The UAE is popularly known as the gateway to the Middle East. It offers a stable government and adopted business-friendly policies supported by a sound legal system in line with international law. In recent years, innovative investment-friendly policies have resulted in businesses worldwide establishing a base in the country.
Like in other Middle Eastern countries, oil has played a significant role in supporting the UAE's economy. But the depleting oil reserves and recent shifting towards renewable energies to reduce the impact of the environment worldwide means the countries are required to find new sources of revenue for infra investments and continued growth. VAT has filled in the vacuum left over by the recent decline in revenues across the Arab world.
VAT in the UAE
International Monetary Fund, also known as the IMF, has been stressing over the various advantages of VAT type of taxation for several years to countries. However, following the instability and downward spiral of oil prices for around a year, GCC (Gulf Co-operative council), of which UAE is a part, has taken this policy into effect, which is supposed to have a significant affirmative effect on the economy member countries.
The GCC countries considered implementing VAT taxation and other corporate tax for few years before making a decision. But due to various bureaucratic issues in these countries, the idea not considered. But earlier in 2017, the federal and local Emirati governments showed enormous interest, and a meeting conducted among those same bureaucrats of respective governments. But there was initial mulling over the impact of VAT on UAE's economic and social conditions, the draft of the law completed within the same year.
The UAE had in place one of the most straightforward taxation systems in the world. To raise the tax revenues to reduce reliance on oil-generated money and invest more in the economy's infrastructure, the Government implemented a new Value added tax (VAT). The new VAT came into effect from the 1st of January 2018 across the UAE, with a flat rate of 5% value-added tax (VAT) on most VAT eligible goods. Additionally, some goods are exempted from VAT and where o% VAT is levied on the buyer. The difference between the two rates is that dealers of zero-rated goods or services can still reclaim the VAT they've paid on inputs into the business. All the eligible firms are required to VAT Compliant to avoid hefty penalties and fines.
The UAE companies must register for VAT if the value of their total taxable supplies exceeded the amount of AED 375,000 (which is around US$ 100,000) over the previous 12-month period or expected to exceed the threshold in the next 30 days. Companies have a choice to register voluntarily if the total value of all supplies and imports –or just the company expenses are expected to exceed the threshold of AED 187,500. Companies are exempt from VAT registration if the total value of the supplies and goods does not cross the threshold value.
Effects of VAT in the UAE
Below are some of the effects of the VAT implementation in the UAE:
VAT is expected to bring significant new revenue to the UAE federal and Emirati Governments. In addition, the VAT revenue will be further invested into creating a more stable and efficient economy, which will have a positive effect on local businesses operating in the country.
VAT will improve the country's infrastructure, making it easier to conduct business in the UAE. Moreover, investment in infrastructure will again have a significant impact on the economic development of the residents because of the resulting multiplier effects, which means that every single AED invested in the infra will have a higher positive impact on GDP.
The most important of the VAT reform is improved liability management. The introduction of VAT and other corporate taxes play an important role in enhancing government accountability. Proper management and recording of the VAT can further result in swifter and better decision-making and decrease the incidence of civil fraud, corruption and waste.
Value Added Tax filing process can prove a bit complex and tedious sometimes. The business must present all the required documents at the time of returns filing. In addition, it requires the company to maintain detailed records of all the financial transactions. The record-keeping will help the company in the VAT Return Filing procedure alone and be useful in other functions such as annual budget preparation, predicting the future trend of the industry and playing a crucial role at the time of company audits.
VAT implementation in the UAE has provided a market opportunity for advisory companies who specialize in VAT and other taxation. However, as VAT is relatively a new tax and involves additional work, many companies don't have the time or resources to readily engage in the complexities associated with VAT systems and hire VAT Consultants in the UAE to help understand the new laws, implement and set up VAT-compliant processes in their business.
How Can We Help?
Jaxa Chartered Accountants are one of the most experienced and respected audits and accounting firms in the UAE. We have offices all over the UAE, which has enabled wider client reach and work with various Government agencies in the different UAE Emirates. Since the new VAT implementation, we have advised and serviced many local companies in different sectors with all VAT related paperwork. Please Contact Us for any assistance regarding VAT rules and regulations. We'd be delighted to help!