VAT in United Arab Emirates: What Is It And What Are The Impacts?
by Adnan Manzoor | NOV 18, 2018
Why is VAT being introduced?
The Ministry of Finance and the wider GCC have agreed to implement Value added tax (VAT) at a rate of 5% from 1 January 2018. This landmark Agreement marks the start of a fiscal reform across the region.
The increased need to diversify the economy, changing operating models and promoting smart initiatives led by technology and employment continue to be key trends. In order to promote such change and create an economy which is safeguarded for the future, governments across the region have introduced various initiatives to reduce the dependency on oil-generated incomes and further stabilize the economy, one of which being the introduction of VAT in Dubai, Abu Dhabi and all of the Emirates.
How will VAT impact your business?
VAT in the UAE is likely to impact various segments of your business, therefore it is advisable to conduct a VAT mapping programme of your current procedures and processes in order to identify the VAT transformation required.
Depending on the size and complexity of your business and operations, VAT readiness can take from three months to a year, with an impact being felt across multiple touch points of your business, which include some, if not all, of the functions such as:
- Finance, Purchasing and Sourcing and Imports
- Sales and Marketing; Logistics and Customs
- Legal and Human Resources; IT Department for Systems and ERP
Standard Rate: 5% to be applied to most goods/services supplied by ‘Chargeable Persons’
Zero Rate: Zero VAT (0%) applied to limited goods and services.
Exempt Supplies: Supplies outside the scope of VAT. Input VAT will not be recoverable.
Who needs to register?
Mandatory registration will be required for ‘Chargeable Persons’ (individuals, companies, groups, etc) making ‘Taxable Supplies’ of AED 375,000 (generally calculated over a 12-month period). The voluntary registration threshold will be AED 187,500.
POINTS TO CONSIDER
VAT Returns: Most Chargeable Persons will need to file quarterly returns. The deadlines for VAT returns will be a month from the end of the quarter. Some entities may need to file monthly returns.
Transitional Rules: Transitional rules will apply on stock / WIP as at 31 December 2017. Contracts that cross over the date of implementation of VAT will be affected.
Tax Audits: FTA has been given rights to undertake a Tax Audit on any person to ascertain the extent of compliance with the provisions of the LAW.
What if you decide not to change anything?
If nothing is done, there is a serious risk that your current business methodology will not be compliant with the new legislation. Furthermore, you might not be able to submit a complete and accurate VAT return in a timely manner. Non-compliance could lead to penalties or prosecution, whichever applies.