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.
Under this, VAT is charged at every stage of the supply chain and the mechanism of Input tax deduction ensures that the businesses act as tax collectors of the government, who collect the tax from the end consumers, account and pay the tax. A VAT exemption applies to certain financial services.
VAT in UAE: For UAE 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 who 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.
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.
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