1. Common VAT Agreement for GCC Countries

The UAE is part of the Gulf Cooperation Council (GCC), along with Saudi Arabia, Bahrain, Oman, Qatar, and Kuwait. GCC States entered into a common Agreement for the implementation of Value Added Tax across the member states and this Agreement aims to establish a unified legal framework for the introduction of a general tax on consumption in the GCC known as Value Added Tax. UAE and Saudi Arabia have implemented VAT on 1st April, 2018 while Bahrain implemented it on January 1, 2019, and Oman implemented it in April 2021. However, Qatar and Kuwait have not yet implemented VAT.

  1. VAT Scope, VAT Rates and VAT Exemptions

Introduction

Value Added Tax (VAT) is a consumption tax applied to goods and services in many countries, including the United Arab Emirates (UAE). Understanding the scope, rates, and exemptions of VAT is critical for businesses and consumers to ensure compliance with the law. This guide provides an overview of taxable supplies, deemed supplies, taxable persons, VAT rates, zero-rated supplies, and VAT exemptions as applicable in UAE. It also addresses the transitional rules for transactions between the UAE and GCC member states that have not implemented VAT, as well as the uncertainty surrounding the implementation of VAT in Qatar and Kuwait.

VAT Scope

VAT encompasses most goods and services, unless exempted. The law defines the following terms:

Taxable Supply: A supply of goods or services for consideration by a person conducting business in the UAE. Exempt supplies are not considered taxable supplies.

Deemed Supply: Any transaction or scenario treated as a taxable supply according to instances stipulated in the VAT law.

Taxable Person: Any person registered or obligated to register for tax purposes under the VAT law.

VAT Rates

In the UAE, the standard VAT rate is 5 percent. However, certain services and goods are taxed at lower rate or at  zero rate as well. This means that although it is counted towards VAT taxable supply but is charged at zero rate.

Zero-Rated Supplies

Zero-rated supplies refer to goods and services that are taxable, but the VAT rate applied is 0 percent. Some examples of zero-rated supplies include:

Exports of goods and services: When goods or services are sold or provided outside the GCC Implementing States, they are subject to VAT at 0 percent.

International transport of passengers and goods: VAT at 0 percent applies to transportation services for passengers and goods that cross international borders, including related services such as freight forwarding.

Supply or import of investment precious metals: VAT at 0 percent is applicable for the supply or import of investment precious metals such as gold or silver.

First supply of residential buildings within 3 years of completion: Newly constructed or completed residential buildings are subject to VAT at 0 percent for the first sale within three years.

Supply of crude oil and natural gas: The supply of crude oil and natural gas is zero-rated for VAT purposes.

VAT Exemptions

VAT exemptions refer to supplies that are not subject to VAT. Some examples of exemptions are:

Financial services: Services provided by banks, lenders, insurers, and similar entities are exempt from VAT.

Supply of residential buildings through sale or lease: The supply of residential buildings through sale or lease is exempt, unless it falls under the specific conditions for zero-rated supplies of bare land.

Supply of local passenger transport: VAT is not applicable to public transportation services provided within the UAE, such as buses, taxis, and trains.

Transitional Rules

Currently, the implementation of VAT varies among GCC member states. For transactions between the UAE and GCC member states that have not implemented VAT, transitional rules apply. These rules treat these transactions similarly to those between the UAE and non-GCC member states.

Uncertainty in Qatar and Kuwait

As of now, it is uncertain when Qatar and Kuwait will implement VAT. Discussions have been ongoing since 2016, but no official dates have been announced yet.

Understanding the scope, rates, and exemptions of VAT is vital for businesses and consumers to ensure compliance and avoid penalties. It is also important to stay informed about any changes to VAT regulations, including transitional rules and potential implementation in other Gulf countries, to be prepared for any future updates.

Please note that VAT regulations can change over time, so it is always advisable to stay updated  or consult with professionals or refer to official sources for the most accurate and up-to-date information.

  1. VAT Registration

Depending on its taxable annual turnover, an enterprise or business may be required to register for VAT. The threshold for compulsory registration in this case is AED 375,000, while the threshold for voluntary registration is AED 187,500. A tax registration number (TRN) and a VAT Certificate will be provided by the Federal Tax Authority (FTA).

When a person is required to file for a tax registration application but fails to do so, the FTA must register that person as of the date they first became subject to tax registration and impose the necessary fines in accordance with Federal Law No. 7 on Tax Procedures from 2017.

Non-local entities making taxable supplies in the UAE are subject to the same registration requirements as local entities. If a person is required to register but is not a resident of the state, the FTA must do so as of the date the person began making supplies in the UAE, whether or not the person informs the FTA of this obligation, or as of the earlier date that the FTA and the person have previously agreed upon.

The Reverse Charge Mechanism is a simplified regulation that the UAE uses to impose VAT by the payer on itself. For example the importer is required to pay VAT under Reverse Charge Mechanism while clearing goods from customs  as though he had supplied the goods to himself inside the UAE. The service recipient may assume the responsibility for paying the VAT, which relieves the overseas supplier of the duty to collect the tax and pay it as well as the requirement to register in the destination nation. To receive the benefits of the RCM, it is noted that a number of specific requirements must be met.

Further amendments have been made to exempt from VAT registration whereby a taxable person who has supplies that are only subject to the zero rate may request that the FTA exempt him from the requirement to register for taxes. The FTA must review the application for an exception from tax registration before deciding whether to accept it or reject it and inform the taxable Person of the decision.

  1. Declaration Requirements and Penalty:

At the conclusion of each tax period which is usually quarterly basis, the taxable person must submit the tax return to the FTA listing all supplies made and received during that tax period. The authority must receive the tax return and tax payment no later than the end of the relevant tax period or by any other date specified by the FTA.

A taxable person’s standard tax period is a period of three calendar months that ends on the day that the FTA determines. As an exception to this, the FTA may assign a person or class of persons a shorter or longer tax period where it considers that a non-standard tax period length is necessary or beneficial to: .

decrease the possibility of tax evasion.

enabling the FTA to increase tax revenue collection or compliance monitoring.

Reduce the FTA’s administrative burden or the burden of compliance on a specific individual or group of individuals.

In accordance with the VAT Law, the tax procedure- and penal code, tax-related cases may be punished by administrative fines in addition to tax evasion. In order to look into irregularities in the collection and payment of VAT, the FTA is given broad authority under the tax laws. While administrative penalties only require payment of fines, the penalties for tax evasion include both fines and imprisonment, which may be imposed concurrently or alternatively.

The FTA is required by the VAT law to issue an administrative penalty assessment and to notify the person of the same within five business days as of the date of issuance under the following situations:

  • the taxable person’s failure to show prices with tax included.
  • failing to inform the FTA that tax based on the margin will be applied by the taxable person.
  • Failure to comply with the conditions and procedures related to keeping the goods in a designated zone or moving them to another designated zone.
  • taxable person’s failure to issue a tax invoice or other document when making a supply.
  • absence of a tax credit note or alternative document from the taxpayer.
  • the taxable person’s noncompliance with the requirements and guidelines for the issuance of electronic tax invoices and electronic tax credit notes.

If it is established that a person who is not registered purchases goods while claiming to be registered, this is considered tax evasion and the associated penalties under Federal Law No. 7 of 2017 on Tax Procedures can be levied.

  1. VAT Recovery:

If the following requirements have been met, along with others cumulatively, the recoverable input tax may be written off through the tax return pertaining to the first tax period, to the extent permitted by law.

  • The taxable person receives and retains the tax invoice in accordance with the law, provided that it contains information about the supply that gave rise to the input tax. They may also retain any other document that is comparable in relation to the supply or import for which input tax was paid.
  • Payment for the supply or any portion of it is made by the taxable person.

In addition, if particular requirements are met, a person may also apply for recovery from input VAT incurred prior to tax registration. The situations are:

  • supplies of goods and services made to him prior to the tax registration,
  • Import of goods prior to the date of tax registration.

In addition to claiming refunds associated with the business, the VAT law contains special cases for which tax refunds may be made for any supply received by or import carried out by any of the following: .

  • When purchasing goods and services for the purpose of building a new home by a citizen of the state.
  • a non-resident who runs a business but is not a taxable person and is neither a resident of an implementing state.
  • For goods that were supplied to non-resident while in the state but the goods are exported.
  • Foreign governments, international organisations, diplomatic bodies and missions according to treaties that the state is a party to.
  • Individuals or groups who are listed in a cabinet decision made on the minister’s recommendation.

Businesses may not be able to recover VAT in some circumstances. Examples include company cars, entertainment services, other goods and services for employees, and other ancillary goods or services that are required by law.

  1. Issue of Invoices

As per the UAe VAT, there are a few formal invoicing requirements, and they vary depending on the operation and the customer.

The VAT law mandates that the registrant must ensure as under:

  • A person making a taxable supply must create an original tax invoice and deliver it to the person receiving the goods or services.
  • When making a deemed supply, the supplier must issue an original tax invoice and deliver it to the recipient of the goods or services if one is available, or keep it for his records.
  • the invoice must be issued within 14 days of the supply of goods or services.

The taxable person may issue a tax invoice electronically, but only if he is able to safely store a copy of the electronic tax invoice in accordance with the requirements for record keeping.

The electronic tax invoice’s integrity of content and authenticity of origin should be guaranteed.

  1. Tax Group

Under the UAE VAT, two or more associated business entities may form a tax group and accordingly obtain tax registration as a tax group and submit tax returns as a tax group on a consolidated data of all the entities forming part of the tax group.

  1. Others

UAE VAT legislature along with Cabinet and Ministerial decisions issued from time to time provides for various other matters like record keeping, deregistration, tax agents, tax audit and other matters.