Most Emirates impose a municipality tax on properties, mostly by reference to the annual rental value. It is generally the tenants’ obligation to pay the tax. In some cases, separate fees are payable by both tenants and property owners. For example, in the Emirate of Dubai, the municipality tax on the property is currently imposed at 2.5% on annual rental value for commercial properties (paid by property owners) and 5% for residential properties (paid by tenants).
VAT in UAE was introduced in the United Arab Emirates on 1 January 2018. The general VAT rate is 5% and applies to most goods and services, with some goods and services subject to a 0% rate or an exemption from VAT (subject to specific conditions being met).
When Was VAT In UAE Introduced?
VAT in UAE was introduced on 1 January 2018. The VAT in UAE rate is 5% and applies to most goods and services, with some goods and services subject to a 0% rate or an exemption from VAT. VAT in UAE is a general consumption tax that will be levied on the majority of transactions of goods and services unless specifically exempted by the Law.
The 0% VAT rate applies to goods and services exported outside the VAT-implementing Gulf Cooperation Council (GCC) member states, international transportation, the supply of crude oil/natural gas, the first supply of residential real estate, and some specific areas, such as health care and education.
How does VAT in UAE work?
Let’s consider the following example to see how the VAT system works:
- A manufacturer who produces plasma television sets sells a TV to a wholesaler for AED 1000. Under the new tax system, the manufacturer collects a VAT of 5% (AED 50) from the wholesaler on behalf of the government. The wholesaler then pays a total amount of AED 1050.
- The wholesaler increases the selling price to AED 2000 and sells it to a retailer. The wholesaler collects a VAT of 5% (AED 100) from the retailer on behalf of the government, while also receiving a refund of the VAT paid to the manufacturer in the previous step. The retailer pays a total amount of AED 2100.
- The retailer further increases the selling price to AED 3000 and sells it to the end customer. The retailer collects a VAT of 5% (AED 150) from the end customer, while also receiving a refund of the VAT paid to the wholesaler in the previous step.
- The end customer pays a total amount of AED 3150 for the plasma TV set.
Why is the VAT in UAE being introduced?
The UAE delivers excellent public services, including healthcare, education, public transportation, and social services. The introduction of a VAT will allow the government to diversify their sources of income and continue to ensure a good standard of living for UAE residents. The implementation of VAT is expected to generate AED 12bn of revenue in its first year and up to AED 20bn in the second year.
How much is VAT in UAE?
The standard value-added tax (VAT) in UAE is 5%. It applies to most goods and services with a few exemptions. Zero-rated supplies, or 0% VAT rate applied to goods and services which are exported outside the VAT-implementing Gulf Cooperation Council (GCC) member states. These include the supply of crude oil/natural gas, international transportation and some specific areas, like healthcare and education.
VAT in UAE Rates:
The VAT rate is 5% for most goods and services except for these exempted or 0% tax categories:
- Certain education and healthcare supplies.
- Goods and services exported outside the GCC.
- International transportation.
- Certain investment-grade precious metals (e.g. gold and silver of 99% purity).
- Newly constructed residential properties sold within 3 years of construction.
VAT in UAE exemption
- Residential properties.
- Public transport.
- Undeveloped land.
- Life insurance.
- Certain financial services.
What Does it Mean For The Resident & Businesses?
For UAE resident businesses, the mandatory VAT registration threshold is 375,000 United Arab Emirates Dirham (AED), and the voluntary registration threshold is AED 187,500. No registration threshold applies to non-resident businesses making supplies on which the UAE VAT is required to be charged.
Businesses in the UAE are impacted indirectly by the introduction of VAT, as the new tax implemented led to several compliance costs and major changes to businesses active in the country. The implementation of VAT in the UAE is a step in the right direction, setting the path for a new efficient taxation system.
VAT in UAE: Legal Perspective
From a legal perspective, it was necessary to review existing contracts to check if they needed to renegotiate contracts that had no VAT clause in order to avoid bearing any VAT cost. They also had to check that all new contracts dealt with the application of VAT and set out which party was responsible for bearing the VAT liability.
It was also important to communicate with suppliers to ensure they were going to issue VAT compliant invoices and businesses had to evaluate the cash ﬂow implications and their working capital requirements as a result of now having to pay the VAT before they received payments.
VAT in UAE: What should businesses do now?
The completion of the tax return may seem a simple, straightforward task, but the department within the organisation that ﬁles the return on behalf of the business will be held responsible for the tax positions taken in that return regardless of whether the compliance work was outsourced. The relevant department will usually be the tax department, but it could be the legal or ﬁnance department.
Given VAT is a new law, there may be uncertainty on many technical positions which could create risk and this has to be taken seriously as penalties for non-compliance, including incorrect tax returns, could be as high as 300% of the tax amount due. VAT will involve a compliance cost for businesses, given the potential risks and penalties, it is important whenever there is uncertainty, businesses work with a trusted tax adviser and navigate logically through any areas of doubt.
VAT in UAE: Impact on Travel & Tourism Industry
The VAT for tourism operators can vary from business to business lot more complex than
operators may be able to feasibly handle. This complexity may drive some operators to make changes to the way in which they do business. Tourism operators will generally find that assuming they breach the threshold for being required to register for VAT, they will need to charge VAT on their fees. Even though a significant percentage of their client base will be tourists from offshore. The reality is that the authorities are likely to take the view that the service is supplied in the respective GCC state, and that it should therefore be subject to VAT there.
VAT in UAE: Impact on accommodation providers
The major issue for hotels will be the recognition of the time of supply for VAT purposes. Traditionally,
hotel operators tend to recognize income from room revenue at the date of the guest’s arrival at the earliest, although many also, recognize it at the date of departure, based on the premise that prior to that time, the booking may have uncertainties associated with it (the guest may depart earlier or later than their booking may initially indicate.
VAT in UAE: Impact on Airlines
If any domestic flight is undertaken with the GCC, most flights would be expected to be zero-rated on the basis that they are international flights. The issues and complexities that arise typically do so as a result of the various ‘non-airfare’ charges made to customers, and other fringe operations that airlines often engage in outside of their core operations of transporting people and goods around. On the revenue side, one of the more obvious examples would be their participation in frequent flier programs.
Impact of VAT in UAE on businesses
The Value Added Tax applies to tax-registered businesses managed on the country’s mainland and in the free zones. However, if a free zone is a “designated zone” by the UAE cabinet, it must be considered outside the UAE for tax purposes. The transfer of goods is tax-free between designated zones.
- VAT-registered businesses are required to charge VAT on supplied taxable services or goods.
- They can reclaim any VAT paid to services or goods related to business.
- These businesses must have relevant records to allow the government to check if everything is in order.
VAT in UAE: Overall Impact on Tourism Industry
The tourism industry contributes significantly to the Gulf economies and offers immense opportunity for individual operators throughout much of the GCC, but all such operators will face major complexities in the manner in which they will need to address the implementation of VAT.
VAT Compliant Travel Accounting Software In UAE
When you choose the right VAT solution and provider, your travel business will not only just save time and money, it will provide a robust powerhouse of financial data that will help your organization respond to the ever-changing market conditions. Systrix, which is a leading travel software automation provider in UAE offers Smart Travel Accounting System which provides invoice automation solutions designed to maximize touchless, processing, especially for travel businesses. For more details schedule a free demo today with us.