VAT in the UAE

As announced in February 2016 by the UAE Minister of State for Financial Affairs, His Excellency Obaid Humaid Al Tayer, the UAE will introduce a Value Added Tax (VAT) of 5% beginning January 1, 2018. The six other states that make up the Gulf Cooperation Council (GCC) region will also be implementing a VAT during this time and/or by January 1, 2019 at the latest.

One of the most common types of consumption tax found across the world — including in the European Union, Canada, New Zealand, Australia, Singapore, and Malaysia — VAT is an indirect tax imposed on the majority of traded goods and services. The implementation of VAT is expected to produce around USD 3 billion in additional income for the governments of the GCC, which will further enable the region’s states to maintain their social and economic programmes while still following through on their plans for economic diversification away from oil and other hydrocarbons as a source of revenue.

Though a detailed report is still in the works, it has been stated that health, education, and approximately 150 basic commodities, such as staple foods, children’s clothing, and books will be exempt from the tax.

Additionally, not all businesses will have to register for VAT. The government has stated that only businesses that meet a certain minimum annual turnover requirement will need to apply for VAT. Thus, small businesses will be safeguarded from the extensive documentation and reporting systems that VAT requires. Furthermore, if a company only provides goods and services that are not subject to VAT, they need not register with the government for VAT either.

Registration for VAT is expected to be made available to businesses that meet the requirements criteria three months before the launch of VAT. At that time, businesses will be able to register online using the UAE’s eServices.

Currently, it remains unclear how VAT will affect companies registered within the region’s free zones, which guarantee a “no tax” regime. Further details from the applicable ministries will be issued throughout the year and especially in the three-month lead up to the implantation of the VAT. Concentration can presently be given to the implementation of a monitoring system by the government, as well as to education and understanding regarding proper record keeping, tax collection, and tax payments within the business community.

A significant source of revenue for the UAE, it has been confirmed that tourists will pay VAT at points of sale, but as the tax rate has been set deliberately low, it is expected to be a limited burden on consumers. It is as of yet uncertain whether tourists will be permitted to reclaim paid VAT when they leave the region, however, it has been stated that foreign businesses will be permitted to recover the VAT they incur when visiting the UAE, as this will encourage further business in the region.