A detailed introduction on the effective implementation of VAT in the UAE.

UAE will apply 5% VAT (Value Added Tax) from January 1, 2018

RLD, a law firm of recognized prestige specialized in Commercial Law and with its own offices in Madrid and the United Arab Emirates, has issued a brief infographic with the main data available about the effective introduction of the VAT in the United Arab Emirates, scheduled for January 1, 2018.

Regulatory provisions are pending publication, but a general overview of what the implementation of this new law in the UAE and its effects will entail.

On August 27, 2017 the federal law to regulate Value Added Tax (VAT) in the United Arab Emirates was published. This law comes to establish the bases for the introduction of the tax in the country. However, it will be necessary to wait for the publication of the regulatory provisions to know its application in detail.

The application of VAT in the UAE will be effective on January 1, 2018, but companies will have to prepare from now, as some of them will be required to register with the body created for this purpose, the Federal Tax Authority (FAT) and make VAT returns quarterly from the entry into force of the law.

In the first year of validity of the tax the country contemplates to enter for that concept 12,000 million dirhams.

This new law will force companies to adapt their operation to these new requirements so they will have to analyze the impact that will occur in the various departments of the company

There will be two types of VAT registers:

1. Mandatory registration:

Companies with purchases and imports taxed with amounts greater than 375,000 AED (planned or made in the last 12 months)

2. Voluntary registration:

Companies with purchases and imports taxed with amounts between 187,500 AED and 375,000 AED (planned or made in the last 12 months)

On the other hand, companies with expenses above the minimum established for voluntary registration may opt to register. For example, start-up companies without income.

What will be the tax rate?

1. Standard Tax Rate 5%

2. Tax rate 0%: Goods and services taxed at 0%

Education, health, new residential properties sold in the first 3 years since the building was built, international transportation and exports outside GCC

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VAT exemption: Exempt goods and services

Life insurance, sale of residential property, provided that 3 years have passed since the property was built, real estate rental (residential), purchase of lots, financial services and local transportation.

The specific categorization of each good or service must be reviewed individually, since its consideration is subject to modification or clarification in the forthcoming regulations.

What effects will the introduction of VAT have on companies?

This new law will force companies to adapt their operation to these new requirements so they will have to analyze the impact that will occur in the different departments of the company.

Some of the most immediate effects will be the adaptation of commercial contracts and invoices, the declaration of taxes and the obligation to store accounting documents for 5 years.

Special considerations:

There are issues in the law that deserve special consideration, such as FREE ZONES, VAT groups and uncollectible debts. These points, of great relevance, still need concretion through the aforementioned regulations.

RLD has indicated that it works to be able to offer the best advisory service in this field and inform about all the news that may be produced. For this purpose, it has created in its offices in the United Arab Emirates a specific support department for the implementation of VAT with which you can request any type of help or information that is needed.

VAT tax introduction will have to be weighed against its impact on spending.

Taxes convenient in the UAE? And, if they were, what kind of taxes should be introduced and in what percentages? Before entering into a more detailed discussion of UAE taxation, it should be noted here that the economy of the UAE is driven by consumption. Follow the explanation of the relationship of this with taxes. 

Taxes are levied to produce what economists call a ‘deadweight loss‘ (DWL). I am yet to come across a person or a book that would explain this so that it can be quantified and displayed in precise numbers. Anyway, here the conventional wisdom states that the DWL is usually known as the fall in economic activity as a result of the introduction of a new tax or increase an existing one.

Another topic of debate is about who has the cost of the tax that is related, more or less, the price elasticity of the product or the service is taxed and demand of the market. So for example, when consumers – that is, the public – are indifferent to price increases, they will be willing to pay the additional amount and will be those that the DWL will affect in a greater way.

And yet, the demand will be negatively affected even if the effect is small. On the contrary – and if the demand for a particular product or service is relatively minor or consumers are very price sensitive, the producers, i.e the suppliers of goods and services, will have to incur the cost of paying for it even if tax only partially.

Therefore, DWL will fall into its domain reflected by a reduction in sales. The Laffer curve explains how, beyond a certain tax, taxes do not collect enough income due to the fall in sales that would occur when the tax continues to rise.

The pros and cons of VAT implementation in the UAE

The case of taxes in the UAE is solid for mainly two reasons. The first is that the country is diversifying away from its main source of income previously, oil. Diversification and at the same time provide citizens and residents of the country with different public services, sources of income that must be increased and diversified from traditional ones.

A very obvious source of income for a more sustainable financial model for the UAE, in the long run, is in the introduction and maintenance of taxes. But for it to work, a tax law must be drafted and its policy introduced and explained. The latter two must include all existing taxes and all taxes that must be introduced at a later stage.

TAX rates in the UAE

At the time of writing this report, existing taxes in the UAE are covered: alcohol by a percentage said it would be around 131 percent; Hotel taxes; and the inevitability of a 100 percent tobacco tax. There are also typical taxes that are associated with airline tickets.

Since there are not many zip codes now; The introduction of additional taxes requires the establishment of an entity in the Ministry of Finance or an independent federal entity to regulate the taxation and collection of income through the seven Emirates. Guidelines will then have to be issued on what taxes are in the UAE and how the income and others need to be registered and how taxes can be paid.

In addition to that, there will also be the need to establish an incorrect refund mechanism registered and pay taxes.The guidelines and adjustment mechanism in place when a fiscal policy is drafted and communicated should have minimal future errors.

Discouraging unwanted consumption and encouraging private savings would be the second reason why taxes should be established in the UAE. Unwanted consumption is what has agitated the argument to impose a tobacco tax on the GCC as an effort to make cigarettes unaffordable for teenagers.

The declared policy actually worked in France, but with a price of a pack of high-end brand cigarettes being € 7 (Dh28.71) – more than double the current prices in the UAE.

Unwanted additional consumption has to do with substances in foods that are direct and indirect causes of non-communicable diseases (NVDs). The World Health Organization estimates deaths from noncommunicable diseases in the UAE as 65 percent of 9,700 deaths. We could all discuss what substances in food cause what kind of noncommunicable diseases or whether cholesterol in eggs is considered good or bad.

We could agree, although, for example, that the intake of sugar accompanied by an alteration in the secretion of insulin by the pancreas could lead to future diabetes, especially if it is compatible with family history. We could also agree on the dangers of saturated fats causing clogged arteries etc. So, qualify the consumption of these as unwanted?

When the Ministry of Finance announced that the VAT will be introduced in the UAE, I could not help not thinking relatively easier would have been in the first tax food or substance of food so that people could adjust to the new concept of basically taxing consumption.

Since such taxes are imposed with the primary purpose of achieving better health outcomes for the entire population, the introduction of tanks will be more fluid and understandable. Then, the proceeds of food-related taxes could be used to finance or subsidize health and health insurance programs that would make perfect sense to the public and would diversify government’s direct payment expense into government health.

In the Philippines, a tax on tobacco was used to finance insurance programs. The nature of taxes related to food is VAT anyway and paves the way to expand the list of products and services that VAT covers. This would not only stop unwanted consumption, but also induce future savings for the economy and the government in terms of higher productivity and less health-related expenses.

Now, since it will be VAT, we already know of purchases abroad and stand in queues to get tax refunds … not in all countries though.

What would be a reasonable tax price to introduce in UAE?

We must take into account the growing number of tourists visiting the country and as VAT, if high enough, could eliminate any advantage that the United Arab Emirates had in the lower prices than their products and services when compared to countries with VAT throughout the world.

Therefore, it would be reasonable to start with a VAT of 3 percent after the effect would be measured before deciding to increase more, by a research team based in the tax regulator. By doing so, it would be feasible to achieve an optimal tax rate, known as T * in the Laffer curve and is the point at which maximum collection is possible.

Beyond that point, or a very high VAT, cushion tourists’ spending and lead to a decrease in domestic spending that will be associated with a fall in tax revenues and inflation in a negative territory (consumption tax) from Japan is a good example). In the case of the UAE, I hope here that a reasonable VAT and the reduction of the fuel subsidy would balance things when it comes to inflation.

The next question to be debated when introducing VAT (except for food) is or should not reimburse tourist tax amounts. If VAT was 3% for example, the reimbursement rate would not generate the expected income from it.

The logic here is simple. With a large share of the population choosing to repatriate income to their countries of origin, $ 29 billion (Dh108.52 million) in 2014 and there is no tax repatriation or exchange rates for houses in place, VAT will discourage their domestic additional expense . So if the tax was reimbursed to tourists, the income to be realized will be reduced to levels that could make the full introduction of VAT not worth it.

The most question here would be to introduce VAT in a way that would balance an increase in revenue at the same time, attract a steady flow of tourists. DWL here would be partly due to lower sales and partly in spending, nationally and by tourists, depending on the demand and price elasticity and high VAT.

The last thought I want to leave with is: gasoline would never be taxed?

For more info on this topic or to download vat in uae app you can visit the Offical UAE VAT website

You can visit this site for Officially VAT Announcement

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