UAE: A new tax regime in UAE from 1st January 2018 Value Added Tax (VAT)

Predominantly, United Arab Emirates (UAE) which is a key business hub of the Middle East and playing a leading role in the region, has been a tax-free economy since independence and there are almost no taxes at all for companies or individuals in the country with exception to some specific entities in Banking and Oil & Gas sectors. The UAE Government has been historically managing its fiscal budget by way of revenue from the Oil & Gas sector, administrative and registration fees from companies as well as other forms of levies such as custom duty, road tax and municipal taxes on the hotel & tourism industry. 

The UAE Government has announced to implement VAT legislation with effect from 1st January 2018. This dynamic announcement and implementation from January 2018 has marked an important step towards the much-talked about financial transparency, following international standards and transformation to a non-oil based economy. 

The GCC Member States have approved the long anticipated ‘Common VAT Agreement of the States of the Gulf Cooperation Council (GCC)’ which aims to establish a common legal framework for the introduction of a general tax on consumption in the GCC known as VAT. The common VAT framework will form the basis for the introduction of a national VAT system by each Member State. While there are a number of challenges that still need to be addressed before it is implemented, VAT will undoubtedly help governments of the GCC countries to deliver on long-standing plans to cut their dependence on Oil & Gas revenue but still able to deliver high standard social and economic contribution in the interest of the residents. The implementing regulations for VAT regime which will set out the common framework and legislation are yet to be published by the UAE Government. It is imperative that the establishment of clear rules & regulations and guidelines for the efficient administrative processes are vital to the successful and smooth roll out of VAT. Businesses in UAE (and GCC) have already started planning from impact assessment to the successful implementation of the VAT to ensure a well-planned and agile transition which is going to change the dynamics of their businesses under a new regulatory environment. 

As per the Common GCC Agreement, the UAE Government has decided to impose a standard rate of 5% VAT which is one of the lowest in the World. Education, healthcare sectors and some specific supplies will be zero rated nonetheless local passenger transport, life insurance premiums and bare land supplies will be exempted. 

Key highlights 

• Effective from 1st January 2018 

• Standard rate of VAT 5% 

• Expected annual revenue to the UAE Government US$4 Billion 

• Applicable on both goods and services 

• Mandatory threshold to register US$ 100,000

• Over 400,000 entities are expected to register 

It has been announced by the newly formed Federal Tax Authority (FTA) that the online VAT registration process will commence from the mid of September 2017 and the entities will have to file quarterly returns with the authority. We understand that it would be a challenge for the professional entities to handle such a voluminous work which will have to be handled and carried out with utmost accountability and responsibility.

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