Tag: Tax

VAT and excise tax

The UAE has issued substantive law on Value Added Tax (VAT) and Excise Tax.

 

Federal decree law No.8 of 2017 deals with VAT.  The imposition of VAT will commence in the UAE from 1 January 2018 at a rate of 5%.  The VAT law provides a framework for implementation of VAT in the UAE.  Many operative provisions specific to the UAE are not incorporated in the VAT law and instead will be disseminated in both the Executive Regulation and the Cabinet Decision to be issued in relation to the VAT law.  Once issued, we will receive guidance on a number of areas which currently remain unlegislated.  In the meantime, this inBrief deals with the provisions of the VAT law and information otherwise available in the public domain.

 

Tax Registration

 

Registration is mandatory for any taxable person/business if the total value of its taxable supplies made within the UAE exceeds the mandatory registration threshold of AED 375,000 over the previous 12 months period or, if it is anticipated that the taxable supplies will exceed the threshold in the next 30 days.

 

Voluntary registration is available for taxable persons/businesses that do not meet the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500 subject to the same taxable supply tests above.

 

A taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%.  Reverse charged supplies and imports are also taken into consideration for this purpose, if a supply of such imported goods and services would be taxable if it were made in the UAE.

 

Entities which are not based in the UAE but provide goods or services in the UAE are also required to apply for registration if they meet the threshold requirements. Registrations will commence in the fourth quarter of 2017 via the Federal Tax Authority (the FTA) website.

 

Exempt and Zero Rated Items

 

The supply by a taxpayer of either an Exempt or Zero Rated good or service will result in no imposition of VAT on that transaction. Although the result of both categories of supply seems identical, these terms are not to be used interchangeably.

 

The key distinguishing feature between the two supplies is that a supplier of a Zero Rated good or service will be able to claim a refund on any VAT paid on their purchases (input tax) whilst a supplier of an Exempt good or service will be unable to recover any VAT paid on their purchases.

 

VAT law provides a list of Zero Rated and Exempt supplies. The list includes:

 

Zero Rated Supplies

 

  • Exports of goods and services outside the GCC;
  • International transportation and related services;
  • Supplies of certain sea, air and land means of transportation (such as aircraft and ships);
  • Certain investment grade precious metals of at least 99% purity (e.g. gold, silver and platinum);
  • New residential properties that are supplied for the first time within 3 years of their construction;
  • Supply of certain education services, and supply of relevant goods and services;
  • Supply of certain healthcare services and supply of relevant goods and services;
  • Supply of crude oil and natural gas.

 

Exempt Supplies

 

  • Certain financial services including sharia compliant products;
  • Residential properties (save those which are zero rated);
  • Bare land;
  • Local passenger transport.

 

Tax Grouping

 

VAT law provides for tax grouping which allows companies with common control and / or ownership to be combined together into one entity for the purposes of VAT. Only one VAT registration number will be issued to the group and a combined VAT return will be required to be filed for the group, resulting in a simplification of VAT administration.

 

Members of a VAT group become jointly and severally liable for each other’s VAT liabilities and no VAT will be payable on transactions among entities within the group.

 

VAT Interactions within the GCC

 

Generally a VAT registered customer must account for VAT paid in respect of purchases however certain transactions between entities within the GCC will be subject to VAT by Reverse Charge.

 

The concept of reverse charging VAT allows the simplification of transactions within a single market (i.e. GCC states). The Reverse Charge removes the obligation to account for the VAT on a sale from the supplier, and places it on the customer. It is a concessional relief measure to assist the FTA with its administration so that foreign businesses do not need to register for VAT.

 

When a transaction is subject to Reverse Charge, and if your customer in another GCC country is VAT registered, then you will not be required to charge local VAT.

 

The customer will Reverse Charge VAT (i.e. account for VAT on your behalf) on their VAT return in their GCC country whilst simultaneously claim a VAT refund for the VAT paid on the purchase on the same return (if appropriate).

 

For the vendor it will effectively result in a Zero Rated transaction, with full entitlement to a refund of any VAT paid locally and no further obligation to account for the transaction.

 

If a GCC customer is not VAT registered (e.g. a private consumer) then reverse charging does not occur and UAE VAT would be charged until the vendor exceeded the AED 375,000 registration threshold in that GCC jurisdiction, at which time VAT registration would be required.

 

Note that for the purposes of a single market (GCC) VAT treatment, only those countries will be taken into account that have implemented VAT at the relevant time; the non-implementing countries would be treated like any other foreign country.

 

Application of VAT in UAE Free Zones

 

VAT law does not provide guidance to the application of VAT within any of the free zones in the UAE.  It is expected that the Executive Regulation to the VAT law will specify the tax treatment of free zone entities.

 

VAT Compliance

 

Registered entities will be required to maintain records for at least a five year period.

 

Tax invoices issued are required to be denominated in Arab Emirate Dirhams (AED) and if a currency conversion is required to AED, only approved rates scheduled on the UAE Central Bank website may be used.

 

VAT returns will be required to be completed with summary level data and filed online via the FTA portal. Reporting of Emirate level sales data will be required, summarized per Emirate. This statistical information is important for each Emirate, as revenue from the implementation of VAT will be distributed between the Federal Government and each Emirate. All communications with the FTA will also be facilitated online via the same portal.

 

The VAT law provides for penalties (imprisonment and/or fines) for contravention of the provisions of the VAT law. Penalty rates have not been set and will be specified by Cabinet Decision. Late returns and errors on VAT returns will be penalized on a tax liability due basis, whilst compliance failures (e.g. persistent non lodgment of VAT returns) will be penalized on a fixed penalty per infraction.

 

Excise Tax

 

Federal decree law No.7 of 2017 deals with Excise Tax and became effective in the UAE as of 1 October 2017.  A reasonably high rate of tax on a limited number of goods is imposed by way of an excise tax.  This includes a 50% excise on carbonated drinks and a 100% excise on energy drinks and tobacco products.  It is clear from the items on which excise has been applied that it is a tax to change social behavior by discouraging consumption of such products.

 

Conclusion

 

The introduction of Excise and Valued Added Taxation are likely to change the way business is conducted and administratively maintained in the UAE and the GCC.  This is a paradigm shift in a region which was largely free of taxation and the associated tax infrastructure. Although the rate of VAT imposition is set at a low 5% initially, and as such its effect economically will not be severe, the development and eventual maturity of a tax regime will have a much more pronounced effect on the economy and businesses alike. ■

Be VAT ready – tax procedures law is already here!

It has already been in the public domain for a while that VAT will be applicable in the UAE (and the GCC) from the beginning of 2018. Under the VAT regime, businesses will be collecting taxes on behalf of the government and will file tax returns accordingly. Although the tax is collected at each stage of value addition, the burden of tax falls only on the end consumer. For all the other stages, one can claim a refund. For this reason VAT is called ‘consumption tax’.

 

Various statutory and administrative actions are being taken for the timely and effective implementation of VAT. Following the establishment of the Federal Tax Authority (the Authority) under Federal Law No. 13 of 2016, the much awaited Tax Procedures Law has been issued as Federal Law No. 7 of 2017. The Tax Procedures Law establishes the framework for federal taxes administration in the UAE. Details will be added by executive regulations to be issued to supplement the Tax Procedures Law.

 

All the persons conducting any business or profession in the UAE are required to maintain accounting records. While the Tax Procedures Law defines a “Person” and a “Business” very broadly, note that in the context of VAT, persons and businesses subject to VAT will be specified in the substantive law which is yet to be issued. All taxable persons are required to register with the Authority to obtain a Tax Registration Number (TRN). The TRN is required to be quoted in all correspondence with the Authority. Tax returns are required to be filed in Arabic, however the Authority may permit filing in another language provided the person agrees to provide the Arabic copies when requested by the Authority.

 

The Tax Procedures Law creates a regime for registration of tax agents with the Authority. A registered tax agent can represent any person before the Authority and assist the person to file tax returns. To practise the profession, a person must be enrolled in the Register maintained by the Authority for such purpose, and the person shall also be licensed for this purpose by the Ministry of Economy and the competent local authority.

 

The Authority has been given wide powers of audit. A tax audit may be conducted at the Authority’s office or at the place of business of the person subject to the tax audit or any other place where such person carries on business, stores goods or keeps records. Ordinarily a five days prior notice is required to be given for a tax audit. However, on specified serious grounds, the Authority can conduct a tax audit without prior notice. To protect the rights of a tax assessee, a tax audit without notice requires prior written approval of the Director General of the Authority. In addition, approval of the Public Prosecutor is required if the audit is to take place at the assessee’s residence. An assessee also has a right to know the identity of the persons conducting a tax audit, ask for approvals for tax audit, obtain copies of any originals impounded by the Authority and attend the tax audit. The Authority also has the power to assess tax and administrative penalties. Tax evasion and related conduct is a criminal offence. Any penalty does not relinquish the requirement of paying the unpaid tax.

 

The Tax Procedures Law establishes a Tax Disputes Resolution Committee to decide disputes regarding the calculation and payment of tax. The Committee’s decision shall be final if the amount of the tax and administrative penalties does not exceed AED 100,000.

 

The Authority’s officers are bound by strict confidentiality obligations in relation to the information they obtain during a tax audit. Unless a tax evasion is proven, the Authority cannot conduct a tax audit after the lapse of a period of five years. The burden of proof for accuracy of a Tax Return lies on the person filing the return, and for tax evasion it lies on the Authority. VAT will come into force on 1 January 2018. Any business that is required to be registered for VAT and charge VAT from 1 January 2018 must be registered prior to that date.

 

The promulgation of the Tax Procedures Law is a significant step forward in the implementation of VAT in the UAE. Given the penal sanctions under the Tax Procedures Law, it is in the interest of all potential tax assessees to prepare early to comply with VAT. ■