The UAE Ministry of Finance announced the Executive Regulation for the Federal Decree-Law No. (8) of 2017 on Value Added Tax at a Cabinet meeting on 7 November 2017, headed by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, Ruler of Dubai.
The Regulation defines VAT as the 5% tax imposed on the import and supply of goods and services at each stage of production and distribution, including:
– what is a deemed supply, with the exception of specific supplies subject to the zero rate
– what is exempted as specified in the Decree-Law.
Before reviewing the individual titles of the registration this is summary of the salient points:
VAT Registrations
It is important to note that the draft VAT executive regulations state that businesses are required to register in accordance with the timelines previously announced by the Federal Tax Authority. As a consequence, if taxpayers have not registered within these timelines, it may potentially result in late registration penalties which are AED 20,000.
The UAE’s Federal Tax Authority is urging companies subject to the value-added tax to register before December 4 to avoid paying the tax from their own pockets.
The Federal Tax Authority (FTA) requires by law 20 working days to access and process their applications, said Khalid Al Bustani at a media briefing in Dubai. Companies submitting applications after that date are not guaranteed to get their formalities completed, will not be able to charge 5 per cent VAT to their customers and may have to pay the tax from their pocket until their registrations are finished, according to FTA officials at the briefing.
– Businesses providing taxable supplies may apply for a voluntary VAT registration if their sales exceed AED 187,500 per annum
– Businesses providing exclusively zero-rated supplies may apply for an exemption from the obligation to VAT register
– The mandatory VAT registration threshold is AED 375,000 sales per annum
– A registration application must be submitted within 30 days of being obliged to register
– Tax Groups may be formed for multiple, related parties businesses to register under one number – one taxable party, the ‘representatives’, takes on the responsibility to prepare and submit the consolidated return
– De-registrations are permitted on the cessation of the taxable supplies, or on the tax authorities decision
Tax point
VAT becomes due on the earlier of:
-The invoice date
– The delivery of the goods or performance of the service
– The payment date
Place of supply rules
– For real estate, a supply is deemed to take place in UAE where the services is directly connected with UAE real estate
– Domestic transport services are deemed to be supplied from the place where the transport commences
– For goods transported to another GCC State which has implemented VAT (‘implementing state), the place of supply is the destination provided adequate proof of transportation can be obtained
Zero rating
The following goods and services shall be zero-rated for VAT purposes (note: all foods will be standard rated):
– Goods physically exported to other VAT registered businesses outside of the UAE or other implementing state provided commercial evidence of the transport is retained by the vendor
– when supplied to a customer that does not have a establishment in UAE and is outside of the country at the time of supply. The exception is real estate in UAE.
– Supply of international transportation services for passengers and goods
– The supply or import of precious metals
– New residential property supplies
– Education services if supplied by an accredited government body
– Healthcare services provided by a body linked to the state
– Approved pharmaceuticals
Exempt supplies
The following services will be exempted from VAT:
– Financial services related to dealing in money (e.g. FX, debt securities, loans, bank accounts, derivatives or similar, issuing shares and life insurance)
– Other financial services attracting a fee or commission are liable to VAT
– Residential buildings with a lease longer than 6 months
– Bare land
– Local passenger transport
VAT Free Designated Zones
Special geographical areas within the UAE, but outside of the UAE VAT regime. These are created upon a decision by the Cabinet. They have security measures and customs controls to monitor the movement of goods. The transfer of goods or provision of services within the Zones will not be subject to VAT – similar to the bonded warehouse concept.
Import VAT becomes payable when any goods leave the Zone.
Non-recoverable VAT
The following VAT is not recoverable against VAT on taxable supplies:
– Entertainment for non-employees
– Personal use vehicles and other goods for employees
– Employee-use goods not directly associated with the provision of taxable supplies
VAT invoices
VAT invoices must include the following details:
– Name and address of supplier
– VAT Number
– Unique VAT invoice number
– Date of invoice, and date of supply if different
– Description of the goods/services provided
– Unit prices, quantity or volumes of the supplies
– Any discount offered
– VAT calculation and gross amount due in AED (any rate of exchange used)
Simplified invoices may be issued to non-tax payers or when the consideration is below AED 10,000.
Electronic invoices may be issued if the vendor has secure storage facilities, and the authenticity of the invoice can be guaranteed
VAT reporting
The standard VAT reporting period is 3 months
VAT returns must be received by the 28th of the month following the reporting period.
The VAT return includes:
– Name, address and tax registration number of the tax payers
– The tax period
– Submission date
– Values of taxable supplies made, and output VAT charged
– Values of zero rated supplies made
– Values of exempt supplies made
– Value of taxable supplies consumed, and input VAT claimed
– Total value of VAT due
Transitional rules
– Goods or services provided before the implementation of VAT will be treated as having been provided on the implementation date
– A payment for the services prior to the implementation date will be disregarded for determining the time of supply after the implementation date
– The value prior to VAT implementation of any goods or services will be treated as exclusive of VAT
The Value Added Tax (VAT) to be launched on January 1 in UAE will bring many changes in the price structure of the goods and services in the country. While some basic things like school fees will be exempt from tax, many other essential items such as: water, food, and jewelry may be included in the VAT.
The VAT in UAE will be levied at a fixed rate of 5 per cent on all applicable items.
The tax will also be levied from the tourists visiting the country, however, the tax paid by tourists in the UAE will be refunded back to them at the airport.
Check out below the list of goods/services we understand will be taxed under VAT
◾Food
◾Electricity bills (Power)
◾Jewellery
◾Car rentals
◾Smartphones
◾Dining out
◾Commercial rents (Renting out for commercial purposes)
◾Plastic surgery
◾Uniforms of private and public schools
◾Water bills
◾Cars
◾Electronics
◾Watches
◾Entertainment
◾Tenancy contracts
◾Hotel
◾Service apartment
◾Private school books
Goods/services we understand to be exempt from VAT
The following items/services will be VAT exempt:
◾Medical fees
◾Air travel
◾Medicines
◾Basic and preventive surgery
◾Exam fees
◾Local transport
◾Residential rents
◾Public school books
The VAT will also be applicable to the free zone companies making supplies outside the zone. This might increase pre-financing cost for such companies.
Draft Regulation Titles:
The first title of the Regulation includes the definitions of terms used.
The second title deals with supply, which includes:
– articles regulating the supply of goods and services,
– supplies that consist of more than one component
– the exceptions related to deemed supplies.
The third title of the document tackles the subject of registration, such as:
– mandatory and voluntary registration,
– related parties,
– conditions to be met to register tax groups
– appointing a representative member,
– deregistration,
– exception from registration,
– registration on law coming into effect
– obligations to be met before deregistration.
The fourth title looks into rules relating to supply, including:
– articles on the date of supply,
– place of supply for goods,
– place of supply of services for real estate,
– transport services,
– telecommunications and electronic services,
– intra-GCC supplies,
– the market value,
– prices to be inclusive of: tax, discounts, subsidies and vouchers.
The fifth title discusses profit margins, and also explains how to calculate VAT based on profit margins,
The sixth title addresses zero-rated goods and services, including:
– telecommunications,
– international transportation of passengers or goods,
– investment grade precious metals,
– new and converted residential buildings,
– healthcare,
– education
– buildings earmarked for charity.
The seventh title clarifies provisions relating to products and services exempt from value added 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 orby lease,
– the supply of bare land,
– the supply of local passenger transport.
The eighth title addresses accounting for tax on:
– specific supplies and includes articles relating to supplies with more than one component,
– general provisions in relation to import of goods
– applying a reverse charge on goods and services,
– moving goods to implementing states
– imports by non-registered persons.
The ninth title address Designated Zones in article (51),
The tenth 10 provides further detail on:
– calculating due tax,
– recovery of input tax relating to exempt supplies,
– input tax not recoverable, a
– special cases for input tax.
The eleventh includes:
– article (55) on apportioning input tax
– article (56) on adjusting input tax after recovery,
The twelfth title addresses:
– the capital asset scheme in article (57)
– adjustments within the capital asset scheme in article (58).
The thirteenth title includes:
– article (59) on tax invoices,
– article (60) on tax credit notes
– article (61) on fractions of the fils.
The fourteenth title discusses Tax Periods and Tax Returns,
The fifteenth title 15 goes into recovery of excess tax in article (65).
The sixteenth title 16 tackles recovery in other cases and includes:
– article (66) on new housing for nationals,
– article (67) on business visitors,
– article (68) on tourists
– article (69) on foreign governments.
The seventeenth title includes:
– article (70) on Transitional Rules,
– article (71) on record-keeping requirements
– article (72) on keeping records of supplies made.
The eighteenth title discusses closing provisions.
The draft text of the Executive Regulation for Federal Decree-Law No. (8) of 2017 on Value Added Tax, is to be published on the UAE Ministry of Finance’s website www.mof.gov.ae – https://www.mof.gov.ae/en/budget/pages/vatquestions.aspx
and the Federal Tax Authority’s website www.tax.gov.ae
https://www.tax.gov.ae/pdf/VAT-Decree-Law-No-8-of-2017.pdf
Some comments:
The Executive Regulation is clear that prices must be expressed inclusive of VAT unless something is being supplied for export or where the customer is registered for VAT i.e. for B2C retail sales
This will prevent preventing businesses from misleading consumers by adding 5 per cent to the price at the till, but it s gives rise to complexity where businesses are supplying to a combination of consumers, non-registered businesses and registered businesses, and where they make both domestic and international supplies.
There is reference to “Designated Zones” being treated as outside the UAE in the Decree-Law, but the Executive Regulation makes it clear these must be “a specific fenced geographic area [which] has security measures and customs controls in place to monitor entry and exit of individuals and movements of goods to and from the area”. It simply wasn’t permissible under the GCC Framework Agreement, or the design of VAT generally, to treat the Dubai International Financial Centre differently from anywhere else in the UAE.
Banks, will need to work through Article (42) of the Executive Regulation to determine which of their supplies are exempt and which are standard rated. For example, supplies cannot be exempt if they are “conducted in return for an explicit fee, discount, commission, and rebate or similar”.
Furthermore, in relation to Islamic finance products, the drafting is currently unclear on whether each separate part of a product will need to be certified as Sharia compliant, or whether only a product generally has to have been certified.
Challenges remain for certain sectors. Healthcare services, which are generally zero rated, are defined as a supply “that is generally accepted in the medical professions as being necessary for the treatment of the recipient of the supply including preventive treatment”. That’s not just a question for a tax lawyer. That’s a question for a doctor.
The UAE Executive Regulation now takes a more considered approach than the simpler but ultimately unsatisfactory approach taken in the Saudi legislation with regard to existing contracts. Under the Executive Regulation, when a contract is silent on VAT, the consideration will be treated as exclusive of VAT, and the recipient will be required to pay VAT in addition if, broadly speaking,
(i) the recipient of the supply is registered for VAT;
(ii) the recipient of the supply has the right to recover the VAT charged in full, or in part.
It is still unclear regarding VAT on supplies to government entities – for example, whether an entity is in fact a government entity, whether a government entity is required to be registered, and whether it has the right to recover VAT?
