Implementation of VAT in UAE
Value Added Tax:
Value Added Tax (or VAT) is an indirect tax and is one of the most common types of consumption tax found around the world. VAT is charged at each step of the “supply chain”. Ultimate consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to the government reflect the “value addition” throughout the supply chain.
VAT implementation in the UAE:
VAT implementation in UAE is intended to provide a new source of revenue, contributing to the continued provision of high quality public services to the people. It also helps the government move towards its vision of reducing dependence on income derived from oil and other hydrocarbons. VAT was introduced across the UAE on 1st January 2018.
The UAE VAT Law is part of GCC VAT framework.VAT in UAE is governed by VAT Decree Law No 8 of 2017 and Cabinet Decision 52 of 2017
Federal Tax Authority:
The Federal Tax Authority (FTA) is a government entity and is established in 2016 by the President of the UAE for the administration, collection and enforcement of federal taxes via Federal Decree-Law 13 of 2016.
VAT on supplies made by Government Entities:
Supplies made by government entities are typically subject to VAT. This ensures that government entities are not unfairly advantaged as compared to private businesses.
Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. Certain government entities are entitled to VAT refunds – this is designed to avoid budgeting issues and provide a level playing field between outsourced and insourced activities.
For the supplies provided for government entities, the treatment of such supplies depends on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard tax rate, the treatment will remain the same even if it is provided to a government entity.
Scope of VAT:
Under the UAE VAT, supplies can be classified as:
- Standard rated supply: The standard VAT rate of 5% will be applied to almost all goods and services in the UAE. The standard rate will apply to the sale and lease of commercial property, hotel and restaurant service, repairs and maintenance services and more.
- Zero rated supply:Zero rated supplies are taxed at 0%. The invoice for a zero rated product should include a tax column showing a zero rate and zero value. The reason for showing the zero value in the invoice is to ensure that this transaction is not used to claim tax offsets later.
Exports, healthcare, medicines, and medical equipment are examples of zero rated supplies.
- Exempt supply:Supplies which are unaffected by the VAT implementation are known as exempted supplies. No tax will be charged for such supplies, and any tax which was previously paid on their purchase will not be available for credit.
Educational institutions and financial services are examples of VAT-exempt supplies.
- Out-of-scope supply:If an overseas supplier or a non-registered entity supplies goods or services to an overseas person, these supplies will be considered out-of-scope for VAT in the UAE.
- Deemed supply:A deemed supply will occur when a business purchases something, claims input VAT for it, and later puts the item to a non-business or private use. Examples include gifts and motor fuel for personal use.
When a VAT-registered business deregisters, any goods held by the business for which the input tax has already been recovered are treated as deemed supplies.
- Supply of goods or services before and after the date of VAT implementation:There are a few factors to keep in mind before deciding whether VAT is applicable on the supply or not.VAT is applicable if supply is made after the date of VAT implementation irrespective of the date of payment.
Supply of Goods:
Though the VAT is applicable at 5% on the supply of both goods and services, each of them are defined separately and governed by separate provisions of UAE VAT Law and Executive Regulation. This is because, the characteristics of supply of goods are different from services. The UAE Executive Regulation has in detail provided clarity for determining it.
In UAE VAT, Goods are defined as a physical property that can be supplied including real estate, water, and all forms of energy as specified in UAE VAT executive regulation. In other words, any tangible property that can be touched or felt are considered as Goods. Anything which meets the above, will be considered as a supply of goods in UAE VAT.
The following are the different forms of supply which are considered to be a supply of goods as detailed in the UAE VAT regulations:
A transfer of ownership of Goods or the right to use them from one Person to another Person
The transfer of ownership of goods or the rights to use them amounts to the supply of Goods. This includes transfer of ownership of goods under a written or verbal agreement for any kind of sale and ownership for a consideration in a compulsory manner in accordance with the provisions of applicable legislation.
Supply of Services:
In UAE VAT, services are defined as ‘anything that can be supplied other than goods’ . In other words, any Supply that does not constitute a Supply of Goods under VAT shall be considered a Supply of Services including the provision of services.
It is a broader definition to consider anything other than goods as a supply of services, the UAE Executive Regulation has detailed few specific forms of supply which should be treated as a supply of services.
Services in UAE VAT are defined in a broader way. The businesses who are in the Services sector need to take extra care in determining whether a supply is a service or goods. This is because, services are defined to include ‘non-physical’ property along with ‘anything’ else that can be supplied other than goods. Thus, it is capable of encompassing all transactions that escape the definition of goods into services.
Deemed Supply :
There are various components which should exist as defined in UAE VAT law to consider an activity as a supply. The term ‘Supply’ includes all forms of supply of goods or services supplied by a registered taxable person in the State of UAE for a consideration and in the course of conducting a business.
However, in certain exceptional scenarios, an activity may take place which does not meet the conditions of a supply. For example, a taxable person may do something with the goods which does not involve making them available to another party, or goods or services may be provided to another person without any consideration.
Registration for VAT:
Only VAT registered businesses will be allowed to do the following:
- Charge VAT on taxable supply of goods and services
- Claim Input Tax Credit on VAT paid on their purchases, which will be deducted from VAT liability on sales
- Payment of VAT to the government
- Periodic filing of VAT return
Only those businesses crossing the defined annual aggregate turnover threshold are liable to register under VAT. Based on the registration threshold. VAT registration in UAE can be classified into the following:
- Mandatory VAT Registration
- Voluntary VAT Registration
- Exemption from VAT Registration
Businesses whose annual turnover exceeds the mandatory registration threshold of AED 375,000 and the voluntary registration threshold of AED 187,500 are allowed to apply for VAT registration. The businesses engaged in making only zero rated supplies can request for exemption from VAT registration.
Any person conducting business is not allowed to have more than one Tax Registration Number (TRN), unless otherwise prescribed in the UAE Executive Regulation. Thus, even if you are operating via branches in more than one Emirate, only one VAT registration is required. With a similar objective, if two or more persons are related or associated parties in the businesses, they are allowed to apply for VAT group registration.
Two or more persons conducting businesses may apply for Tax Registration as a tax Group. A tax group is a group of two or more persons registered with the FTA as a single taxable person subject to fulfilment of conditions under UAE VAT Law. This group registration is only for the purpose of tax.
Conditions for Applying VAT Group Registration
Each person shall have a place of establishment or fixed establishment in the State
The relevant persons shall be Related Parties, related parties refer to two or more persons who are not separated on the economic, financial or regulatory level, where one can control others either by Law, or through the acquisition of shares or voting rights.
Registration of Non Resident:
Non-residents that make taxable supplies in the UAE will be required to register for VAT unless there is any other UAE resident person who is responsible for accounting for VAT on their behalf. This exclusion may apply, for example, where a UAE business is required to account for VAT under a reverse charge mechanism in respect of a purchase from a non-resident.
Date of supply:
Time of supply refers to the time when output VAT is required to be paid. This is a mechanism which is used to determine the point in time when the tax liability will arise on a taxable transaction which a business is liable to pay.
Place of supply:
The default rule for determining the place of supply of services in VAT is that the place of supply will be the place of residence of the supplier.
Note that where the supplier has multiple potential places of residence (e.g. the business is incorporated in one country and has branches in other countries), the place of residence will be the place that is most closely connected with the supply being made.
Value of supply:
Consideration is defined as ‘All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment’. This implies that consideration can be in the form of money and non-monetary as well.
In case of non-monetary consideration the value of supply shall be the market value of goods or services.
Zero rated Supplies:
Zero-rated supplies in UAE VAT refers to the taxable supply on which VAT is charged at zero rate. Here, tax is charged at zero-rate either based on the nature of supply.
Generally, all exports of goods and services in UAE will be considered as zero-rated supplies. However, to qualify a supply as zero-rated, there are a set of conditions laid out in UAE executive regulations which needs to be met for charging zero rate tax
There are certain exempted goods or services notified in UAE executive regulations, on which VAT is not levied. This means, on supplying these goods or services, VAT is not charged.
On the other hand, businesses supplying these exempted goods or services will not be allowed to claim the input tax paid on your purchases.
Exempted goods and services list in UAE
- Financial Services:
- Residential Buildings
- Bare Land
- Local Passenger Transport Services
Is there any difference between Zero rate supplies and Exempt supplies in UAE VAT?
The above question becomes obvious, because, the end result of zero-rated supplies and exempt supplies are same, i.e. VAT is not charged on the supply.
Though VAT is at zero per cent they have differential treatment in claiming input tax credit (ITC). On the purchase of goods or services which are supplied as zero-rated supplies, you are allowed to avail the VAT paid as ITC and set-off against your output liabilities. In the case of exempt supplies, you will not be allowed to claim ITC on VAT amount paid on your purchases.
Also, you may expect the details of zero-rated supplies and exempt supplies to be reported separately in VAT Return.
Reverse Charge Mechanism:
Under reverse charge mechanism, on certain notified supplies, the recipient or the buyer of goods or services is responsible to pay the tax to the Government, unlike in the forward charge, where the supplier is liable to pay the tax. The key change is the shift in the responsibility of paying tax, which is moved from the supplier to the buyer.
In order to ensure that the VAT is collected on the supply of goods or service where the supplier is not a taxable person and the supply has been made in the state of UAE, the government has introduced the concept of reverse charge mechanism. Due to this, the recipient or the buyer is treated as a person making taxable supplies to himself
A Designated Zone is an area which is specified by the cabinet decision and that meets the conditions prescribed in the UAE Executive Regulation. Refer to cabinet decision 59 of 2017 for list of designated zones.
For the purpose of VAT the Designated Zones are treated to be outside the State of UAE, meaning VAT will not be levied. Though it is treated as outside the State, not all supplies will enjoy this benefit, some supplies still attract VAT at 5%. The reason being, only the supply of goods will be tax-free subject to certain conditions and depending upon the place of supply, few type of supplies made from or to the Designated Zone will be taxable. The table below details the VAT applicability on supplies made from/to the Designated Zones.
VAT treatment on Supply of Services related to Designated Zone
There is differential treatment for supply of goods and as well as for the supply of services between Designated Zones. While the supply of goods between the Designated Zones are not subject to tax, it is not true in case of supply of services. The reason being, the place of supply of services is considered to be inside the State of UAE if the place of supply is in the Designated Zone. This implies, any services whether supplied from the mainland to Designated Zone or within the Designated Zone, the standard rate of VAT at 5% will be levied.
Recoverable input Tax:
A Taxable person can reduce the value of input tax eligible for recovery from the tax payable and only pay the balance amount as tax. This ensures that tax is paid only on the value-added at each stage in the supply chain.
Conditions for input tax recovery
A registered business can recover the VAT paid on purchase of goods and services used for business purposes and subject to certain conditions. These conditions to be satisfied are:
1. Should be used to make Taxable supplies: The supplies on which tax is liable to be paid are called taxable supplies (i.e. supplies made at 5% or zero-rated supplies). Input VAT recovery is allowed to be claimed only on inputs used to make taxable supplies, not exempt supplies.
2. Recipient receives and keeps the Tax Invoice: The recipient claiming input tax recovery on a supply should ensure that the Tax invoice pertaining to the supply is received and kept in the records. The Tax Invoice should show the details of the supply related to the input tax recovery being claimed.
3. Recipient pays the consideration for the supply: The recipient claiming input tax recovery should pay or intend to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply.
Tax invoice and Tax Credit Note:
Tax Invoice is the essential document to be issued by a registrant when a taxable supply of goods or services is made. Under VAT in UAE, a Tax Invoice is to be issued by all registrants for taxable supplies to all customers.
Article 59 and 60 of cabinet decision 52 of 2017 can be referred to know all the particulars that tax invoice/tax credit note shall contain.
A Tax Credit Note is issued to record the following occurrences:
- Supplies are returned or found to be deficient by the recipient
- Decrease in value of supply
- Decrease in value of tax
Carry forward of excess recoverable tax:
Where recoverable input tax exceeds the output tax payable for the same period or if the tax paid to the authority exceeds the tax payable according to the provisions of decree law the same can be treated in the following manner
- Carry forward and adjust any excess recoverable tax to the subsequent tax periods and offset such excess against the payable tax until such excess is fully utilized.
- Carry forward and adjust any excess recoverable tax to the subsequent tax periods and offset such excess against any administrative penalties imposed until such excess is fully utilized.
- If there remains any excess for any tax period after being carried forward for a time, the taxable person may apply to the authority reclaim the remaining excess.
Guides & Public Clarifications from FTA:
The Federal Tax Authority provides with a set of guides, clarifications and references that will help understand tax obligations better.