Value Added Tax is an indirect, transaction-based tax that is levied at every stage of the supply chain. The end consumer generally bears the cost of the tax while the registered business calculates and collects the tax, as a tax collector on behalf of the Federal Tax Authority.
What is the value-added tax rate? How is it calculated?
The value-added tax rate in the UAE is 5%, and it is calculated as follows:
Businesses must keep track of their sales, purchases, and expenses. The value-added tax payable by the taxpayer is equal to the value-added tax charged on output (sales) – the value-added tax paid on inputs (purchases).
Let’s look at an example of how to calculate the tax on output and inputs separately.
Let’s say you own a juice shop and spend 200,000 dirhams to get raw materials. The input tax rate is 5%, so the input tax you pay is 5% of 200,000 dirhams = 10,000 dirhams.
After selling juices using purchased raw materials, you can achieve sales of 400,000 dirhams. The output tax rate is 5%, so the tax you will pay is 20,000 dirhams.
Therefore, the final VAT to be paid to you will be 20,000 – 10,000 = 10,000 dirhams.
Which businesses are required to register for VAT?
- Businesses whose taxable supplies and imports from abroad exceed the mandatory registration threshold of AED 375,000.
- Businesses can voluntarily register if their taxable supplies from abroad are less than the mandatory registration threshold, but exceed the voluntary registration threshold of 187,500 dirhams.
- Businesses may voluntarily register if their expenses exceed the voluntary registration limit.
What sectors are subject to zero rates?
The zero rates is levied on the following main categories of supplies:
- Exports of goods and services outside the GCC.
- International transportation and related supplies.
- Supplies of some means of sea, air and land transportation (such as aircraft and ships).
- Certain investments in precious metals (such as gold and silver with a purity of 99%).
- Newly constructed residential real estate that is supplied for the first time within three years of its establishment.
- Basic/certain services in the education sector and related goods and services.
- Basic/certain services in the health sector and related goods and services.
What sectors are exempt from VAT?
The following categories of supplies are exempt from VAT:
- Supplying some financial services.
- Residential real estate.
- Space/empty land.
- Domestic passenger transportation.
When do businesses have to file tax returns?
The taxable person must submit VAT returns to the Federal Tax Authority on a periodic basis (every three months or a shorter period if the authority so decides) within 28 days from the end of the tax period in accordance with the procedures specified in the tax legislation.
What records should a business keep? And what is the retention period?
- Every company must keep accounting records to clarify its transactions so that it accurately reveals, at any time, the financial position of the company and enables partners or shareholders to ensure that the company’s accounts are kept in accordance with the provisions of this law.
- The business must keep its accounting records at its head office for a period of no less than (5) five years from the end of the company’s financial year.
- The company may keep an electronic copy of the originals of any of the documents and records kept and deposited with it in accordance with the controls issued by a decision of the Minister.
What are tax groups?
A tax group is a group of two or more persons registered with the FTA as a single taxable person subject to fulfillment of conditions under UAE VAT Law.
Does the property owner have to register for value-added tax?
- The owner of the residential building does not register for VAT if he does not have other business activities, but if he has any other business activities, he must consider his need to register.
- The owner of any building other than a residential building must register for value-added tax if the amount of his supplies exceeds 375,000 dirhams during the previous twelve months, or his revenues are expected to exceed 375,000 dirhams during the next thirty days.
What is a GIBAN number?
A GIBAN is a unique IBAN issued by the Federal Tax Authority to each taxable person to be used to transfer funds through certain UAE financial institutions in order to pay VAT payable, Excise tax payable and any payable administrative fines. This option cannot be used for other miscellaneous payments.
Will import VAT be paid?
VAT is due on goods and services purchased from abroad.
- If the recipient in the country is a person registered with the Federal Tax Authority, the tax is due on that import using the reverse charge mechanism.
- In the event that the recipient in the country is an unregistered person, the value-added tax is paid on the import of goods from outside the GCC before the goods are released to the person.
In what circumstances can a business claim a VAT refund?
VAT can be deducted from business expenses in the following cases:
- That the business is subject to tax (the end consumer cannot request a refund of the input tax).
- That the tax is charged correctly (VAT charged without justification/incorrect cannot be recovered).
- The business must keep documents that show the value of the tax
For a paid add-on (tax invoice).
- The goods or services obtained will be used or intended to be used to make taxable supplies.
- Input tax refunds can only be requested on the amount paid or to be paid before the expiry of 6 months from the agreed date for payment of the supply.
Can UAE nationals request a VAT refund?
Residents of the UAE who are not registered for value-added tax may claim a refund of value-added tax paid on goods and services associated with the establishment of a new residence for the purpose of housing their families. This will allow VAT refunds on expenses such as services for engineers, contractors and building materials.
What are the cases that lead to the imposition of fines and penalties?
Fines and penalties for non-compliance will be imposed to ensure compliance with tax laws.
Examples of acts and abuses that can lead to fines include:
- Failure of a person to register for tax when he becomes obligated to do so.
- The failure of the taxable person to submit the tax return or make payments within the specified period.
- The person’s failure to keep the records required in the issued tax legislation.
- Tax evasion crimes where a person intentionally commits acts that violate the provisions of the issued tax legislation.
What is the role of tax agents in helping businesses comply with VAT?
Since VAT implementation and compliance are two important aspects for the success of a business in the UAE, you need to have expert business tax agents to help you with that. We at Abdulla Al Mulla Auditing of Accounts have helped a group of companies implements and comply with VAT. We are in a position to provide all types of VAT implementation and compliance in the UAE. Feel free to contact us.