VAT is going to be implemented in UAE

UAE government is finalizing procedures to implement sales tax or VAT. According to Al Ittihad newspaper, only luxury goods segment will be affected, such as Alcohol and Tobacco products, the daily goods will be exempt from tax. The first draft law is scheduled to be implemented in the third quarter of this year. It is not known what will be the stake of taxes, IMF suggests to start from 5%.  There is no information when and how the UAE government is planning to impose tax, companies will be given a 2 year transition period to adjust to the new tax rules. Earlier the GCC council discussed to implement VAT in all GCC countries, however UAE will be the first GCC country to impose tax. The final tax rate has yet to be agreed.

 

What we already know about VAT in UAE

Timeline: VAT is likely to be introduced across UAE on 1 January 2018.

Rate & Structure: The VAT rate is likely to be low. As of today, the most probable rate which was officially communicated by the government is 5%.

Base: VAT is a consumption tax which will be imposed on most of the goods and services. The VAT will be charged on sales invoices of registered taxpayers and VAT credits will be granted on purchase invoices (inputs). VAT is also likely to be applied on all import transactions. The exports are likely to be charged with 0% rate, which means that there will be no tax charged on exports but tax credits will be granted for all the corresponding inputs.

Thresholds:  VAT implementation in UAE will be performed in 2 phases. For the Phase 1 the government announced following thresholds:

  • Companies with annual revenue over 3.75 million dirhams (mAED) will be taxed by VAT and will be required to register under VAT system
  • Companies with annual revenue between 1.87  million dirhams (mAED) and 3.75 million dirhams (mAED)  will have the option and the freedom either to register under VAT system or not to do so during the Phase 1

What concerns the Phase 2 there are no minimum thresholds announced yet by the Government and it is assumed that eventually registration under VAT system will be obligatory for all the companies.

Exemptions: 2 types of exceptions  may be applicable – exemptions on  products or services and  exemptions on individuals or organisations.

  • Exemptions on products/services: in one of its earliest announcements UAE Government announced that certain number of food items as well as education and healthcare services will be exempt of VAT
  • Exemptions on individuals/organizations:  it is not intended that there will be special exceptions for individuals or organizations. However, there may be special VAT rules for organizations such as government entities. If eventually there will be a minimum annual turnover threshold announced for Phase 2, than those companies with annual revenues below the threshold will not be obliged to register under VAT system.