The UAE has implemented a value-added tax (VAT) system since 2018, which applies a 5% tax on the consumption or use of goods and services. The VAT system affects both businesses and consumers in the UAE, as well as foreign businesses that make taxable supplies in the UAE. In this blog post, we will cover the following topics:
- What is the scope and rate of the UAE VAT?
- Who is required to register for VAT and how to do it?
- How to file and pay VAT returns and refunds?
- What are the key considerations for free zone businesses?
- How to prepare for the VAT audits and penalties?
- What are the benefits and challenges of the VAT system?
What is the scope and rate of the UAE VAT?
The UAE VAT is a form of indirect tax levied on the value added to goods and services at each stage of the supply chain. The standard rate of VAT in the UAE is 5%, which is one of the lowest in the world1. However, some goods and services are subject to zero-rated VAT (0%) or exempt from VAT.
Zero-rated VAT means that the goods and services are taxable, but the VAT rate is zero. This means that the suppliers can recover the VAT they paid on their inputs, but they do not charge VAT to their customers. Some examples of zero-rated goods and services are:
- Exports of goods and services to outside the GCC VAT implementing states;
- International transportation of goods and passengers and related services;
- Certain means of transport, such as trains, trams, vessels, and airplanes;
- Certain investment-grade precious metals, such as gold, silver, and platinum;
- Newly constructed residential properties that are supplied for the first time within three years of their construction;
- Supply of certain education services and related goods and services;
- Supply of certain healthcare services and related goods and services2.
Exempt from VAT means that the goods and services are not taxable, and the suppliers cannot recover the VAT they paid on their inputs. Some examples of exempt goods and services are:
- The supply of some financial services;
- Residential properties other than zero-rated ones;
- Bare land;
- Local passenger transport2.
Who is required to register for VAT and how to do it?
It is mandatory for businesses to register for VAT in the following two cases:
- If the taxable supplies and imports of a UAE-based business exceed AED 375,000 per annum;
- If a non UAE-based business makes taxable supplies in the UAE, regardless of its value, and there is no other person obligated to pay the due tax on these supplies in the UAE2.
Meanwhile, VAT registration is optional for businesses whose supplies and imports exceed AED 187,500 per annum.
Businesses can register for VAT through the eServices section on the Federal Tax Authority (FTA) website. However, they need to create an account first. For general queries about tax registration and/or application, you may contact FTA through the ‘Contact us’ page1.
How to file and pay VAT returns and refunds?
Businesses that are registered for VAT must file VAT returns and pay the due tax to the FTA on a regular basis. The standard tax period for VAT is three months, but some businesses may have a different tax period assigned by the FTA. The VAT returns must be filed within 28 days from the end of the tax period2.
Businesses can file their VAT returns and pay their tax online through the eServices section on the FTA website. They need to log in to their account, access the ‘VAT’ tab, and click on ‘VAT201-VAT Returns’. Then, they need to fill in the required information, such as the sales and purchases, the output and input tax, and the net payable or refundable tax. After submitting the VAT return, they need to pay the tax through the ‘My Payments’ tab1.
Businesses can also claim VAT refunds in certain circumstances, such as:
- If they are in a net tax refundable position, meaning that their input tax exceeds their output tax;
- If they are foreign businesses that are not registered for VAT in the UAE, but incurred VAT on their business expenses in the UAE;
- If they are UAE nationals who are building new residences for themselves or their family members2.
To claim VAT refunds, businesses need to submit a VAT refund request through the eServices section on the FTA website. They need to log in to their account, access the ‘VAT’ tab, and click on ‘VAT Refunds’. Then, they need to fill in the required information, such as the bank account details, the refund period, and the amount of refund. The FTA will process the refund request and transfer the amount to the bank account within a certain period1.
What are the key considerations for free zone businesses?
Free zones are special economic zones in the UAE that offer various incentives and benefits to businesses, such as 100% foreign ownership, 100% repatriation of capital and profits, and exemption from customs duties. However, free zone businesses are not automatically exempt from VAT, and they need to comply with the VAT rules and regulations.
The VAT treatment of free zone businesses depends on whether they are designated or non-designated free zones. Designated free zones are those that meet certain criteria set by the Cabinet, such as having security measures, customs controls, and isolation from the mainland. Non-designated free zones are those that do not meet these criteria.
Businesses in designated free zones are treated as being outside the UAE for VAT purposes, unless they make supplies to or from the mainland. This means that they do not have to register for VAT, charge VAT, or file VAT returns, unless they make taxable supplies to or from the mainland. However, they may still be able to recover the VAT they paid on their purchases through the VAT refund mechanism2.
Businesses in non-designated free zones are treated as being inside the UAE for VAT purposes, and they have to follow the same VAT rules and regulations as mainland businesses. This means that they have to register for VAT, charge VAT, and file VAT returns, if they meet the registration threshold or make taxable supplies in the UAE2.
How to prepare for the VAT audits and penalties?
The FTA has the authority to conduct VAT audits on businesses to ensure their compliance with the VAT laws and regulations. A VAT audit is a formal examination of the business’s records, documents, and transactions related to VAT. The FTA may conduct a VAT audit at any time, but it will usually notify the business at least five business days before the audit date2.
Businesses should prepare for the VAT audits by keeping accurate and complete records of their VAT affairs, such as invoices, receipts, contracts, bank statements, tax returns, and tax payments. They should also cooperate with the FTA auditors and provide them with the requested information and evidence. If the FTA finds any errors or discrepancies in the VAT returns or payments, it may issue a tax assessment and require the business to pay the due tax, along with any penalties or fines2.
The FTA may impose penalties or fines on businesses for various VAT violations, such as:
- Failure to register for VAT on time;
- Failure to file VAT returns or pay VAT on time;
- Failure to keep or provide VAT records or documents;
- Failure to display VAT invoices or prices;
- Failure to report or correct VAT errors or omissions;
- Failure to comply with VAT audits or investigations;
- Tax evasion or fraud2.
The penalties or fines may vary depending on the type and severity of the violation, but they can range from AED 3,000 to AED 50,000, or even higher in some cases2.
What are the benefits and challenges of the VAT system?
The introduction of the VAT system in the UAE has brought some benefits and challenges for both the government and the businesses. Some of the benefits are:
- It provides a new and stable source of revenue for the government, which can be used to fund public services and infrastructure projects;
- It diversifies the government’s income and reduces its reliance on oil and gas revenues;
- It enhances the UAE’s competitiveness and attractiveness as a business and investment destination;
- It aligns the UAE with the international best practices and standards for taxation13.
Some of the challenges are:
- It increases the cost of living and doing business in the UAE, as the VAT is ultimately borne by the end consumers;
- It imposes additional administrative and compliance burden on businesses, as they have to register, charge, file, and pay VAT;
- It requires businesses to adapt and update their systems, processes, and policies to comply with the VAT rules and regulations;
- It exposes businesses to potential VAT risks and liabilities, such as audits, penalties, and fines13.
Conclusion
The UAE VAT is a complex and dynamic system that affects both businesses and consumers in the UAE, as well as foreign businesses that make taxable supplies in the UAE. Businesses should be aware of the scope, rate, registration, filing, payment, refund, audit, and penalty aspects of the VAT system, and prepare accordingly for the compliance and challenges. Businesses should also weigh the benefits and costs of the VAT system, and seek professional advice if needed.
We hope you found this blog post helpful and informative. If you have any questions or comments, please feel free to contact us. Thank you for reading.
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