All businesses operating in a jurisdiction are required to pay taxes as per the taxation policy of the particular jurisdiction. The taxes paid by the companies varies from country to a country. In the UAE, businesses operating in the UAE are exempt from any income taxes and corporate taxes (though corporate taxes are levied on the companies operating in the Oil sector and branches of foreign banks). However, the UAE businesses must submit VAT returns on the goods and services sold by them.
VAT for Businesses
Value Added Tax (VAT) was introduced in the GCC countries of which UAE is a significant partner and came into effect from 1st January 2018. VAT is a tax levied on the goods and services for value addition taking place at any manufacturing or distribution stage. The VAT is charged at a flat rate of 5% for all the country's eligible goods and services. Federal Tax Authority (FTA) governs all the matters related to the VAT in the UAE.
Firms are required to collect tax on behalf of the tax authority at the time of the customer's sale and submit the same to the authority along with Filing VAT Returns periodically. The VAT is applicable on all the businesses operating in the UAE Mainland and Freezones. All firms registered under VAT are provided with a unique Tax Registration Number (TRN). Companies must file their VAT returns and make VAT payments before the end of the VAT period.
Calculate Due VAT for a Business
As per the VAT system, all business act as the buyer as well as the seller. When in a buyer's position, a business needs to pay VAT for the goods procured, including the raw materials or other services. The same business when in seller's position will need to levy VAT for all the goods and services sold to the customers.
By definition, VAT is levied on the value addition made at any particular stage. The business needs to calculate the exact amount of VAT that needs to be paid to the authorities. The total VAT can be calculated as the difference between total tax collected from the customer at the point of the sale and the total tax paid for the goods and services' procurement/purchase. Here is a rough calculation on the net VAT to be paid by the businesses:
Net VAT= Output VAT – Input VAT
Net VAT – The differential amount to be paid to the tax authorities
Output VAT- Total VAT collected at the point of Sale (POS)
Input VAT: Total VAT paid for the purchase of raw materials/ services.
In case the net VAT is negative, the business will be eligible for the tax refunds upon the filing of the VAT returns. The tax authority has also availed different payment means which makes the process easier for the businesses. It is crucial to have the right information when filing the VAT returns with the authorities, and misinformation will always result in hefty fines and possible legal action.
Jaxa Chartered Accountants, with an omnipresence all over the UAE, has been assisting clients for many years in their business, including calculating and filing tax returns, payroll, and audit services. Our tax experts with many years of experience will guide companies and assist them from end-to-end process starting from VAT registration till the filing of the VAT returns. The right advice and assistance mean the businesses can forget about the hefty fines and other legal actions. Please Contact Us for any UAE tax-related queries you may have. We are happy to help!