A 5% value-added tax (VAT) will be effective in 2018 for the United Arab Emirates
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:
What Is the UAE VAT Law and Why Is It Being Implemented?
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:
What will The UAE VAT Implementation Mean for Businesses?
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:
- Charge VAT on taxable goods or services they supply
- Keep a range of business records which will allow the government to check that they got things right
- Report the amount of VAT they’ve charged and the amount of VAT they’ve paid to the government on a regular basis
The Ministry of Finance also stated that the following businesses will be charged a 0% VAT:
- Exports of goods and services to outside the GCC
- International transportation, and related supplies
- Supplies of certain sea, air and land means of transportation (such as aircrafts and ships)
- Certain investment grade precious metals (e.g., gold, silver, of 99% purity)
- Newly constructed residential properties that are supplied for the first time within 3 years of their construction
- Supply of certain education services, and supply of relevant goods and services
- Supply of certain healthcare services, and supply of relevant goods and services
And these businesses are completely exempt from VAT:
- Residential properties
- Public transport
- Undeveloped land
- Life insurance
- Certain financial services
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:
How Do Businesses Comply with VAT in UAE?
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 unique sequential number
- The date of issue
- The supplier’s name, address and Tax Registration Number (TRN)
- The customer’s name, address and Tax Registration Number (TRN)
- Description of goods or services supplied
- Total amount excluding VAT
- Total VAT chargeable
- Price and quantity of each item
- Rate of discount per item
- Rate of VAT charged per item – if an item is exempt or zero-rated, then mention there is no VAT on these items
- Total amount including VAT
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.
What Tool Helps Businesses Stay VAT Compliant Automatically?
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.
- Software that has built-in advanced bookkeeping features to help ensure your accounting meets all of the UAE VAT requirements.
- Software that customizes your invoices to automatically include the 5% VAT (and any other taxes you have to calculate).
- Software that lets you keep track of sales tax across all your sales channels (from ecommerce platforms to retail stores).
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.