Frequently Asked Questions.
1.1 What is Tax?
There are many different types of taxes:
- A direct tax is collected by government from the person on whom it is imposed (e.g., income tax, corporate tax).
- An indirect tax is collected for government by an intermediary (e.g. a retail store) from the person that ultimately pays the tax (e.g., VAT, Sales Tax).
1.2 What is VAT?
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
1.3 What is the difference between VAT and Sales Tax?
Many countries prefer a VAT over sales taxes for a range of reasons. Importantly, VAT is considered a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
1.4 Why is the UAE implementing VAT?
1.5 Why does the UAE need to coordinate VAT implementation with other GCC countries?
1.6 When will the VAT go into effect and what will be the rates?
1.7 How will the government collect VAT?
1.8 Will VAT cover all products and services?
1.9 Will the cost of living increase?
1.10 What measures will the government take to ensure that businesses don’t use the VAT implementation as an excuse to increase prices?
1.11 How can one object to the decisions of the Authority?
As a first step, the person shall request the FTA to reconsider its decision. Such request of re-consideration has to be made within 20 business days from the date the person was notified of the original decision of the FTA, and the FTA will have 20 business days from receipt of such application to provide its revised decision.
If the person is not satisfied with the revised decision of the FTA, it will be able to object to the Tax Disputes Resolution Committee which will be set up for these purposes. Objections to the Committee will need to be submitted within 20 business days from the date the person was notified of the FTA’s revised decision, and the person must pay all taxes and penalties subject of objection before objecting to the Committee. The Committee will typically be required to give its decision regarding the objection within 20 business days from its receipt.
As a final step, if the person is not satisfied with the decision of the Committee, the person may challenge its decision before the competent court. The appeal must be made within 20 business days from the date of the appellant being notified of the Committee’s decision
2.1 Who can or will be able to register for VAT?
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
2.2 What are the VAT-related responsibilities of businesses?
VAT-registered businesses generally:
must charge VAT on taxable goods or services they supply;
may reclaim any VAT they’ve paid on business-related goods or services;
keep a range of business records which will allow the government to check that they have got things right
If you’re a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be made online.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to the government. If you’ve paid more VAT than you’ve charged, you can reclaim the difference.
2.3 What does a business need to do to prepare for VAT?
2.4 When are businesses supposed to start registering for VAT?
To enable businesses to prepare for introduction of VAT and comply with this registration obligation in time, the electronic registrations will be open for VAT from the third quarter of 2017 on a voluntary basis and a compulsory basis from the final quarter of 2017 for those that choose not to register earlier. This will ensure that there is no last minute rush from businesses to register for VAT before the deadline.
2.5 When are registered businesses required to file VAT returns?
2.6 What kind of records are businesses required to maintain, and for how long?
2.7 How long must a taxable person retain VAT invoices for?
2.8 How should a business determine the place of supply?
For a supply of goods, the place of supply should be the location of goods when the supply takes place with special rules for certain categories of supplies (e.g. water and energy, cross border supplies).
For the supply of services, the place of supply should be where the supplier is established with special rules for certain categories of supplies (e.g. cross border supplies between businesses).
2.9 Can businesses offset customs duty against VAT payments?
2.10 How will real estate be treated?
Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%).
On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within 3 years from their completion will be zero-rated.
2.11 What sectors will be zero rated?
Exports of goods and services to outside the GCC;
International transportation, and related supplies;
Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
Newly constructed residential properties, that are supplied for the first time within 3 years of their construction ;
Supply of certain education services, and supply of relevant goods and services;
Supply of certain Healthcare services, and supply of relevant goods and services.
2.12 What sectors will be exempt?
The supply of some financial services (clarified in VAT legislation);
Bare land; and
Local passenger transport
2.13 Will there be VAT grouping?
2.14 Will there be bad debt relief?
2.15 Will there be a margin scheme?
2.16 How will partial exemption work?
In certain situations, an expense may relate to both taxable and non-taxable supplies made by the registered person (such as activities of the banking sector). In these circumstances, the registered person would need to apportion input tax between the taxable and non-taxable (exempt) supplies.
Businesses will be expected to use input tax (ratio of recoverable to total) as a basis for apportionment in the first instance although there will be the facility to use other methods where they are fair and agreed with the Federal Tax Authority.
2.17 What are the cases that would lead to the imposition of penalties?
Examples of actions and omissions that may give raise to penalties include:
A person failing to register when required to do so;
A person failing to submit a tax return or make a payment within the required period;
A person failing to keep the records required under the issued tax legislation;
Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.
2.18 Will there be any special schemes for SMEs?
2.19 Will there be transitional rules?
- Where a payment is received in respect of a supply of goods before the introduction of VAT but the goods are actually delivered after the introduction of VAT, this means that VAT will have to be charged on such supplies. Likewise, special rules will apply with regards to supplies of services spanning the introduction of VAT.
- Where a contract is concluded prior to the introduction of VAT in respect of a supply which is wholly or partly made after the introduction of VAT, and the contract does not contain clauses relating to the VAT treatment of the supply, then consideration for the supply will be treated as inclusive of VAT. There will, however, be special provisions to allow suppliers to charge VAT in situations where their recipient is able to recover their VAT but where there is no VAT clause.
2.20 How will insurance be treated?
2.21 How will financial services be treated?
2.22 How will Islamic finance be treated?
To ensure that there are no inconsistencies between the VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products will be aligned with the treatment of similar standard financial services.
2.23 Can UAE nationals claim VAT?
2.24 How quickly will refunds be released?
2.25 Will FTA issue rulings or provide tax advice?
2.26 Will it be possible to issue cash receipts instead of VAT invoices?
2.27 Will there be any VAT that businesses are not allowed to claim?
2.28 Under which conditions will businesses be allowed to claim VAT incurred on expenses?
- The business must be a taxable person (the end consumer cannot claim any input tax refund).
- VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
- The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
- The goods or services acquired are used or intended to be used for making taxable supplies.
- VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.
2.29 Will non-residents be required to register for VAT?
2.30 Will VAT be paid on imports?
In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.
In case the recipient in the State is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC. Such VAT will typically be required to be paid before the goods are released to the person.
2.31 How will Government Entities be treated for VAT purposes?
Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. It is likely certain government entities will be entitled to VAT refunds – this is designed to avoid budgeting issues and provide a level playing field between outsourced and unsourced activities.
For the supplies provided for government entities, the treatment of such supplies shall depend on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard tax rate, the treatment would remain the same even if it is provided to a government entity.
2.32 Will Businesses have to report on their business in each of the Emirates?
It is expected that the rules will be relatively straightforward for most businesses and will be based, for example, for B2C transactions, on the location of the transaction (e.g. in a retail environment, the location of the shop).
2.33 Will the goods exempt from customs duties also be exempt from VAT?
3.1 Will tourists also pay VAT?
3.2 Will visiting businesses be able to reclaim VAT?
4.1 How can someone access UAE Tax Law?
5.1 What other taxes is the UAE considering?
5.2 Will this impact economic growth of the UAE?
5.3 Where can I learn more about the UAE’s plan to implement VAT?
As part of its awareness campaign, the Ministry of Finance has launched the first phase of the awareness sessions during the period from March till May 2017. These sessions were held in the different Emirates.
5.4 Changing my business systems for VAT reporting will cost money. Can the government help?
5.5 What are the penalties for not complying with a business’s VAT responsibilities?
Administrative penalties for violations will be decided by Cabinet and announced after issuance. There will be further penalties decided by Courts in the case of tax evasion.