Value Added Tax in the UAE : Key Insights
October 25, 2016
1 JANUARY 2018
UAE VAT to roll out in two phases
Phase 1: Companies with revenue over AED 3.75 million are obliged to register for VAT. Companies with revenue between AED 1.87 million and AED 3.75 million have the option to register for VAT.
Phase 2: All companies will be obliged to register for VAT. The date for phase 2 remains under discussion.
1 JANUARY 2019
VAT will be implemented throughout the GCC by 1 January 2019 with the possibility of some member states joining the UAE and Kuwait for the earlier date of 1 January 2018.
How VAT works
VAT is an indirect government tax borne by the end consumer of goods and services.
When a business charges VAT on a sale they are collecting that money on behalf of government. A business can reclaim VAT they have paid on purchases. The difference between what they have charged on sales and paid on purchases is sent to government.
A helpful way of looking at VAT is as tax on consumption.
A key feature of VAT is that it is charged on the valued added at each stage of the supply chain. This is best shown in a simple example. A date farmer sells his produce at AED 20.00 to a supermarket. The VAT at 5% would be AED 1. The supermarket pays the farmer AED 21.00 and the date farmer sends AED 1.00 in VAT to the government. The supermarket then sells the dates to a consumer for AED 50. The VAT would be AED 2.50 and the consumer pays the supermarket AED 52.50. The supermarket sends AED 1.50 to the government – the supermarket pays AED 2.50 in VAT but receives a credit of AED 1 from the government on the purchase of the dates from the farmer. The total value consumed is AED 50 and thus total VAT the government should collect is AED 2.50. The government has collected AED 2.50 in total – AED 1 from the farmer and AED 1.50 from the supermarket.
An important feature of VAT is the exemption of certain goods and services. If all services or goods that a business sells are exempt then the entire business is exempt from VAT. In most VAT regimes internationally an exempt business cannot claim VAT on its purchases. From the announcement we are aware that education, health and some basic foods will be exempt from VAT in the UAE. Based upon our experience of other VAT regimes, if only some of the goods and services are exempt then a partial exemption claim is made. We would need to see the exact details of the VAT regime in the UAE once available to determine how partial exemption maybe applied – for example the sale of books and uniforms may subject to VAT at schools which are exempt.
Whilst more than 150 countries have implemented VAT or Sales Tax, we have found that many businesses fail to take account of VAT in some business arrangements – for example in real estate transactions. MBG can help you identify business transactions where VAT has an impact.
Key actions to consider
From our experience of the implementation of VAT over the last few decades in other countries, there are some key actions to consider now:
- Identifying someone in your organization to develop and lead the VAT implementation strategy. This lead person should be senior enough to coordinate with all departments as VAT impacts on procurement, sales, IT, HR and legal.
- Sales and consumers facing staff need effective training in understanding VAT and how it impacts sales negotiations to ensure margins are not impacted in error and your consumer doesn’t value your product or service any less.
- Most business contracts would have provisions for future taxes within the pricing structure to ensure that there is clarity over whether the pricing is VAT inclusive or VAT exclusive. However it is worth reviewing all contracts to ensure that any contracts that require clearer provisions regarding indirect taxes are addressed before 1 January 2018.
- In many countries, VAT is based on the invoice date, not when the invoice is settled, for remittance to government collection agencies. If this approach is adopted in the UAE, carefully consider long term contracts to ensure that VAT on invoices received from the suppliers are in step in terms of timing with VAT on your invoices to consumers to help support cash flow management.
- In particular for the retail industry, consider how your Point of Sale systems are capable of dealing with VAT. Best practice is to run test stimulations in advance of the implementation date. For businesses not involved in retail, it is still important to assess existing systems.
There may be changes in consumer behavior – especially in retail, hospitality and entertainment immediately prior and post VAT implementation. This disruption in consumer behavior present opportunities for businesses in these sectors to protect and acquire customers so it is worthwhile to plan business strategies accordingly for maximum impact on 1 January 2018.