x Abu Dhabi, UAESaturday 25 November 2017

New VAT law in the UAE: All your questions answered

To avoid any confusion ahead of the implementation on January 1, 2018, read our guide on the new law which has been passed by Sheikh Khalifa

VAT will affect electronic items such as these digital cameras. Jeffrey E Biteng / The National
VAT will affect electronic items such as these digital cameras. Jeffrey E Biteng / The National

What is it? And where can I find it?

The official title is Federal Decree-Law No.(8) of 2017, on Value Added Tax. An English version is available on the UAE Ministry of Finance website (www.mof.gov.ae).

Does it tell me all I need to know?

It tells you a lot, but not everything. VAT is complex and much more detail will become available in a yet-to-be-published Executive Regulation.

What will be in the Executive Regulation?

The Regulation is referenced over 60 times in the VAT law, so a complete answer would be too long. It will contain important information on essentials like who must register for VAT and when, details about tax periods and the submission of tax returns, when and how tax must be paid, what records must be kept and for how long, and what data must be included in a tax invoice.

VAT puts a standard rate of tax (5%) on goods and services – why is it complex?

Several reasons: 1 - Not everything will be taxed.

2 - There are new legal concepts (and a bit of jargon) to understand.

3 - Some things – like the place of supply of electronic services – can be quite difficult to define (think about it!).

4 - The GCC is a customs union – so, implementing national VAT laws and keeping the benefits of a transnational economic bloc can be a challenge (ask the EU).

5 - Some GCC states (like the UAE) are further ahead than others, so all GCC states may not implement VAT on January 1, 2018.

____________

Read more:

UAE tax authority launches new website to help prepare businesses for VAT

VAT and small businesses - what are the implications?

____________

Why isn’t everything taxed?

Thre main reasons:

1 - Some goods and services (eg education and healthcare) provide social benefits, so the government doesn’t want to make them more costly than necessary.

2 - A few things like “bare” land cannot be consumed (and VAT is a tax on consumption).

3 - Some things (eg some financial services) are too difficult to tax.

Various goods and services are not taxed because they are exempt; others are not (in effect) taxed because the tax is 0% (zero-rated supplies). All such supplies are VAT-free to the consumer, but whether the supply is exempt or zero-rated will make a big difference to the taxable entity making the supply.

________________

Read more:

Tax in the UAE: Everything you need to know about VAT and a little bit more

UAE's VAT to be added onto shelf prices and not at checkouts

New VAT law: housing exempt and education at 0%

How VAT will be applied to UAE free zones is yet to be decided by the new law

________________

What concepts/jargon might businesses encounter?

A number of businesses will need to know about “concerned goods/services”, the “reverse charge” and “deemed supply”, to name but three. They might also need to know about "VAT groups”. All those matters are for taxable traders; consumers won’t need to be concerned.

Why might “place of supply” be difficult for businesses?

It’s usually easier to identify the place of supply for goods than services. Even with goods, there are special rules if the supply involves export or import. It may also depend on whether the supply is to an ultimate consumer or not, whether or not the supply is to a registered recipient, whether the recipient is resident or non-resident, whether the export/import is within or outside the GCC, whether – even within the GCC – the other state has implemented a VAT law or not. Special rules apply for water and energy.

All of those variables might affect how a supply is treated to tax, and quite a lot of the detail needed to find out has been held over to the Executive Regulation.

How are free zones affected?

Some will be treated as “outside the State” and, therefore, outside the scope of the VAT Law. The details will be in the Executive Regulation. In particular, it remains to be seen how financial free zones, like the ADGM and the DIFC, will be treated. They might be treated differently from other free zones.

The UAE and Saudi Arabia are expected to be the first two countries to implement VAT on January 1, 2018. The 5 per cent rate lower than tax levels in other countries – such as 20 per cent VAT in the United Kingdom, as shown on the receipt above. Chris Ratcliffe / Bloomberg
VAT in the GCC will be charged at 5 per cent. Small businesses need to be prepared well in advance of its January 1 implementation. Chris Ratcliffe / Bloomberg

Are prices VAT-inclusive or not?

“Advertised” prices must include VAT. That means shop prices will be VAT-inclusive, providing clarity and certainty for the consumer – there won’t be an extra 5% added to the sticker price at the till. Other instances, where the price might not include the tax (eg to wholesalers), will be explained in the Executive Regulation,

Will tourists be able to reclaim VAT?

The VAT Law says that the Executive Regulation may contain conditions for the return of tax paid by a non-resident for goods supplied in the UAE that will be exported. So, the answer is “quite possibly”.

What else does the new VAT Law cover?

There are provisions about the tax treatment of capital assets, tax adjustments for errors in tax returns and bad debts, apportionment measures, tax on samples and commercial gifts, and on supplies between related parties. If you invoice in a currency other than the UAE Dirham, you’ll have to convert it. Tax evasion gets a mention, too. Remember, Federal Law No. (7) of 2017 on Tax Procedures contains more about tax evasion (which is a criminal offence), and the imposition of Penalty Assessments (which is an administrative measure).

What should businesses be aware of now?

Obviously, businesses should be familiarising themselves with what the VAT Law says, and how it will apply to their business. Given that the start date for VAT is January 1, 2018, businesses should look, in particular, at the Transitional Rules (Article 80).

Please note that if a contract entered into in 2017 for a supply to be made in 2018 does not contain express provisions about tax on that supply, the price will be considered to include VAT if chargeable, whether or not the tax liability has been taken into account in determining the price.

Unwary businesses could be bitten hard by that. So, start making express provision for VAT in future supply contracts now.

Michael Patchett-Joyce is a commercial lawyer and arbitrator, based in London and the UAE