BASIC INFORMATION REGARDING VALUE ADDED TAX (VAT) IN UAE Important Note: The intention of this document is to provide a general information on VAT law s in UAE. You should refer the VAT law issued by the Ministry of Finance and visit Federal Tax Authority Website for registration and supporting. Website : www.tax.gov.ae Call centre : 600 599 994 Email : info@tax.gov.ae Table of Contents Contents Pages 1) Basic Information : 2 2) VAT liability : 3 3) VAT Groups : 7 4) Record-keeping : 7 5) Place of Supply : 8 6) Date of supply : 10 7) Conditions for recovery of Input tax : 10 8) Reverse Charge Mechanism : 10 9) VAT Invoices : 11 10) Penalties : 12 11) Collection and Payment : 13 12) How to register for VAT : 13 13) Precautions : 13 14) Registration due dates : 14 1
1) BASIC INFORMATION Basic points regarding VAT as per Federal law no.(8) of 2017. Value Added Tax (VAT) is an indirect tax imposed on supplies of goods and services. VAT will be due where a taxable supply is being made by a taxable person VAT is also imposed on import of goods and services. VAT will come into force on 01 January 2018 at a standard rate of 5%. Any business that is required to be registered for VAT and charge VAT from 01 January 2018 must be registered prior to that date. Business will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government. A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500. Any business that is required to be registered for VAT and charge VAT from 01 January 2018 must be registered prior to that date. ANNUAL SALES Less than AED 187,500 AED 187,500 to AED 375,000 More than AED 375,000 REGISTRATION : Cannot register : Voluntary registration : Mandatory registration Annual sales to be considered taking into account historical data and future projections VAT registered business generally must charge VAT on taxable goods or services they supply, may reclaim any VAT they have paid on business related goods or services, keep a range of business records which will allow the government to check that they have got things right. VAT charged at each stage in the supply of goods and services. 2
Tax payers must file VAT returns with the Federal Tax Authority (FTA) on a regular basis within 28 days from the end of the tax period. If you have charged more VAT than you have paid (i.e., output VAT is more than input Vat), you have to pay the difference to the Government. If you have paid more VAT than you have charged (i.e., input VAT is more than output Vat) you can reclaim the difference. VAT shall be computed on the value that includes the customs duties paid by the importer. VAT is ultimately borne by the final consumer. VAT will not be deductible in respect of expenses incurred for making non-taxable supplies. Furthermore, input tax cannot be deducted if it is incurred in respect of specific expenses such as entertainment expenses Types of Supplies (Goods & Services) Taxable supply at standard rate 5% Taxable supply at zero rate (0%) Exempted Supplies VAT will be charged at a standard rate of 5% unless the goods or services are exempt, zero rated or out of scope 2) VAT liability VAT liability - Planned zero-rated supplies in the UAE Specified education Specified health care International transportation and related supplies Supplies of identified sea, air and land means of transportation. Exports of goods and services Identified investment grade precious metals (e.g. gold, silver, of 99% purity) 3
Newly constructed residential properties that are supplied for the first time and within 3 years of their construction. First lease of new residential First supply of charitable buildings and buildings converted from nonresidential to residential VAT Liability - Exempt supplies in the UAE Financial services (margin based) by banks and financial institutions. Life insurance. Bare land. Local passenger transport Residential properties (Incl. Student accommodation and labour camps; lease must exceed 6months or tenant has Emirates ID VAT Liability - Standard rated Everything else (including commercial property, serviced apartments, car parks, commercial leasing, property management fee, engineering services). Illustration: Standard rated supply (Eg. Most goods & Services) VAT@5% Supplier Price: AED 1000 VAT: AED 50 VAT Payable= AED 50 Manufacturing Company Price: AED 5000 VAT: AED250 VAT Chargeable = AED 250 Less: Reclaim VAT on purchase AED 50 Net VAT Payable = AED 200 Retailer Price: AED 6000 VAT: AED 300 VAT Chargeable = AED 300 Less: Reclaim VAT on purchase AED 250 Net VAT Payable = AED 50 End consumer Price: AED 6300 Total amount remitted to FTA = AED 300 4
Illustration: Zero rated supply (Eg. exports) VAT@0% Supplier Price: AED 1,000 VAT: AED 50 VAT Payable= AED 50 Manufacturing Company Price: AED 5,000 VAT: AED 250 VAT payable = AED 250 Less Reclaim VAT on purchase AED 50 AED 200 Retailer Export Price: AED 6,000 VAT: AED 0 (zero) VAT payable = AED 0 Less: Reclaim VAT on purchase AED 250 AED -250 End consumer (not in GCC) Total amount remitted to FTA = AED 0 5
Illustration: Exempt supply (Eg. Residential leasing) VAT Exempt Supplier Price: AED 1000 VAT: AED 50 VAT Payable= AED 50 Manufacturing Company Price: AED 5,000 VAT: AED 250 VAT payable = AED 250 Less Reclaim VAT on purchase AED 50 AED 200 Landlord Price: AED 6000 VAT: Exempt VAT payable = AED 0 Less: Reclaim VAT on purchase AED 0 AED 0 Tenants Total amount remitted to FTA = AED 250 Suppliers of exempted items should pay the tax on taxable import item on reverse charge mechanism. For Eg. If a supplier of an exempted item had an import of taxable raw material costing AED 1,000,000/- on which he needs to pay the tax @5% i.e. AED 50,000/-. VAT due on sale of exempted item : AED 0 VAT due on import (on reverse charge) : AED 50,000 Total Out put tax : AED 50,000 Less : Reclaim VAT on purchase : AED 0 Less: Reclaim VAT on reverse charge : AED 0 Net amount remitted to FTA : AED 50,000 6
Example of Mixed business: If a supplier s 50% sales subject to 5% VAT, 30% sales subject to 0% VAT, 20% sales exempt from VAT and purchases and imports subject to 5% VAT, he is entitled to reclaim tax on purchase and import (tax credit) of 80% i.e.,taxable supplies Total supplies i.e.(50+30)/100. Expected Treatment in UAE. (More clarifications will be specified in the Executive Regulation of the Federal Decree Law No.(8) of 2017). 3) VAT Groups TAX GROUP/ VAT GROUP It is two or more persons registered with the Authority for tax purposes as a single taxable person in accordance with the provisions of the Law. Sales and purchases inside this VAT Group are generally disregarded. Only one VAT return for all entities in a VAT Group. One person will be nominated as Group s lead member. One entity can only be a member of one VAT group. VAT Group Registration Each Member State may treat the Tax Group as a single Taxable Person Two or more persons carrying on a business are able to apply for a single Group VAT registration where: Each person has a place of establishment or a fixed establishment in the UAE The persons are related parties, and Either one person controls the others, or two or more persons form a partnership and control the others Impact of VAT groups Entities within the VAT group are treated as one for VAT purposes. Supplies made between members of a VAT group are disregarded from VAT (i.e., no VAT is due on the supplies). Supplies made by the VAT group to an entity outside the VAT group are subject to normal VAT rules 4) Record-keeping The following records are required to be kept to ensure accurate tax compliance: 1) Books of account and any information necessary to verify entries, including, but not limited to: annual accounts; general ledger; purchase day book; invoices issued or received; credit notes and debit notes. 7
2) Additional records required for specific taxes Different taxes may require different records to be kept in order for taxpayers to be compliant, for example, a VAT account. 3) Any other information as directed by the FTA that may be required in order to confirm, the person s liability to tax, including any liability to register. Taxable persons for VAT must in addition retain the following records for at least 5 years: Invoices, credit/debit notes All tax invoices and alternative documents related to receiving the goods or services All received tax credit notes and alternative documents received All tax invoices and alternative documents issued All tax credit notes and alternative documents issued Records of: All supplies and imports of goods and services Exported goods and services Goods and services that have been disposed of or used for matters not related to business Goods and services purchased for which the input tax was not deducted VAT account VAT due on taxable supplies (incl. those pursuant the reverse charge mechanism) VAT due after error correction or adjustment VAT deductible after error correction or adjustment VAT deductible for supplies or imports 5) Place of Supply Place of supply is the place where a supply/sale is made and where VAT may be charged and paid. The place of supply determines where a supply takes place and therefore which member state s local VAT law is relevant. Different rules are applicable for goods and services. Place of supply - Goods Domestic sales within UAE no movement of goods outside UAE eg. Dubai to Sharjah Place of supply is UAE and VAT @ 5% or zero rated as applicable Export sales outside GCC eg. Dubai to Germany Place of supply is UAE and zero rated VAT applicable 8
Import into UAE from outside GCC eg. Germany to Dubai Place of supply is UAE and reverse charge mechanism applicable Goods imported to UAE for transfer to other GCC countries (transhipment) UAE importer to pay VAT without using reverse charge and cannot recover this VAT Export of goods to GCC eg. UAE to KSA Zero rated in UAE. Place of supply is KSA where VAT will be collected Place of supply - Services Providing services within U.A.E Place of supply is UAE and VAT @ 5% or zero rated as applicable Import of services GCC or otherwise Reverse charge mechanism applies Export of Services Zero rated VAT Example 1 ABC LLC registered in UAE provides services to XYZ LLC registered in Saudi Arabia. This is not taxable in UAE, but will be taxed in Saudi under the reverse charge mechanism. Example 2 ABC LLC registered in UAE receives services from XYZ Pvt Ltd registered in India. This is taxable in UAE under the reverse charge mechanism. Example 3 ABC LLC registered in UAE provides services to XYZ LLC registered in UAE. This is taxable in UAE and VAT has to be charged by ABC LLC. Example 4 ABC LLC registered in UAE provides services to XYZ Pvt Ltd registered in India. Zero rated VAT is applicable. 9
6) Date of supply Date of supply: When to account for output VAT Supply of goods with transportation Date of removal of goods Supply of goods without transportation Date on which goods made available to customer Supply of goods involving installation Date of installation Supply of goods with transportation Date of removal of goods Supply of one time service Date on completion of service Supply of continuous service Earlier of receipt of payment or issuance of tax invoice In case, the payment is received in advance or tax invoice is issued in advance, then those dates would be considered as the date of supply. 7) Conditions for recovery of Input tax Recipient must be a taxable person and must be registered for VAT. VAT on the purchase must have been correctly charged by the supplier. The goods or services have been acquired for business purpose. Recipient must receive and retain a tax invoice evidencing the transaction. The amount of VAT which the recipient seeks to recover must have been paid in whole or in part, or indented to be paid in whole or in part. 8) Reverse Charge Mechanism The Reverse Charge Mechanism moves the responsibility for the reporting of a VAT transaction from the seller to the buyer of a good or service. When a transaction is subject to Reverse Charge, the recipient of the goods or services reports both their purchase (input VAT) and the supplier s sale (output VAT) in the same VAT return. These two 10
declarations offset each other from a cash payment point of view, but the authorities have full visibility of the transactions. Imports of goods into the UAE will be subject to the reverse charge, meaning that businesses will not have to physically pay VAT at the point of import. Imports of goods into other GCC Member States, transhipped through the UAE will not be eligible for the reverse charge, and import VAT will be due on such imports at the first point of entry into the GCC Customs Union. If imported through the UAE there will be no entitlement to recover the import VAT paid as input VAT in the UAE. The input VAT will have to be sought from the final destination Member State. If a business has previously imported goods into the UAE under the reverse charge mechanism, and then subsequently moves the goods to another GCC Member State, it will be required to pay back the input VAT it initially recovered under the reverse charge to the UAE Federal Tax Authority 9) VAT Invoices Tax invoices must be issued by all registered persons who makes taxable supplies Must be in prescribed format. Option to issue tax invoices in paper or electronically. To be valid, a VAT invoice issued by a taxable person needs to include the following information, but not limited to: A sequential number which uniquely identifies the document The date of issue of the invoice The time of supply (only if different from the invoice date) tax invoice in a prominent place The name, address and TRN of the supplier For each description, the quantity of goods or extent of services supplied, the rate of VAT and amount payable, expressed in UAE Dirham The total amount of VAT expressed in UAE Dirham together with the rate of exchange applied and the source of that rate, as below 11
TAX INVOICE Tax Invoice No. : 180101 Date : 01.10.2018 Customer Name and Address ABC LLC P.O.Box: 123xx Dubai, UAE Tel.04-35465xx Supplier Name and Address XYZ Trading Co. LLC P.O.Box: 529xx Dubai, UAE Tel.04-12465xx TRN No. XXXXXX TRN No. XXXXXX Sl.No. Item Code Description Qty(kg) Unit price(aed) Total Amount (AED) 1 HMJ 123 NBGUGUGBIHBI 2 100 200.00 2 XYT 654 BJBIKJIJNBI NBNKNK 3 150 450.00 3 ABK 986 NNNNNNNLLN NKO 4 250 1,000.00 Total Sales excluding VAT 1,650.00 VAT @ 5% 82.50 Total Amount Payable 1,732.50 10) Penalties Penalties will be imposed for non-compliance such as a person failing to register when required to do so, failing to submit a tax return or make a payment within the required period, failing to keep the required records and tax evasion. There will be strict penalties for non-compliance - including business closure for three days and penalties up to 500% of the VAT owed in cases of fraud. The FTA will also have the power to conduct VAT audits with five days notice, unless fraud is suspected. There will be a three-tier appeal process. Employees of the new UAE Federal Tax Authority will be judicial officers. 12
11) Collection and Payment 1. Collect VAT on taxable supply of goods and services. 2. Account for VAT credit paid on purchase of goods and services 3. Payment of VAT to tax authorities on a regular basis (expected to be monthly/quarterly) after deducting Input VAT credit. 4. Filing of quarterly returns within 28 days after the end of the quarter 5. Emirate wise reporting of supplies. 12) How to register for VAT Where an entity is required to register for VAT, or would like to voluntarily register for VAT, it should complete a VAT registration form The VAT registration form will be available via the FTA s online portal Registrations are expected to open on a voluntarily basis during Q3 2017 and on a compulsory basis during Q4 2017 in order that registrations can be processed in good time for the implementation of VAT on 1 January 2018 During the application process various documents will be requested to validate the information provided. It is advisable to have these to hand prior to starting the application and copies of the documents should be uploaded with the application. Supporting documents will include such items as: 1. Documents identifying the authorized signatory e.g. passport copy, Emirates ID, Contact details, customs details 2. Memorandum of Association, AOA, Certificate of incorporation 3. Trade license, Bank Account Details, Financial Statements 4. Other official documents authorizing the entity to conduct activities within the UAE Following approval of the application a Tax Registration Number will be issued 13) Precautions All long term contracts extending to 2018 should revise to include the effect of applicable VAT rate. For getting the VAT credit the purchases should be from a VAT registered supplier. Proper invoicing methods should be followed. Care about the working capital portion blocked in VAT on credit supplies. Proper VAT knowledge and training of staff. Tax registration and filing requirements. 13
Accounting System changes for VAT compliance and reporting. Appointing a good competent accountant 14) Registration Due Dates Turnover more than 150 Million : October 31 Turnover b/w 10 M & 150M : November 30 Turnover b/w.375m & 10M : December 4 14