VAT

Value Added Tax (VAT) was introduced in the United Arab Emirates (UAE) on January 1, 2018, as a general consumption tax to diversify government revenue sources. It is an indirect tax levied on most goods and services at each step of the supply chain, with the final cost borne by the end consumer

What is VAT Registration

VAT registration in the UAE is mandatory for businesses with total taxable supplies and imports exceeding AED 375,000 over the previous 12 months, or expected to exceed this threshold in the next 30 days. Businesses may also register voluntarily if their turnover or expenses exceed AED 187,500.

VAT Categories of Goods and Services

The UAE VAT system categorizes goods and services into three types:

Standard-Rated (5% VAT): The majority of goods and services.

Zero-Rated (0% VAT): Taxable supplies where the rate is 0%, allowing businesses to reclaim input VAT. Examples include exports, international transport, certain healthcare and education services, and the first supply of new residential properties

Exempt from VAT: No VAT is charged, and businesses cannot recover input VAT. Examples include most financial services, subsequent sales/leases of residential property, and local passenger transport.

Filing VAT Returns

Tax invoices must be issued for all taxable transactions, with all pertinent details clearly stated. Simplified tax invoices are permissible for smaller transactions when the recipient is not VAT registered or the transaction value is below the voluntary registration threshold of 10,000. Retail businesses with transactions under this threshold may also use simplified invoices, which require less information but must still include certain essential details.

Handling VAT Payment and Refunds

Accuracy is paramount when managing VAT payments and refunds. In the event of an error, a VAT voluntary disclosure form can be submitted to rectify the mistake and avoid penalties. Businesses must update their ERP and accounting systems to handle these requirements effectively.

Deregistration from VAT is an option for businesses whose taxable supplies fall below 187,500 over 12 months or if they cease to make taxable supplies.

Tourists and visitors can claim refunds on VAT for purchases made during their stay through an electronic system that connects registered retailers with all entry and exit points. To qualify for a refund, transactions must be validated within 90 days, and the tourist must meet certain criteria, including being over 18 and purchasing from a retailer participating in the ‘Tax Refund for Tourists’ scheme.

Refunds are processed at departure points, where tourists can receive 85% of the total VAT paid, less a handling fee, either in cash or as a credit to their card. However, refunds are only available for consumed goods or if the goods are present upon departure.

Business Responsibilities

VAT-registered businesses have several obligations:

Charge the correct VAT rate.

Issue valid tax invoices

Maintain accurate records for at least five years.

File VAT returns electronically via the FTA’s EmaraTax portal and pay any net VAT liability, typically quarterly.

Penalties

Non-compliance with UAE VAT laws can lead to penalties, including fines for late registration, late filing, and late payment of tax.