The United Arab Emirates (UAE) Government is officially moving forward with a 5% value-added tax (VAT) that will take effect on January 1st, 2018 – and you need to prepare for it immediately.
Any business that’s required to register for the VAT in UAE must be registered before January 1st, 2018.
In the 3rd quarter of 2017, registration was open on a voluntary basis. Now that we’re in the 4th quarter of 2017, registration is mandatory.
If you don’t register your business before the end of the year, you’ll face penalties and fines as outlined in Section 25 of Federal Law No. 7.
To help you avoid the penalties and fees of UAE’s new tax law, we’ll answer the most pressing questions about the UAE VAT and show you exactly what it is, what it means for your business, and what you’ll need to do to remain compliant.
So let’s start with the most basic question:
The UAE VAT law is a general consumption tax which will apply to the majority of transactions of goods and services, including those bought from abroad. The tax will be set at 5% and will be implemented on January 1st, 2018.
In case you’re unfamiliar, here’s a quick overview of value-added taxes:
Value-added taxes are collected incrementally and are based on the value of the product or service at each stage of production and distribution.
So every stage of the product lifecycle will be taxed.
With a 5% VAT, if a supplier purchases a widget for $1 from a manufacturer, the manufacturer (the seller) will be required to charge an extra $.05 to the supplier (the buyer), and pay that $.05 to the Government.
The 5% tax will be added-on by every seller throughout the supply chain all the way to the final customer.
The UAE will be using this tax to curb their dependence on oil as a primary source of revenue and to provide citizens of the region with better public services such as hospitals, schools, and roads.
The UAE VAT is the second major tax being enacted after the Excise Tax took effect earlier this year.
With every new tax comes new regulations and burdens imposed on businesses covered by that tax.
Which brings us to the next question:
The primary requirement for businesses in the UAE is recording all of their financial transactions and ensuring their financial records are accurate, up-to-date, and VAT compliant.
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000 (AED is shorthand for UAE’s currency, Dirham).
However, you can voluntarily register your business for VAT if the taxable sales and imports within UAE exceed the voluntary registration threshold of AED 187,500.
Startups and small businesses can voluntarily register for VAT if their expenses exceed the voluntary registration threshold – a smart decision if they want to be eligible for tax credits.
UAE’s Ministry of Finance clearly states that VAT-registered businesses must:
The Ministry of Finance also stated that the following businesses will be charged a 0% VAT:
And these businesses are completely exempt from VAT:
The Ministry of Finance made it clear that businesses may reclaim any VAT they’ve paid on business-related goods or services, and may reclaim VAT if they’ve paid more VAT to the Government than they’ve charged their customers.
However, if you’ve charged more VAT than you’ve paid, you have to pay the difference to the government.
With all these responsibilities, the next obvious question is:
It should be stated that the burden of fulfilling your VAT requirements rests completely on your shoulders.
To comply with VAT in UAE, you’ll need to make the necessary changes to your financial management processes, your bookkeeping software, and your accounting staff to fulfill your role in allowing the FTA to understand your business activities and review your transactions.
Tax-paying Businesses must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, depending on the timeframe the FTA decides) within 28 days from the end of the tax period.
The most important records to keep (for a minimum of 5 years) to stay VAT compliant include the following:
An invoice is a commercial document that records the products, quantities, and agreed prices for products or services between a buyer and seller.
As a VAT-registered business, you’ll be authorized and required to issue tax invoices in addition to normal invoices.
A VAT invoice must include the following information:
A credit note is a commercial document that’s issued by a seller to a buyer when a product or service is refunded, when an invoice amount is overstated, or when a business refunds a buyer for any reason.
A debit note is a commercial document issued by a buyer to a seller to request a credit note, or by a seller to a buyer to request additional payment if extra goods were delivered or goods already delivered were charged incorrectly.
Staying VAT compliant is a difficult process, and it’s made worse if you’re using accounting software that isn’t designed to work with VAT.
Plus, if you’re managing your inventory and fulfilling your orders and doing your accounting in separate programs with no integration between them – you’ll increase your risk of errors and tax penalties.
And software that does all of this while tracking your inventory in real-time, fulfilling your orders automatically, and integrating seamlessly with all of your business apps.
Where will you find such a powerful software ready-made for the VAT in UAE?
Right here at DEAR Systems.
Our cloud-based inventory management system integrates with leading accounting apps such as Xero and Quickbooks for streamlined accounting that’s VAT compliant while storing all of your invoices for simplified bookkeeping. The best part is, you’ll stay VAT compliant while enhancing your inventory management at the same time.
Start your free 14-day trial of DEAR Inventory today!
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