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VAT

VAT has changed the history in two parts for the Gulf states VAT

VAT has changed the history in two parts for the Gulf states and specially for the United Arab Emirates. The Before and After VAT scenario has also made a much bigger change to the way business is done this region than the cultural shock that has shook the minds of the many.

In our opinion , we do not consider VAT as a deterrent to the business in the country or region rather as a boon by imparting transparency and accountability in the business as well as the financial transactions in the country.When the business is transparent and well documented , the confidene

Value Added Tax (VAT) was introduced in the UAE on 1 January 2018 as part of the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC).

The rate of VAT is 5 per cent. VAT will provide the UAE and the other implementing countries with a new source of income which will be continued to be utilized to provide high-quality public services. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
Implication of VAT on individuals

VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of exemptions may be granted.

As a result, the cost of living is likely to increase slightly, but this will vary depending on an individual’s lifestyle and spending behavior. If an individual spends mainly on those things which are relieved from VAT, he is unlikely to see any significant increase.

The government will include rules that require businesses to be clear about how much VAT an individual is required to pay for each transaction. Based on this information, individuals can decide whether to buy something.

Implication of VAT on businesses

Businesses will be responsible for carefully documenting their business income, costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.

VAT-registered businesses generally:
  1. must charge VAT on taxable goods or services they supply
  2. may reclaim any VAT they have paid on business-related goods or services
  3. keep a range of business records which will allow the government to check that they have got things right.

VAT-registered businesses must report the amount of VAT they have charged and the amount of VAT they have paid to the government on a regular basis. It will be a formal submission and reporting will be done online.
If they have charged more VAT than they have paid, they have to pay the difference to the government. If they have paid more VAT than they have charged, they can reclaim the difference.

VAT implementationVAT in GCC

The UAE coordinates VAT implementation with other GCC countries because she is connected with them through ‘The Economic Agreement between the GCC States’ and ‘The GCC Customs Union’.
Criteria for registering for VAT

A business must register for VAT if its taxable supplies and imports exceeds AED 375,000 per annum.

It is optional for businesses whose supplies and imports exceed AED 187,500 per annum.

A business house pays the government the tax that it collects from the customers, but at the same time it receives a refund from the government on tax that it has paid to its suppliers.

Foreign businesses may also recover the VAT they incur when visiting the UAE.

How to register for VAT?

Businesses can register for VAT through the eServices section on the FTA website. However, they need to create an account first by uploading the relevant documents as requested by the Federal Tax Authority.

How is VAT collected?

VAT-registered businesses collect the amount on behalf of the government; consumers bear the VAT in the form of a 5 per cent increase in the cost of taxable goods and services they purchase in the UAE.

UAE imposes VAT on tax-registered businesses at a rate of 5 per cent on a taxable supply of goods or services at each step of the supply chain.

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Tourists in the UAE also pay VAT at the point of sale.On which businesses does VAT apply?

VAT applies equally on tax-registered businesses managed on the UAE mainland and in the free zones. However, if the UAE Cabinet defines a certain free zone as a ‘designated zone’, it must be treated as outside the UAE for tax purposes.

Designated Zones

The transfer of goods between designated zones are tax-free. There are certain Freezones which are categorized as Designated Zones by annexing the Cabinet Decision No (59) of 2017.
Designated Zones (Abu Dhabi)
1. Free Trade Zone of Khalifa Port
2. Abu Dhabi Airport Free Zone
3. Khalifa Industrial Zone
Designated Zones (Sharjah)
1. Hamriyah Free Zone
2. Sharjah Airport International Free Zone
Designated Zones (Umm Al Quwain)
1. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
2. Umm Al Quwain Free Trade Zone on Sheikh Monhammed Bin Zayed Road
Designated Zones (Ajman)
1. Ajman Free Zone
Designated Zones (Fujairah)
1. Fujairah Free Zone
2. FOIZ (Fujairah Oil Industry Zone)
Designated Zones (Ras Al Khaimah)
1. RAK Free Trade Zone
2. RAK Maritime City Free Zone
3. RAK Airport Free Zone
Designated Zones (Dubai)
1. Jebel Ali Free Zone (North-South)
2. Dubai Cars and Automotive Zone (DUCAMZ)
3. Dubai Textile City
4. Free Zone Area in Al Quoz
5. Free Zone Area in Al Qusais
6. Dubai Aviation City
7. Dubai Airport Free Zone

At the end of each tax periodFiling a tax return for VAT

At the end of each tax period, VAT registered businesses or the ‘taxable persons’ must submit a ‘VAT return’ to Federal Tax Authority (FTA). A VAT return summarizes the value of the supplies and purchases a taxable person has made during the tax period, and shows the taxable person’s VAT liability.
  • Liability of VAT
  • How to file VAT return?
  • When are businesses required to file VAT return?

The liability of VAT is the difference between the output tax payable (VAT charged on supplies of goods and services) for a given tax period and the input tax (VAT incurred on purchases) recoverable for the same tax period.

Where the output tax exceeds the input tax amount, the difference must be paid to FTA. Where the input tax exceeds the output tax, a taxable person will have the excess input tax recovered; he will be entitled to set this off against subsequent payment due to FTA.

You must file for tax return electronically through the FTA portal: eservices.tax.gov.ae. Before filing the VAT return form on the portal, make sure you have met all tax returns requirements.

Please click on the links for Useful links (all are PDFs):

  • VAT return user guide
  • Vat return summary user guide
  • Special VAT refund user guide for business visitors only
  • VAT return user guide summary
  • VAT payment for commercial property buyers
  • Federal Law No. 7 of 2017 on Tax Procedures
  • Cabinet Decision No. 36 of 2017 on the Executive Regulation of Federal Law No. 7 of 2017 on Tax Procedures

Taxable businesses must file VAT returns with FTA on a regular basis and usually within 28 days of the end of the ‘tax period’ as defined for each type of business. A ‘tax period’ is a specific period of time for which the payable tax shall be calculated and paid. The standard tax period is:

quarterly for businesses with an annual turnover below AED150 million

monthly for businesses with an annual turnover of AED150 million or more.

The FTA may, at its choice, assign a different tax period for certain type of businesses.

Failure to file a tax returnFailure to file a tax return

Failure to file a tax return within the specified timeframe will make the violator liable for fines as per the provisions of Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE.
Table (1): Violations and Administrative Penalties related to the Implementation of the Federal Law No. (7) of 2017 on Tax Procedures
Description of Violation Administrative Penalty (AED)
1. The failure of the person conducting Business to keep the required records and other information specified in Tax Procedures Law and the Tax Law
  • (10,000) for the first time.

  • (50,000) in case of repetition.
2. The failure of the person conducting Business to submit the data, records and documents related to Tax in Arabic to the Authority when requested. (20,000)
3. The failure of the Taxable Person to submit a registration application within the timeframe specified in the Tax Law (20,000)
4. The failure of the Taxable Person to submit a registration application within the timeframe specified in the Tax Law (10,000)
5. The failure of the Registrant to inform the Authority of any circumstance that requires the amendment of the information pertaining to his tax record kept by Authority.
  • (5,000) for the first time.

  • (15,000) in case of repetition
6. The failure of the person appointed as a Legal Representative for the Taxable Person to inform the Authority of his appointment within the specified timeframe. The penalties will be due from the Legal Representative’s own funds. (20,000)
7. The failure of the person appointed as a Legal Representative for the Taxable Person to file a Tax Return within the specified timeframe. The penalties will be due from the Legal Representative’s own funds.
  • (1,000) for the first time.

  • (2,000) in case of repetition within (24)
    months.
8. The failure of the Registrant to submit the Tax Return within the timeframe specified in the Tax Law.
  • (1,000) for the first time.

  • (2,000) in case of repetition within (24)
    months.
9. The failure of the Taxable Person to settle the Payable Tax stated in the submitted Tax Return or Tax Assessment he was notified of, within the timeframe specified in the Tax Law. The Taxable Person shall be obligated to pay a late payment penalty consisting of:
  • (2%) of the unpaid tax is due immediately once the payment of Payable Tax is late;

  • (4%) is due on the seventh day following the deadline for payment, on the amount of tax which is still unpaid.

– (1%) daily penalty charged on any amount that is still unpaid one calendar month following the deadline for payment with upper ceiling of (300%).
10. The submittal of an incorrect Tax Return by the Registrant. Two penalties are
1. applied:
Fixed penalty of:
  • (3,000) for the first time.

  • (5,000) in case of repetition

2. Percentage based penalty shall be applied on the amount unpaid to the Authority due to the error and resulting in a tax benefit as follows:
  • (50%) if the Registrant does not make a voluntary disclosure or he made the voluntary disclosure after being notified of the tax audit and the Authority has started the tax audit process, or after being asked for information relating to the tax audit, whichever takes place first.

  • (30%) if the Registrant makes the voluntary disclosure after being notified of the tax audit and before the Authority starts the tax audit.

  • (5%) if the Registrant makes a voluntary disclosure before being notified of the tax audit by the Authority.
11. The Voluntary Disclosure by the Person/Taxpayer of errors in the Tax Return, Tax Assessment or Refund Application pursuant to Article 10 (1) and (2) of the Tax Procedures Law. Two penalties are applied:
1. Fixed penalty of:

  • (3,000) for the first time.

  • (5,000) in case of repetition

2. Percentage based penalty shall be applied on the amount unpaid to the Authority due to the error and resulting in a tax benefit as follows:

  • (50%) if the Person/Taxpayer makes a voluntary disclosure after being notified of the tax audit and the Authority starting the tax audit or after being asked for information relating to the tax audit, whichever takes place first.

  • (30%) if the Person/Taxpayer makes the voluntary disclosure after being notified of the tax audit but before the start of the tax audit.

  • (5%) if the Person/Taxpayer makes voluntary disclosure before being notified of the tax audit by the Authority.
12. The failure of the Taxable Person to voluntarily disclose errors in the Tax Return, Tax Assessment or Refund Application pursuant to Article 10 (1) and (2) of this the Tax Procedures Law before being notified that he will be subject to a Tax Audit. Two penalties are applied: 1. Fixed penalty of:
  • (3,000) for the first time.

  • (5,000) in case of repetition

2. (50%) of the amount unpaid to the Authority
due to the error resulting in a tax benefit for the Person/Taxpayer.
13. The failure of the Person conducting Business to facilitate the work of the Tax Auditor in violation of the provisions of Article (21) of the Tax Procedures Law. (20,000)
14. The failure of the Registrant to calculate Tax on behalf of another Person when the registered Taxable Person is obligated to do so under the Tax Law. The Registrant shall be obligated to pay a late payment penalty consisting of:
  • (2%) of the unpaid tax is due immediately once the payment of Payable Tax is late;

  • (4%) is due on the seventh day following the deadline for payment, on the amount of tax which is still unpaid.

  • (1%) daily penalty charged on any amount that is still unpaid one calendar month following the deadline for payment with upper ceiling of (300%).
15. A Person not accounting for any tax that may be due on import of goods as required under the Tax Law. (50%) of unpaid or undeclared tax.
Table (2): Violations and Administrative Penalties related to the Implementation of the Federal Decree-Law No. (7) of 2017 on Excise Tax
Description of ViolationAdministrative Penalty (AED)
Failure by the Taxable Person to display prices inclusive of Tax. (15,000).
Failure to comply with the conditions and procedures related to transfer the Excise Goods from a Designated Zone to another Designated Zone, and the mechanism of processing and storing of such Excise Goods.The penalty shall be the higher of AED (50,000) or (50%) of the tax, if any, chargeable in respect of the goods as the result of the violation.
Failure by the Taxable Person to provide the Authority with price lists for the Excise Goods produced, imported or sold thereby.

  • (5,000) for the first time.

  • (20,000) in case of repetition

Table (3): Violations and Administrative Penalties related to the Implementation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax
Description of ViolationAdministrative Penalty (AED)
Failure by the Taxable Person to display prices inclusive of Tax. (15,000)
Failure by the Taxable Person to notify the Authority of applying Tax based on the margin.(2,500)
Failure to comply with conditions and procedures related to keeping the Goods in a Designated Zone or moving them to another Designated Zone.The penalty shall be the higher of AED (50,000) or (50%) of the tax, if any, chargeable in respect of the goods as the result of the violation.
Failure by the Taxable Person to issue the Tax invoice or an alternative document when making any supply. (5,000) for each tax invoice or alternative document.
Failure by the Taxable Person to issue a Tax Credit Note or an alternative document(5,000) for each tax credit note or alternative document.
Failure by the Taxable Person to comply with the conditions and procedures regarding the issuance of electronic Tax Invoices and electronic Tax Credit Notes
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