Value Added Tax (VAT) in UAE has three major categories, which depend on the nature of the supplies. They are taxable VAT, VAT exempted, and zero-rated. In this article, we’ll focus on the two categories which are often confused with each other: zero-rating and VAT exemption.
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What constitutes zero-rating for VAT in UAE?
Zero-rated VAT applies to certain taxable supplies with the applicable VAT rate of zero percent. The suppliers which produce the supplies with zero-rating are to register for VAT in the UAE. Tax return filing in the UAE, apart from having to undergo the process of VAT registration in Dubai or the other emirates, is mandatory.
As per Federal Decree-Law (No 8) of 2017 Article 45, the supplies that are regarded as zero-rated for the purpose of VAT in the UAE are as follows:
- Basic and preventative healthcare services (including related supplies)
- All educational-related services, including the goods and services that are intended for preschools, nurseries, primary school education, and all higher educational institutions that are owned and/or funded by the local or federal government
- Natural gas
- Crude oil
- Investments in the form of precious metals
- Residential buildings within 3 years of completion, may it be through leasing or sale in part or as a whole
- Buildings that are designed especially for the use of charities, may it be through rental or sale
- Buildings that are converted from commercial real estate to residential buildings either through leasing or sale
- Goods and services that are related to the shipment of goods and transfer of passengers, either by sea, air, or land
- Vessels or aircraft which are designated to provide assistance on rescue operations, either by sea or land
- All exports of products and services to countries that are not member states of the GCC
What are VAT exempt supplies in UAE?
The VAT exemptions in UAE apply to the supplies which are declared to be exempted from additional taxation. The suppliers of goods and services which fall under VAT exemption categories don’t have to undergo VAT registration in UAE or regularly file tax returns with the Federal Tax Authority. Rents in Dubai, for instance, are included in the real estate-related transactions which are exempted from Value Added Tax. Here’s a complete list of the VAT-exempt supplies in UAE:
- Local transportation
- Bare land
- Residential buildings apart from the residential buildings regarded as zero-rated
Financial services, most especially life insurance plans, reinsurance of life insurance, and all those that aren’t conducted for a discount, explicit fee, rebate, commission, or any other kind of compensation or consideration
Apart from the aforementioned, the visitors that come to UAE for tourist-related activities are exempt from paying VAT. As per the Federal Tax Authority, all tourists are eligible for receiving eighty-five percent of the total amount paid for VAT. This applies when tourists shop at stores located within the seven emirates.
What are the common errors of VAT-registered businesses in UAE?
VAT in UAE, as you may already know, is a complicated subject. You should always consult with regulated tax agents in Dubai and the other emirates about VAT treatments for transactions. Bear in mind VAT is calculated upon the turnover and not the profits. Any mistake in VAT accounting and treatment of VAT will cost businesses valuable time and money.
Charging the correct VAT rate is a VAT-registered business’ responsibility. The responsibility does not fall on the company or individual paying an invoice. The list below contains the most common errors we found companies new to VAT commit:
- Improper invoicing – if you’ve registered voluntarily or mandatorily for VAT in the UAE, you need to issue a valid VAT invoice in the correct format. all the required elements also need to be included in each invoice.
- Not issuing invoices – VAT can’t be recovered without valid tax invoices. You won’t be able to recover VAT based on order notes, pro-forma notes, or any other kind of similar document.
- Recovering VAT on costs that aren’t for business – VAT can only be recovered for costs incurred as part of the business expenses. In addition, each VAT invoice needs to be addressed to your VAT-registered business. It can also be a member of your staff if the VAT is subject to reimbursement. It is not possible for your business to recover tax paid on an invoice that was addressed to someone else or for another business.
- Not utilizing the reverse-charge mechanism – if you purchase goods and services for your business from abroad or overseas, even when you’re not charged with VAT, there may be the need for your business to account for tax using the reverse-charge mechanism. It’s important that you check correct VAT treatments are applied for such expenses even when there are no VAT amounts appearing on the tax invoices.
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