The UAE is on track to implement VAT from 1 January 2018. The GCC VAT Framework Agreement allows member states until 1 January 2019 to implement the tax.
The UAE Ministry of Finance has said it will release domestic VAT legislation by mid-2017, with detailed regulations to follow quickly. However, recognising that this is a relatively short implementation period, the Ministry revealed some of the key features of the upcoming tax at its recent meeting.
Registration and administrative matters
The standard rate of VAT will be 5%, with exemptions and zero-rate reliefs available.
Registration will be mandatory for businesses with turnover in excess of $100,000, while businesses with turnover in excess of $50,000 may voluntarily register. Below that level, registration will not be possible. Registration is expected to open in the third quarter of 2017.
Other details that have emerged include that VAT returns will be quarterly with payment due one month following submission, that cash refunds of VAT will be available where VAT incurred exceeds VAT due, and that businesses will be required to retain records, for example tax invoices, for a period of five years.
VAT will be a federal tax across the UAE, but businesses will be required to report sales and purchases at an Emirate-level basis.
Appeals and enforcement
The officers of the UAE Federal Tax Authority will be judicial officers, the Ministry said. This move is presumably intended to assist in their duties enforcing the new tax.
A three tier tribunal system will be put in place to handle appeals.
Taxpayers will be given five days notice of audit by the tax authority, unless fraud is suspected. In those circumstances the tax authority will have the power to close down businesses and impose penalties of up to 500% of the VAT due.
Reliefs and exemptions
The tax is expected to be broad-based on supplies of goods and services, but some reliefs and exemptions will be available.
Education and healthcare will be subject to a zero-rate, meaning that no VAT will be due on income in these sectors, but institutions will be able to recover VAT on cost base. This will remove much of the burden for these sectors.
There will be a narrow exemption for financial services. It is expected that VAT equivalence will be applied as between Islamic and non-Islamic financial products, thus allowing transactions in underlying physical commodities to benefit from the exemptions and reliefs granted to purely financial non-Islamic credit arrangements.
Financial services remunerated by fees will not benefit from exemption. In short, this means that core financial products such as credit and securities transactions will be exempt, while financial advisory services are likely to be subject to VAT.
Life insurance will be exempt from VAT, but non-life products will be taxable.
Investment quality gold, silver and platinum will be zero-rated, largely relieving business undertaking such transactions from the burden of tax.
Sales of bare land without structures on it will be exempt from VAT.
Transactions in commercial property, including disposals and lease transactions) will be subject to the standard rate of tax. Supplies of residential property will be exempt from VAT, and there will be a zero rate applicable to the first sale of new residential property to remove the burden of VAT for property development.
All the indications are that the VAT system will be reasonably similar to that operated in the EU, and these details will allow businesses to begin to plan for the new tax.
Issues to consider include whether standard documents and contracts are ready and can allow charging VAT on top of standard prices. Is it clearly defined as to who bears the burden of the tax, and are invoicing and payment requirements clearly set out?
Businesses will need control procedures in place to identify which sales are subject to VAT, and to separate the VAT collected for remittance to the tax authority. The tax authority is unlikely to be sympathetic to a business that has received VAT from its customers, but is unable to pay over the tax at the appropriate deadline.
Darren Mellor-Clark is a tax expert with Pinsent Masons, the law firm behind Out-Law.com.