT collected will move the UAE closer to independence from hydrocarbons and oil for revenue.
How Does VAT Impact Businesses and Individuals in the UAE?
When a customer makes purchases, they may have to pay VAT, depending on the taxability of the items purchased. The brands or businesses from which a customer buys will levy VAT on behalf of the Federal Tax Authority and submit as outlined by law and regulatory authorities.
Since VAT is a consumption tax, most individuals will be impacted as they purchase items and conduct business. However, some categories of supplies qualify for exemptions, including:
- Some financial services
- Residential properties
- Bare land
- Local passenger transport
Businesses are required to clearly post the amount of VAT levied on purchases so consumers can make informed decisions. VAT applies to anyone transacting business or making purchases in the UAE, including tourists. But in some cases, the amount paid may be refunded to travelers upon departure.
VAT for Business
For businesses, the new legislation covering VAT requires that they properly calculate and collect VAT. The arrival of this new tax means that businesses may also need to provide additional documentation and costs as they collect, track, and report VAT amounts.
A business would pay VAT on items that come from suppliers, then charge VAT to its customers as items are purchased. Records must be accurate, up to date, and compliant with all reporting rules and regulations. These records need to be available to the government as needed and kept for a set amount of time. Online reporting of VAT charged and collected, along with payments for any differences or refunds for overpayments, are to be conducted online. This reconciliation ensures that VAT is properly charged and collected at all levels in compliance with the UAE Federal Tax Authority and Ministry of Finance.
Which Businesses Need to Register for VAT?
If a business has taxable imports or supplies of over 375,000 AED each year, it will need to register in order to collect and pay VAT. For businesses generating between 187,500 and 374,999 AED, VAT is optional. Businesses required or that are opting to collect VAT can register to do so online. Businesses collecting VAT need to file returns each tax season to reconcile their reports and ensure that the proper amount of tax has been collected and refunded.
Expand Globally with Confidence
If you’re considering expanding operations into the UAE, understanding how VAT may impact your business is essential. Velocity Global can provide you with insight into the UAE’s economic environment with country-specific reports and guidance through each step of the expansion process through our full suite of global expansion services. Reach out to us today to get started.