Why have Taxes?
The introduction of taxes in the UAE is part of a GCC-wide initiative to diversify regional economies. Given the overall reduction in oil prices in recent years, it has been necessary for the GCC member states to explore other revenue raising measures and reduce dependency on hydrocarbons as the key contributor to the public purse. As a result, the GCC member states have agreed to sign unified framework agreements for the implementation of VAT and Excise taxes. Member states will also implement their own domestic legislation that will govern the introduction of these taxes.
The UAE’s citizens and residents enjoy exceptional public services, such as healthcare, roads, education, parks, social services and waste management. The full cost of these services is paid for by the government . The introduction of VAT and Excise taxes will help the UAE diversify sources of revenue so that government departments can continue to deliver excellent public services and ensure a high quality of life for coming generations. This is also in line with a key pillar of the UAE’s Vision 2021 – The Sustainability of Infrastructure – more information about which can be found here.
In addition, taxation allows governments to correct certain behaviours that are detrimental to society and which cannot be left to the market to regulate. Excise taxes on products that are harmful to human health are a good example of this.
How Taxes Work
Getting Ready for VAT
It is important to understand any potential obligations you or your business may have under the UAE VAT Law. The FTA is committed to providing extensive support and guidance to assist with this, however the responsibility lies with the business to make sure that any required compliance obligations are fulfilled. The FTA does have the power to conduct audits on taxable persons and subsequently impose penal measures on those that are not compliant with the law.
To fully comply with the UAE VAT law, businesses may need to make some changes to their core operations, financial management and book-keeping, technology, and perhaps even their human resources.
It is essential that businesses try to understand the implications of the new taxes and make every effort to align their business model to government reporting and compliance requirements.
In the UAE, VAT will be levied at a rate of 5% on most goods and services, although there will be some exceptions.
End-consumers generally bear the VAT cost in the form of a 5% increase of most goods and services they purchase in the UAE, while VAT registered businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
VAT will be charged at 0% in respect of the following main categories of supplies:
- Exports of goods and services to outside the GCC States that implement VAT
- 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
The following categories of supplies will be exempt from VAT:
- The supply of some financial services
- Residential properties
- Bare land
- Local passenger transport