Keeping it Simple: Federal Law Number (8) of 2017 on Value Added Tax
The UAE governing law regarding VAT is the Federal Decree-Law Number (8) of 2017 (the Law). According to Article (1) of the Law defines Value Added Tax as ‘tax levied on import and/ or supply of goods and/ or services at every stage of production and distribution, including the Deemed Supply.'
The Law addresses the importance of understanding VAT and the impact it may have on a person, such as increase in the Value Added Tax, compulsory and voluntary registration, methods of payment, the required amount of payment, items that which is not subject to VAT, as well as many other regulations. Due to sudden transformation to the Value Added Tax system, it is essential that tax payers in the UAE review the new tax scheme in connection with their dealings. An interpretation of the Law defines a Taxable Person as an individual who is registered or should register for tax under the provisions of the Law.
Under Article 3 of the Law, a standard tax rate of five percent (5%) on import and supply and goods and services. Supply of goods includes but is not limited to transfer of a contract for the exchange of goods and services. The article covers all possible goods transferred and traded in the UAE, including products supplied from an agent of a person.
A government entity also falls within the ambit of law on the basis that it distributes goods or services (PROVIDED HOWEVER THAT the entity's conduct is in the non-sovereign capacity or if they are in competition with the private sector). However, a cabinet decision will be issued in the future to determine their entities, activities, and the possibility of a company falling under that expressed within article 10 of the Law.
The VAT regulations also apply to service providers, therefore will impact and influence the interest of investors and entrepreneurs who desire to or consider future company formation in Dubai and the UAE. Authorities (such as free zones and Economic Department) in the UAE issue service licenses in several broad categories. In the past and till date, investors applied for business setup in Dubai and UAE with the ambition of servicing domestic as well as international clientele. Every person that comes under the scope mentioned above of the goods and services supply must register for the new tax system when they exceed the threshold level provided as per the Law. According to the threshold level, registration divides into two categories, namely, mandatory and voluntary registration.
Article 13 mandates that every (natural or legal) person who resides in the UAE is required to make mandatory registration for the new tax scheme when his total value of all supply exceeds the amount of AED 375,000. Similarly, a person is obliged to take the same above action when the anticipated total value of supply exceeds the compulsory registration threshold in the next thirty (30) days.
Payment of VAT will only arise in the above situations, however, to avoid liability of VAT from the new regulations, tax payers must calculate the tax due on their accounts up to 31st December 2017. The Executive Regulation which is to be published by the cabinet will specify the time limit that a person must inform the authority of his liability to register the tax.
Voluntary registration applies to persons who are not mandatorily required to register for taxes under article (13). Article (19) mandates that from a previous twelve (12) months period, a person whose total value of supply exceeds AED 187,500 can voluntarily register under the new regulations. A person may also register if they anticipate that the total amount of supplies will exceed the voluntary threshold within the next thirty (30) days.
The Law defines a set of guidelines on how to determine whether a person exceeds the mandatory or voluntary threshold. The following factors below must be taken into consideration:
I. The value of the taxable good(s) and service(s)
II. The value of Concerned Good(s) and Service(s) obtained by a person – ‘Concerned Goods and Services’ are those that have been imported and would not be exempt from tax if supplied within the UAE;
III. The gross (total) value of the whole or relevant part of taxable supplies that are owned by a person if he has wholly or partly acquired a business from another person who provided or sold those goods;
IV. The value of taxable supply made by Related Parties according to the cases stated in the Executive Regulation – ‘Regulated Parties’ two (2) or more parties that are considered as the same or not separated in an economic, financial and regulated perspective. The parties that can control the other(s) under the law of the land or through shares or voting rights.
It is pertinent to note that the supply of transfer of capital assets should not be taken into consideration while calculating the mandatory or voluntary threshold to determine tax registration obligations of the parties.
To register as Related Parties, each person must have fixed establishment in the UAE, and the person(s) undertaking the business in a partnership should have control over the other entities. The Executive Regulation will state the circumstances when a person may not be permitted to register under a tax group. Any person(s) undertaking business in the UAE should have one (1) tax registration number.
Article (15) states that a taxable person could be exempted from mandatory tax registration in Article (13) if they file a request indicating that their supplies are subject to zero (0) rate, such as but not limited to international cargo or passenger transport that commence and arrive in the UAE; supply of land, sea and air transport for passengers and cargo, supply of aircraft and vessels; import of precious metals; firstly supply (sale or lease) of residential buildings in whole or part; supply of crude oil and natural gases.
Further, one of the main raising question among the UAE people is whether these VAT apply to free zone as well. Free Zones are one of the most used or simplified company formation systems in UAE. One of the main reason is that free zone entities are Tax-free and they provide sole ownership for the Non-UAE residences. Also, the free zones are accessible for having their dedicated laws and regulations that would apply to companies and individuals within the free zone. Most scholars argue that the application of these new VAT to the free zone entities and persons will create questions on the underlying concept of free zones are free to act within their limitations. In contrast, some scholars argue that it is best for the Tax regime of the country to apply the new laws to free zone with some exemptions. However, the UAE government has taken a balanced place in this matter with the final consideration.
Under Article 77, anyone committing Tax evasion is liable to the penalties provided under Federal Law Number 7 of 2017 on Tax Procedures. In addition to the aforementioned penalty, the person will be liable for an administrative penalty under the new Law if the person failed to display prices inclusive of Tax, if the taxable person failed to notify the authority of applying Tax, if the supply person failed to issue tax invoices or documents or tax credit note, and if a person failed to comply with the regulations related to electronic tax invoices. Moreover, it is important to understand that everything under the category of goods and services will not be taxed. Services such as education and healthcare exempted from this new law considering the value of such services to the country in general. Both the services were highly expected to be exempted before the establishment of the Law. Similarly, VAT is exempted in the supply of bare land, the supply of local passenger transport services, some of the financial services mentioned in the executive regulations, a direct or indirect export to outside implementing states, the supply of aircraft or vessels designated for rescue and assistance.
According to Article 15, the person who falls under the category of the exemption from VAT must request the authorities stating his supply is excepted from the new tax or in other words subject to zero rates. One can understand that the intention of lawmakers was to simplify the procedure to socially valued services such as education and health services. Further, the supply of residential properties will be exempt as well. Another type of supply which has taken into consideration of exemption is the supply of bare land. Also, financial services will be subject to a narrow exemption. However, free based financial services are not categorized as an exemption in the Law and therefore will be charged under the Law.
Praising the new Tax changes in recent years, the Deputy Ruler of Dubai said that the Tax procedure law is a significant milestone towards establishing the UAE’s Tax system and diversifying the economy. Accordingly, UAE is shifting from the days where Tax laws were known as toothless laws or ineffective in practical to a strong regulation of Tax law. The FTA chairman has stated that the Law, issued by Shaikh Khalifa is an all- encompassing legislative framework which lays down the groundwork for the UAE’s futuristic plan to enforce taxes as a method to ensure sustainability and diversify the government’s revenue sources. The increased resources will enable the Government to maintain the momentum of its development and infrastructure for a better future.” The government does not only provide legislation but also plan to provide administrative and all the required resources to increase the level of the system. The steps are taken such as a clear process for appeal when a person did not register to the Tax scheme in the first instance and providing FTA as transparent is international best practices. In overall, UAE government believe that this VAT system is designed to promote economic growth and plans for the country in a bigger picture. Now the UAE has Implemented the tax regulations, which is the most important revenue of a country. Now the government has to make sure Tax payers pay their Tax in practice. Implementing regulations and enforcement of the law is very important as well. The government will also have to focus on how to create Tax awareness among the people and what are the possible actions can be taken to get this into the practice. Once the country succeeds in making awareness of the persons on how they are part of the development of the country and how the Tax money is spent, the goal of Tax collecting will be completed. Different countries do it in different styles such as publishing magazines in newspaper, the internet or political websites and UAE has designed to promote a website to help Tax payers in every aspect as most of the UAE government departments are very successful in providing government services through online and its successfully designed websites which contain all the information, forms, and relevant Law for the user’s perusal. The increase of taxes in other countries may aim at several objectives, but UAE aims at financing public expenditures. However, will these changes affect the investors of UAE and damage the long run reputation on tax related matters? Some scholars argue that new increase in tax may affect the overall business in UAE. Nevertheless, it can be analyzed to the effective date of the Law and how the suppliers of goods and services react on the matter.
Although the Law is extensive, the application and implementation are yet to be seen in the UAE. The new VAT regulations will come into effect 1 January, 2018 and allow companies to register up to three (3) months before the implementation date.
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