VAT in the UAE: How will it impact your business?

As the UAE’s economy matures and the reliance on oil revenues decreases, we are seeing a greater need for the country to identify new revenue streams to fund many of UAE’s public services.  The introduction of Value Added Tax (“VAT”), set to be introduced on 1 January 2018, will be a significant step in this direction.

This article explores the impact on businesses through the introduction of VAT; what they should do to comply with the government’s requirements; and how Davidson & Co can assist to achieve the necessary restructuring and protection your business may need to undertake to ensure compliance.

Businesses likely to be affected 

Whilst the official announcement of specific conditions is awaited from the Ministry of Finance (“MOF”), it is anticipated that in order to register for VAT, the below requirements must be met:

  1. Business must sell “taxable goods or services”:
    • Likely to apply to majority of transactions in goods and services.
    • A limited number of exemptions and reliefs may be granted (see below).
  1. Business must meet the “minimum annual turnover” requirement:
    • The exact amount is yet to be confirmed by the MOF, however, stakeholders are hoping that this will safeguard small businesses from registering for VAT in support of local entrepreneurship.

Nevertheless, according to a recent MOF online article, all companies in the UAE (whether subject to VAT or not) will still be obliged to maintain their financial records in order to evidence their VAT position to the government if required.

Exemptions / Reliefs

Goods & Services likely to be exempt from VAT

  • A number of food items;
  • Health, education & social services.

Reliefs from VAT

  • The MOF has expressed an intention to allow foreign businesses to recover the VAT they incur when visiting the UAE (although it is still unclear what is meant by “foreign businesses” and “visiting” the UAE).
  • Special rules on VAT for government entities will be applied, as well as refunds in certain scenarios to these organisations.

What your business needs to do

As VAT will be charged throughout the supply chain, businesses are ultimately responsible for invoicing / collecting VAT and remitting it to the UAE government as required.

Those businesses likely to be affected by VAT will have approximately 18 months once the legislation is enforced to ensure any requirements are met to fulfil their tax obligations.

It is anticipated that the process will be as follows:

  1. Understand VAT registration obligations (take independent advice as necessary);
  2. Apply for a VAT registration number (Davidson & Co can assist with this);
  3. Ensure relevant financial records are maintained in the appropriate manner and in accordance with the regulations;
  4. Charge VAT at the applicable rate (currently estimated at 5%) on the taxable goods / services;
  5. Revise Terms of Business with customers to ensure VAT ultimately becomes the cost of customers and not suppliers (Davidson & Co can assist with this);
  6. Implement necessary changes to core operations and obtain relevant training, such as:
    • Financial management and book-keeping;
    • Technology (implement manual or automatic systems as part of the accounting process);
    • Human resource mix (e.g. accountants and tax-advisors);
  7. Reclaim business-related VAT paid to suppliers;
  8. Report amount of VAT charged and amount that will be paid to the government through an online submission.

How can Davidson & Co help?

From a legal perspective, non-compliance with tax laws will have legal ramifications and may in the near future attract severe penalties which are punishable in the UAE.  It is therefore essential to update your company’s policies to apply VAT correctly and avoid additional costs and/or legal liabilities in non-compliance.

At Davidson & Co we have the right team to help simplify the UAE’s growing legal and tax complexities in order to find practical solutions to cater to your business needs.  As commercial specialists, we work closely with customs and government entities to advise clients on all aspects of the new taxation regime in the UAE.

Davidson & Co will continue to update this article as new information comes to light.