As this is the first month of the new VAT regulations in the UAE, business owners across the Emirates are bracing themselves for big change.
Historically the UAE has operated one of the simplest taxation systems in the world. But in order to reduce its reliance on oil-generated revenue, and to invest more in the economy’s infrastructure, the government is looking to raise tax revenue. As of January 1st 2018, a new 5% value added tax (VAT) was introduced in the UAE and Saudi Arabia. The same tax will be rolled out in the other four Gulf Cooperation Council (GCC) countries over the next year, following an agreement signed by all six countries in July 2017.
Yet many company owners here in the UAE are still recovering from what has been a hasty registration process, and might not have considered yet how the new laws are going to affect them.
Let’s take a look at the new VAT implementation and explore how it might impact your company in the year ahead.
Who has to register for VAT?
UAE companies should have registered for VAT if the value of their taxable supplies exceeded AED 375,000 (around USD 100,000) over the previous 12-month period – or is expected to exceed that threshold in the next 30 days. You can also register voluntarily if your supplies and imports – or just your expenses if you are a startup business – are expected to exceed AED 187,500.
UAE companies should have registered for VAT if the value of their taxable supplies exceeded AED 375,000 (around USD 100,000) over the previous 12-month period.
These registration thresholds apply irrespective of location. The same VAT regulations pertain whether you’re a mainland company or a free zone company.
What products and services are covered?
The standard rate of VAT at 5% is now charged on most business products and services. However, a number of goods and services – the ones that are considered most vital to the economy – don’t incur VAT. They’re either charged a 0% rate or are exempt.
The difference between the two is that suppliers of zero-rated goods or services can still reclaim VAT they’ve paid on inputs into their business. On the other hand, suppliers of exempt goods and services don’t have to register for VAT at all; or if they do register, they can’t reclaim any VAT they’ve paid on inputs.
Let’s look at what’s covered in each category.
Zero rate: The 0% rate includes exports of goods and services to outside the GCC – in order to protect this key area of business for the UAE – as well as education, medical equipment, healthcare and the supply of commercial aircraft, buses and trains.
Also covered under the 0% rate are international transport services (for both passengers and goods), certain investment grade precious metals, newly constructed or converted residential properties, crude oil and natural gas.
Exempt rate: Residential buildings, bare land and local public transport services are all included in the exempt rate category, along with some financial services. The exempt rate includes life insurance and margin-based products such as loans and fixed deposits, but general insurance and fee-based financial services are expected to be chargeable: exact details are set out in the VAT legislation itself.
What are the downsides of VAT for businesses in the UAE?
The new VAT rules raise a number of new challenges and considerations for UAE companies.
1. Increased costs: With the new VAT laws, your business essentially has an extra function to perform, which comes with an unavoidable set of admin and implementation costs. In order to make sure you’re collecting VAT correctly, complying with the new laws, and able to do your new quarterly VAT reporting, you’ll need to update IT and internal systems, train your employees in VAT processes, and potentially even employ an accounting specialist to help with the transition. It can be expensive, particularly at the beginning, and particularly for small labour-intensive businesses. But it can’t be avoided. The collection and remittance process is mostly self-assessed, and mistakes can result in hefty penalties, laborious exchanges with local tax authorities, and expensive disruptions to your business.
In order to make sure you’re collecting VAT correctly, complying with the new laws, and able to do your new quarterly VAT reporting, you’ll need to update IT and internal systems, train your employees in VAT processes, and potentially even employ an accounting specialist to help with the transition.
2. Changes to business structure: Aside from having a significant cash flow impact on some companies, VAT will be charged at each stage of production and distribution, which can be problematic if you have more than one business entity handling the same product or service. In order to avoid being taxed on transfers made between different stages (and therefore paying VAT twice), you’ll need to bring them together; if you’re a larger business with multiple entities, you may have to consider a more significant restructure to avoid VAT leakage.
3. Being accountable: Now that you’re VAT-registered, you’re legally required to prepare and keep a range of business records so the government can check that you’re getting things right. The authorities can ask for annual accounts, general ledgers, purchase day books, and invoices issued and received, as well as credit and debit notes. You’ll need to maintain these records for a minimum of five years, keeping them up to date, ensuring they’re valid, and having them ready to supply when your business undergoes an audit.
4. Uncertainty about the future: VAT rates aren’t set in stone, and a number of UAE companies are concerned that the rate might rise in the future. And it’s not just the 5% rate that might be affected. Whilst exempt categories are likely to remain exempt, zero-rated products may also see an increase. This prospect creates uncertainty for both businesses and consumers, who will naturally be worried about increased costs being passed on to them.
What are the upsides of VAT for the UAE?
Still, let’s not overlook the number of benefits to be gained from VAT, both for the UAE as a whole and for your business and future profitability levels.
1. Boost to government coffers: The new tax is expected to bring a significant new revenue stream to the UAE government. According to His Excellency Younis Al Khouri, undersecretary at the Ministry of Finance, the measure is expected to raise around AED 10-12bn in the first year of implementation alone. This revenue will go into creating a more stable economy, which can’t help but have a positive knock-on effect on local businesses.
2. Improved infrastructure: Not only will the revenue help to stabilise the economy, but it will improve the country’s infrastructure, making it easier and less expensive to do business in the UAE. Investment in infrastructure often has a significant effect on economic development because of multiplier effects, which means that for every AED 1 invested the impact on GDP is even higher. What’s more, value-creating tax strategies can give you a competitive advantage compared to other countries in the region, although in the UAE’s case this will be neutralised by the fact that all six GCC countries will eventually implement the same measure.
3. Non-financial benefits: As demonstrated by a number of successful global implementations, tax regulation can bring many non-financial benefits to an economy. The most important of these is improved liability management. The introduction of taxes, particularly VAT, can play an important role in enhancing government accountability and democracy. Official taxation records, properly managed, result in faster and more informed decision-making, and reduce the incidence of civil fraud, corruption and waste.
4. Increased business efficiency: Companies may see an initial rise in costs when administering and implementing the roll-out, but there are plenty of long-term benefits to be gained from replacing inefficient, out-of-date accounting systems. Once VAT-compliant systems are in place – for smaller companies these might even be low-cost software or apps – many businesses will run far more efficiently, and will gain a long-term benefit from this streamlining exercise.
Once VAT-compliant systems are in place – for smaller companies these might even be low-cost software or apps – many businesses will run far more efficiently, and will gain a long-term benefit from this streamlining exercise.
5. Distributed costs: Although small businesses in particular have the upfront implementation costs to consider, it’s the consumer who is ultimately going to be hit the hardest by the new VAT laws. Although the process of collecting and remitting VAT lies with you, the company, ultimately it will end up being charged to the customer via sales channels. So even at the relatively low rate of 5% – it shouldn’t affect your bottom-line too much.
6. Advisory opportunities: The implementation opens up a market opportunity for advisory firms who specialise in VAT terms. Many companies won’t have the time or resources to engage in the complexities of the new VAT systems, and will look to hire consultants to help them understand the new laws, adapt their business, and set up VAT-compliant systems. It therefore offers a potentially lucrative opportunity for entrepreneurs looking to tap into this sector.
VAT: Benefit or burden?
While the administrative and financial challenges posed by VAT will seem stressful – and even a bit overwhelming for some – there are ways to make its implementation far more straightforward and affordable, and it may even help your business become more efficient in the long run.
If you’re still unsure to how the VAT system will specifically impact your business, or whether you’re operating in line with regulations, seek the advice of a consultant. At a basic level, it’s worth keeping an up-to-date implementation strategy to ensure you’re retaining all the right records and following all the necessary steps to successfully submit this year’s VAT returns. A roadmap will ensure you’re fulfilling your tax obligations, and will help your business run as smoothly as possible during the transition period.