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Implementation of the VAT Tax in the UAE – what will Change?

Implementation of the VAT Tax in the UAE – what will Change?

According to the decision made by the GCC and in compliance with the GCC Agreement, the UAE implements the VAT tax beginning from January, 1б 2018. The VAT Decree Law developed by the UAE that has been so widely discussed has been recently published by the authorities. It clarifies many issues that have been questioned by businessmen who will be affected by the introduction of VAT in the UAE. More details on VAT implementation will be covered in the Executive Regulation which is still to be released. It is very likely that the authorities of the UAE are still uncertain about some of the aspects of the VAT introduction and are working on the final draft of the regulations.

There are three main groups of supplies in the UAE. They include standard-rated supplies, exempt supplies, and zero-rated supplies. Understanding the difference between them is vital for conducting business in the UAE. The VAT rate differs for each of the group of the supplies. It comprises 5% for standard-rated supplies. There is no VAT to be implemented for exempt supplies while VAT for zero rate supplies is 0%. The supplier can recover VAT in case of standard and zero rate supplies.

Zero rate supplies are considered to be the best type of supplies from the customers’ point of view. Its absence implies that the price of the goods is not affected. As for exempt supplies, in this case, only the final supply is exempt from the UAE VAT. Therefore, revenues are still collected from the supply chain. Four types of supplies are exempt from the VAT tax. This includes:

  • Financial services;
  • Residential property;
  • Local transport;
  • Land.

Financial services are exempt from the VAT implementation since it is challenging to determine what is supplied. There are also certain difficulties in deciding how to value it. It is important to note that there are no details yet specifying which financial services are exempt from the VAT. Though this has not been yet clarified, financing services working in compliance with the Sharia law will most likely be exempt from the VAT tax in the UAE. It is not yet exactly clear how the authorities of the UAE will be able to outline all regulatory particulars such a way that no uncertainties remain.

Insurance services are not exempt from the VAT implementation. However, this might be changed, and there might be some exceptions or modifications. For example, life assurance can be categorized as the financial service and thus become part of the financial services exemption.

Food will not be exempt from the UAE VAT or zero-rated, although the GCC Agreement enables the UAE to do that. There is a reason why food is often zero-rated in many countries of the world. This is the state’s way to protect families living in unfavorable conditions. Food belongs to the essentials; so many governments try to reduce the influence of VAT implementation in the UAE on such basic items. However, when food is zero-rated, it might create certain difficulties, especially when it comes to categorizing and classifying it.

What does the introduction of VAT mean for an end consumer? The consumer will have to face the increase of all prices with regard to the VAT rate in the UAE by 5%. The rise in prices for groceries will definitely touch low-income families who are the least socially protected strata. However, it is not yet clear how exactly the UAE authorities will handle this issue and what the policy concerning food and VAT will look like.

International aviation will be zero-rated by the conditions of the GCC Agreement. Taxes are imposed on aviation in some areas of the UAE. Therefore, on the one hand, there is no reason to make it zero-rated.

The hotel sector has been taxed before, and this will remain the same.

Precious metals will be zero-rated. This is done for the sake of investment purposes. However, it is not yet clear which precious metals will be zero-rated – the details will appear in the Executive Regulation on VAT Implementation. So far, only gold, silver and platinum have been mentioned in the GCC Agreement. Retail jewelry is subject to VAT. The government will also design the tourist's VAT refund policy. It will be released in the Executive Regulation that will soon be published by the UAE authorities.

Educational and healthcare sectors are zero-rated. However, it should be noted that this is restricted to the supply of goods and services for nurseries, for preschool and primary school as well as higher educational institutions working in the public sector. Therefore, supplies made by private schools are standard VAT rated. The same refers to the UAE healthcare sector. Basic healthcare services are zero-rated. The Executive Regulation will shed more light on the issue.

As for contracts and agreements signed in the UAE, according to the Decree Law, all contracts in force must include the VAT tax. This means that if there is a contract signed in 2016 and it lasts for five years, the post-VAT amount will be calculated for it. The Executive Regulation on VAT implementation will give more details concerning the transition. What does it mean for a business owner? To stay on the safe side, ask your lawyers to review your most important contracts right now.

IMPORTANT NOTE: UAE companies have to register for VAT only in the event when their total taxable supplies to the UAE and other VAT taxable income in the UAE exceeds the AED 375.000,- per annum.

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