Any taxable person must retain VAT invoices issued and received for a minimum of 5 years.
Imports
The place of supply will determine whether a supply is made within the UAE (in which case the UAE VAT law will apply), or outside the UAE for VAT purposes. For a supply of goods, the place of supply should be the location of goods when the supply takes place – with special rules for certain categories of supplies (e.g. water and energy, cross border supplies).
For the supply of services, the place of supply should be where the supplier is established – (with special rules for certain categories of supplies e.g. cross border supplies between businesses).
VAT shall be payable in addition to the custom duties paid by the importer of the goods and cannot be deducted against. VAT shall be computed on the value that includes the customs duties.
Some goods that are imported may be exempt from customs duties but be subject to VAT.
VAT is due on the goods and services purchased from abroad. In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, the VAT would be due on that import using a reverse charge mechanism. In case the recipient in the State is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC. Such VAT will typically be required to be paid before the goods are released to the person.
Exempt and zero rate
– The VAT treatment of real estate will depend on whether it is a commercial or residential property.
Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%).
– Supplies of residential properties will generally be exempt from VAT to ensure that VAT does not constitute an irrecoverable cost to persons who buy their own properties. To ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within 3 years from their completion will be zero-rated.
There is a difference between exempt goods and zero rate. (for example zero rate might be raised in future).
VAT will be charged at 0% in respect of the following main categories of supplies:
• Exports of goods and services to outside the GCC;
• International transportation, and related supplies;
• Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
• Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
• Newly constructed residential properties, that are supplied for the first time within 3 years of their construction ;
• Supply of certain education services, and supply of relevant goods and services;
• Supply of certain Healthcare services, and supply of relevant goods and services.
The following categories of supplies will be exempt from VAT:
• The supply of some financial services (clarified in VAT legislation);
• Residential properties;
• Bare land;
• Local passenger transport
Financial Services
It is expected that fee based financial services will be taxed but margin based products are likely to be exempt.
Generally, insurance (vehicle, medical, etc) will be taxable.
Life insurance, we understand will be treated as an exempt financial service
The VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products will be aligned with the treatment of similar standard financial services
Businesses that meet requirements the Legislation (such as being resident in the UAE and being related/associated parties) will be able to register as a VAT group. For some businesses, VAT grouping will be a useful tool to simplify accounting for VAT.
Offsetting VAT.
VAT registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to bad debt which has been written off by the VAT registered business. The legislation will include the conditions and limitations concerning the use of this relief.
A scheme will be introduced to allow a UAE national who is not registered for VAT to reclaim VAT paid on goods and services relating to constructing a new residence which will be privately used by the person and his family. This will allow the recovery of VAT on such expenses as contractor’s services and building materials.
To avoid double taxation (where second hand goods are acquired by a registered person from an unregistered person for the purpose of resale), the VAT-registered person will be able to account for VAT on sales of second hand goods with reference to: the difference between the purchase price of the goods, and the selling price of the goods (that is, the profit margin).
The VAT which must be accounted for by the registered person, will be included in the profit margin. The legislation will include the details of the conditions to be met in order to apply this mechanism.
VAT on expenses
A VAT registered person incurs input tax on its business expenses, and this input tax can be recovered in full when it relates to a taxable supply that was made, or intended to be made, by the registered person. In contrast, where the expense relates to a non-taxable supply (e.g. exempt supplies), then the registered person may not recover the input tax paid.
VAT will not be deductible in respect of expenses incurred for making non-taxable supplies. Furthermore, input tax cannot be deducted when it is incurred in respect of specific expenses such as entertainment expenses e.g. for employee entertainment.
VAT on expenses that were incurred by a business can be deducted in the following circumstances:
• The business must be a taxable person (the end consumer cannot claim any input tax refund).
• VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
• The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
• The goods or services acquired are used or intended to be used for making taxable supplies.
• VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.
In certain situations, an expense may relate to both taxable and non-taxable supplies made by the registered person (such as activities of the banking sector). In these circumstances, the registered person would need to apportion input tax between the taxable and non-taxable (exempt) supplies.
Businesses will be expected to use input tax (ratio of recoverable to total) as a basis for apportionment in the first instance – (there will be the facility to use other methods where those are fair and agreed with the Federal Tax Authority).
Compliance and returns
Penalties will be imposed for non-compliance. Examples of actions and omissions that may give raise to penalties include:
• A person failing to register when required to do so;
• A person failing to submit a tax return or make a payment within the required period;
• A person failing to keep the records required under the issued tax legislation;
• Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.
No special rules are planned for small or medium sized enterprises. The FTA will provide materials and resources available for these entities to assist them in their enquiries.
A supplier registered or required to be registered for VAT must issue a valid VAT invoice for the supply. To be considered as a valid VAT invoice, the document must follow a specific format as mentioned in the legislation. In certain situations the supplier may be able to issue a simplified VAT invoice.
Government entities
Supplies made by government entities will typically be subject to VAT. This will ensure 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. It is likely certain government entities will be 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 shall depend 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 would remain the same even if it is provided to a government entity.
Transitional rules
Special rules will be provided to deal with various situations that may arise in respect of supplies that span the introduction of VAT. For example:
• Where a payment is received in respect of a supply of goods before the introduction of VAT, but the goods are actually delivered after the introduction of VAT. This means that VAT will have to be charged on such supplies. Likewise, special rules will apply with regards to supplies of services spanning the introduction of VAT.
• Where a contract is concluded prior to the introduction of VAT in respect of a supply, which is wholly or partly made after the introduction of VAT, and the contract does not contain clauses relating to the VAT treatment of the supply, then consideration for the supply will be treated as inclusive of VAT.
There will, however, be special provisions to allow suppliers to charge VAT in situations where their recipient is able to recover their VAT but where there is no VAT clause.
Payments and claims
Note that VAT will be payable in full not after netting off input tax which will then have to be claimed. This is more of a challenge for cash flow and business risk, especially given the penalties for late payments.
Refunds will be made after the receipt of the application and will be subject to verification checks, with a particular focus to avoid fraud.
The FTA may provide its views on various matters in the law. Taxpayers may choose to challenge these views. However, penalties may be imposed on taxpayers who are found to violate any tax laws and regulations.
Other Emirates
It is expected that businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate. Guidance will be provided to businesses with regards to this. It is expected that the rules will be relatively straightforward for most businesses and will be based, for example, for B2C transactions, on the location of the transaction (e.g. in a retail environment, the location of the shop).
