General Consumption Tax or Value Added Tax (VAT) is a type of excise tax that is applicable on the sales and purchase of different items and goods in the country where VAT is applied. About 150 countries, including all European Union members (EU), have implemented the law of VAT in their countries, making VAT the most prevalent form of consumption tax all over the world. VAT bolsters the financial strength of the government; it makes it easier for them to provide the citizens with the best quality of life along with moving a step ahead in achieving the mission of attaining a more sustainable and strong economy in the future.
The Federal Tax Authority of UAE has implemented the VAT on January 1st, 2018 with its application on imported goods. The general rate of VAT is 5% which is for most of the imported goods and services while some of them are subjected to 0% rate that is exempted from VAT.
UAE VAT Guidelines
The UAE Ministry of Finance (MoF) has devised clear guideless regarding the VAT implementation on businesses and VAT exemption.
There exists a limit of an amount of AED 375,000 which if exceeds the concerned businesses are ought to get themselves registered for VAT for their taxable goods and supplies imported from another country. It is up to the businesses if they want to get themselves registered voluntarily for which the limit is AED 187,500. In addition to this, businesses can opt to get themselves registered when their expenses go beyond the voluntarily registration limit as this is to support the new businesses which are not eligible for VAT registration revenue.
Documentation of the financial transactions are necessary for businesses in the UAE to keep their records up to date. Those who do not qualify for the VAT registration have to maintain the records of their finances regularly in order to make sure if they qualify for the tax.
Business are exempted from VAT if they meet one or more of the following criteria:
- Goods and services are exported to countries other than Gulf Cooperation Council (GCC) including states.
- Businesses in international transport and related services along with supplies of means of all kinds of transportation (water, land, air).
- First time supplies within three years of the construction of new residential properties.
- Businesses in specific and essential services i.e., education and health respectively
- Investment in precious metals, supply of crude oil and natural gas
Cabinet Decision (No. 46, 2020) on June 4th, 2020 declared any person who lives for a very short period of time in the state i.e., less than one month, and is not associated with supplies shall be considered outside the state and hence will be subjected to 0% rate VAT. Companies making transactions of goods and services which are established in UAE Designated Zones also may not be subject to VAT rather the services supplied within the Designated Zones will be applicable for the VAT in accordance with the UAE VAT legislation.
Cross-Border VAT Compliance in UAE
In the UAE, VAT is not applied to cross-border trade transactions when the goods are sourced from outside the country. This exemption is particularly relevant for goods delivered by vessel or container operators who bill clients located within the UAE. This policy reflects the global aspect of such transactions and is consistent with the UAE’s VAT regulations, which aim to support and promote international trade
Payment of VAT
UAE registered businesses have two ways through which they can pay their tax:
- Direct Method: if the taxable person has linked his business with the provided importer code via Federal Tax Authority then the tax is not due at the time of import but when the VAT return is filed.
- Third Party: This is when the importer does not have the importer code or VAT code so a third party is liable to pay the tax of the VAT registered business.
VAT for Government Organizations
VAT is applied to government organizations as well meaning that these organizations are not provided with an edge and are fairly treated like other businesses in the country. However, if the government organization is the only supplier or has no competitor in the country then the business may be excluded from the tax.
UAE VAT Audit
The UAE Federal Tax Authority has the right to issue tax assessments to businesses if they find any discrepancies or issues in the business’s taxation records as failure to VAT registration, delayed tax payments, no tax payment at all, false VAT return information and unable to pay the tax for a person whose businesses is registered for VAT.
FTA has the authority to go through the financial records of the business, verify the assets if it is subjected to FTA audit and can block the bank accounts and assets if required. The concerned person or his Tax Agent, or legal representative will be bound to provide all the mandatory assistance the FTA authorities require.
Being unable to obey the laws and VAT regulations results in penalties as devised by the Federal Decree Law for VAT.
Conclusion
To better keep the business engaged with cross-border transactions and widen the scope of businesses, it is important to develop a better understanding of the VAT laws and regulations while showing complete adherence to the VAT. UAE, with its VAT system, shows a significant effort in the way to align with the worldwide taxation system while remaining committed to sustainable economic growth and promising the long-term interest of the state.
VAT experts at “VAT Registration UAE” have a thorough expertise to remain your business compliant for VAT purposes in the UAE. Please contact us for more details.
Frequently Asked Questions
Q1: How is VAT applied to imports in UAE?
Ans: VAT is applicable on goods once they entered the country i.e., UAE. The taxable person is compiled to pay the VAT at the time of entry of goods comprising of the economic value of goods, insurance and other custom duties. 5% VAT is the standard rate while 0% is for some specific businesses. The tax can be reclaimed if the imported supply is for the production of taxable items in the UAE.
Q2: Are there any exemptions for VAT on imports in UAE?
Ans: Yes. A few of the businesses and supplies are exempted from VAT including specific and basic services supplies, investment in precious metals, new residential buildings with a certain timeframe, supply of means of transportation, etc.
Q3: How do Businesses claim VAT on imports in UAE?
Ans: In order to claim the VAT, businesses have to keep a record of their financial documentation, such as transactions, and import invoices to support their claim. They can claim VAT on imports in UAE by adding the VAT amount as the input taxation in the VAT return.
