Our expert provides analysis on the executive regulation ahead of the Jan 1 implementation
VAT in UAE: a guide to what will be taxed, exempt or zero-rated
What the UAE VAT Executive Regulation actually says
The eagerly-anticipated Executive Regulation (the “Regulation” or “ER”) to accompany the UAE VAT Law has now been published in draft. Here is an initial guide.
What is it?
The Executive Regulation supplements the UAE VAT Law, and should be read in conjunction with it. As expressly anticipated in the VAT Law, the ER provides substantive and procedural detail on many important provisions in that Law.
What are the most important provisions?
For immediate purposes:
- the tax treatment of “Designated Zones”, i.e.,Free Zones and Financial Free Zones
- the tax treatment of supplies of financial services
- zero-rating and exemptions
- supplies between GCC states that have implemented a VAT
What does the ER say about Designated Zones, (Financial or otherwise)?
A “designated zone” is any area specified as such by Cabinet Decision. As long as the goods remain in the Designated Zone, it acts like a giant bonded warehouse. There will be no consumption of those goods in the jurisdiction. No VAT will be levied, whether on import, sale within the Designated Zone, or on export.
A variation would be if the goods arrived in one Designated Zone (say, by ship at Jebel Ali) with the intention of being air freighted from an airport Designated Zone. From a fiscal point of view, the same reasoning applies. If the Designated Zone is a port of entry, the goods will enter the distribution chain as soon as they are taken out of the Zone. If the supply is a taxable supply, VAT will be levied.
Zero-rating and exemptions
The first supply of residential buildings, the supply of educational services, the supply of essential (ie, preventive and basic) healthcare services, and the supply of investment-grade precious metals are all zero-VAT-rated. The ER provides much greater specificity, enabling taxable persons to know whether a particular transaction will be zero-rated or not.
Tax in the UAE: Everything you need to know about VAT and a little bit more
As regards exemptions, the ER sets out which financial services are exempt from VAT. Here, there is a tension between theory and practice. Theory says as many transactions as possible should be taxable; practice shows that the “value-added” in margin-based (rather than fee (or similar)-remunerated) financial services can be too difficult to tax. The ER has maintained this distinction. Financial services remunerated by fee, commission, discount or rebate will be subject to VAT. Financial services conducted on any other basis will be exempt.
The export of financial services will be zero-rated. This raises an interesting possibility: if the cross-border supply of financial services is zero-rated, but the domestic supply of the same financial services is exempt, there will be an incentive to make cross-border supplies of certain financial services and a corresponding disincentive to make domestic supplies of the same financial services.
The level taxation playing field between non-Islamic financial products and comparable Islamic finance products is expressly established by the ER.
Inter-Implementing State supplies
A rule of thumb with VAT is that imports are taxed, and exports are not. For imports/exports between VAT Implementing States, that rule may change. The ER provides for the retention of evidence of such supplies, but regarding payment of goods being transferred to another Implementing State is not wholly clear. This is an aspect where greater clarification would be helpful.
What else does the Regulation contain?
The ER confirms the mandatory and voluntary thresholds for registration and also sets out with greater particularity the requisite contents of a tax invoice, the requirements for making returns and record-keeping requirements.
The regulation sets out in more detail the circumstances in which a supplier of goods or services must be registered (including further provisions regarding VAT Groups), and must de-register.
It also provides particular information about how contracts that straddle the implementation date will be treated to tax (ie, where the contract was entered into before 1 January 2018 but where the relevant supply was on or after that date).
The ER expands on how businesses should apportion taxable sums, and make adjustments as appropriate.
Michael Patchett-Joyce is a commercial lawyer and arbitrator, based in London and the UAE
VAT in the UAE