27/02/2020 by MNV Associates
Comprehensive Guide to VAT in the UAE
Introduced by the government in 2018 in a bid to diversify the region’s economy, the new tax has remained to be one of the hottest topics in today’s news. Read on to get some clarity about the VAT in the UAE.
You may not be aware of it, but VAT in the GCC block has assumed a tremendous role in the day-to-day lives of everyone in the region, especially in the marketplace. Introduced by the government in 2018 in a bid to diversify the region’s economy, the new tax has remained to be one of the hottest topics in today’s news.
Whether you’re eyeing to make your mark in the business landscape or simply wanting to understand how this new tax works as a normal buyer, turning to account experts in Dubai will help you get the gist of this topic. To help you with that, we have prepared a comprehensive guide on what you should know and expect from the value-added tax in the UAE.
What is VAT?
To simply explain, Value Added Tax, or more popularly known as VAT, is a form of tax imposed on the on supplies of goods and services that are bought and sold. Interestingly, it is levied at each stage of the supply chain – covering the production of the product up to its point of sale. Because of this, VAT is also often referred to as a form of “consumption tax,” as it provides value-added taxation based on the taxpayer’s consumption rather than his or her income.
Generally, VAT is expressed as a percentage of the total cost made from the transactions of goods and services. Say, for instance, a mobile phone manufacturer will need to purchase the necessary materials in order to produce a product. From there, he will need to purchase materials from other dealers, such as a metal company. At that point, he will be charged by a certain amount of tax by the metal seller. In turn, when the manufacturer sells the product to a retailer, the price will come with the VAT the manufacturer had faced when engineering the product. As a result, when a customer purchases the mobile phone from the retailer, he or she will need to pay the total VAT or the tax that the retailer had been liable for during the production process, as a percentage of the total price.
Through the implementation of this tax, buyers at earlier stages of production will receive reimbursements for the previous VAT they've paid.
Introduction of VAT in the UAE
The introduction of VAT in the GCC can be traced back to only about two years ago. Specifically, the government implemented the new tax on January 1 of 2018, at a rate of 5 per cent. With this, it comes as a no surprise that many are still largely unfamiliar with the ins and outs of the tax system and are still largely reliant on the guidance of registered Dubai tax consultants.
Specifically, under the new law, the Federal Tax Authority (FTA) will take on the role of the primary managing authority that will guide, collect VAT, and conduct audits in the country.
Under the new arrangement, companies in the UAE with annual revenues of over Dh3.75 million must register under the GCC VAT system. Meanwhile, registration for those whose revenues range from Dh1.87 million to Dh3.75 million will only be optional, but only during the first phase of the VAT implementation.
By registering, businesses will have the opportunity to reclaim the VAT they have previously paid during the production process from the Federal Tax Authority later on. However, those who are not registered will still be able to collect VAT from their sales but will not be able to receive a refund in the future.
How to Apply for VAT Registration in UAE?
Applying for VAT registration has never been easier under UAE law. To do so, a business will only need to create an e-Service account with the Federal Tax Authority by visiting the e-Service website and clicking on the ‘sign up’ option located at the right-hand side of the screen.
From there, the business will be asked to provide the necessary information needed for the registration. Once done, the company will then receive a verification message on the email address they had provided. It is only after this that the business can log in to their account in the e-Service.
Once logged in, the company must click on the ‘Register for VAT’ option to receive a ‘VAT-Getting Started Guide’ that will explain the ins and outs of the system. After reading the guide, they can continue by clicking the “Proceed” option to get into the official VAT registration.
On the form, the business will be asked to complete 8 important sections. Once done, they can click on the “View” option and proceed to submit the application.
Why is there a need for VAT in the GCC?
According to authorities, the introduction of the tax comes as an effort of the government to diversify its economy and help reduce the here a need for VAT in the GCC? Government’s reliance on oil and other hydrocarbons as a source of revenue. As part of the arrangement, the revenue that will be extracted from the tax will be used to fund different public services, including hospitals, roads, public schools, waste control, and many more.
Who will be taxed?
· Companies: As discussed earlier, companies in the UAE with annual revenues of over Dh3.75 million must register under the GCC VAT system. Meanwhile, those whose revenues range from Dh1.87 million to Dh3.75 million will have the option to register for it.
· Consumers: Generally, since VAT runs as a tax on consumption, consumers are to face higher prices in certain goods and services that concern anything other than basic food and essential commodities. However, since the VAT rate is only 5 per cent, consumers might not notice it so much.
· Tenants: Under the VAT system, residential tenants’ leases will not be subject to tax. However, commercial tenants, such as those who occupy offices, shops, and other commercial spaces, can expect to pay VAT.
· Home sellers: Sales of commercial property by VAT payers are subject to VAT at a standard rate.
What can we expect from this change?
Generally, despite the introduction of VAT, the UAE will remain to be largely tax-free, as there will still be no income tax on salaries in the country and free zones will continue to have tax free environments.
However, non-essential consumer items, such as electronics and jewellery will be taxed. Additional excise duties on beverages that are deemed to be harmful to health and are produced with high sugar content will also be imposed.
How can businesses claim for a VAT refund?
As mentioned earlier, the first step for businesses to ensure that they can claim for a VAT refund in the future is to register in the GCC VAT system. Once they do, the next step is to maintain a clear and accurate business and financial records that will allow the government to check whether the business has been imposing the right range of prices and is complying with the necessary tax laws. To ensure that everything will be recorded, and no transaction will be missed, companies are advised to hire professional accounting companies in Dubai that will help organize and keep a strict track of their day-to-day activities.
Once the Federal Tax Authority reviews the records and sees that the business has got things right, they will approve the refund, and the business can soon receive reimbursements for the previous VAT they've paid.
Why hire accounting and bookkeeping services in Dubai?
With the relatively young history of VAT in the UAE, it’s easy for businesses and individuals to get confused about the newly implemented tax system. With this, it is only wise to seek guidance from the experts and consult an experienced tax consultant in Dubai.
With the guidance of such professional, organizations and individuals can expect to have accurate and consistent records that are needed by the law and even enjoy the convenience of having reliable financial data that will help direct their spending and future investment.
The Bottom Line
Have you learned something about the GCC VAT system? We hope you had. Sure, while the tax systems may seem complicated at first, understanding its basics is not far from possible.
With enough research and proper guidance from the experts, anyone is sure to realize how the value-added tax works in the region, and how, specifically, will it help the public in the near future.
To know more about VAT in the UAE, don’t hesitate to give our accounting experts a call today! Understand knowing its ins and outs of the current tax system and see for yourself how your knowledge VAT can help improve your current financial standing and avoid possible problems in the future.
MNV Associates are specialist Accountants in Dubai who have years of experience working with local and international businesses, helping them to outsource key elements of their business such as Accounting& Bookkeeping, Tax, VAT, Audit & Assurance to improve effectiveness and save costs.
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