After the oil prices collapse and its drastic impact on the Gulf Cooperation Countries (GCC) economies, the United Arab Emirates (UAE) decided to give up on its long-run reputation of a tax-free lifestyle and force the general public to share the burden of budgetary expenditure. Following the passing of the Unified VAT Agreement for the GCC, the UAE introduced the domestic rules applying to the value-added tax (VAT) by virtue of Federal Decree-Law Number (8) of 2017 (the VAT Law).
The VAT Law sets the framework around the implementation of the VAT in the UAE and provides further assurances around deadlines for registration. As of January 1st 2018, the standard VAT rate of 5% is applied on goods and services that are not specifically VAT “exempt” or “zero-rated”.
Businesses are not allowed to charge VAT unless they are registered with the Federal Tax Authority (FTA) and have a tax registration number (TRN). But how can a business determine if it must be VAT registered or if it is exempted from registration?
In order to answer this question, the VAT Law determined a threshold level which sets out two categories of registration:
Mandatory registration: According to Article 13 of the VAT Law, every person who resides in the UAE must register for VAT if they make taxable supplies or imports that exceed the mandatory registration threshold of AED 375,000. Similarly, a person is obliged to take the same above action when the anticipated total value of supply exceeds the mandatory registration threshold in the next 30 days.
Voluntary registration: According to Article 17 of the VAT Law, a business may choose to register for VAT voluntarily if the taxable supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500. A person may also register if they anticipate that the total amount of supplied will exceed the voluntary threshold within the next 30 days.
Furthermore, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
As to non-resident businesses, no threshold applies and registration is not required unless they make taxable supplies within the UAE and no other UAE resident business is responsible for accounting for VAT on that supply.
To determine whether a business has exceeded the threshold, Article 19 provided for a set of 4 factors to take into consideration in the calculation, and which include:
the value of taxable goods and services;
the value of goods and services that have been imported by the person and would not be exempt from tax if supplied within the UAE;
the value of the whole or relevant part of taxable supplies that belong to the person if it has, wholly or partly, acquired a business from another person who provided or sold those supplies; and
the value of taxable supply made by related parties (i.e. two or more parties that are not separated on the economic, financial or regulatory level and where one can control the others either by law, or through the acquisition of shares or voting rights) pursuant to the cases stated in the executive regulation of the VAT Law.
It is worth mentioning that the VAT Law also provides that the supply of some goods and services in the UAE can be zero-rated or exempted, meaning that no VAT will be charged. Zero-rated businesses are the businesses that are subject to VAT but which are entitled to register for their VAT to be returned at the end of the year, while exempted businesses do not pay VAT and thus do not register for any return.
Article 45 of the VAT Law explicitly lists the activities that are considered zero-rated such as (i) the export of goods and services outside the GCC; (ii) international transportation; (iii) transportation of goods and persons by land, air or sea; (iv) the initial sale of buildings specifically designed for use by charities; (v) the provision of certain educational services and goods; and (vi) the supply of preventive and basic healthcare services.
On the other hand, Article 46 of the VAT Law identifies exempted transactions to include: 1) financial services; 2) sale and lease transactions involving residential buildings; 3) the supply of bare land; and 4) local passenger transport services.
In the midst of these tax changes, one of the main questions that arises is whether VAT will apply in the UAE free zones, a concept which was built around the idea of providing a tax-free environment for its businesses. At present, the VAT Law provides that certain “Designated Zones” will be treated as outside the UAE for the purposes of VAT compliance. The Ministry of Finance added that “if a supply is treated as not taking place in the UAE, then UAE VAT should not be charged, with some exceptions”, including the provision of water services and all forms of energy goods sold for use or consumption.
The Designated Zones were defined in Cabinet Decision No. (59) of 2017 on Designated Zones for Federal Decree-Law No. (8) of 2017 and included 20 free zones. In these free zones, transfer or supply of goods from the UAE mainland into the designated free zone or from abroad into the designated free zone will not be considered export or import of goods. As to transfer of goods between designated free zones, VAT will not apply on both conditions that the goods are not released, used or altered during the transfer between the designated free zones, and the transfer is made in accordance with applicable customs rules.
Although the VAT Law is comprehensive, its implementation is still raising certain apprehensions and concerns, especially that the UAE is new to taxation. There is no doubt that VAT will result in a sharp increase in the cost of living; however, the UAE economy needs to mature and the government, like in all GCC countries, should be able to diversify its revenues in order to face the pressure created by the persistent low oil prices over the past years: “It’s as simple as that,” said Ms Christine Lagarde (managing director of the International Monetary Fund).
Written by: Magda Farhat (Esq.)