This article was originally published in Global Trade Magazine on Sept. 1, 2018
By JC Pachakkil, senior consultant, Global Trade Management at trade services firm Livingston International.
For many years, the United Arab Emirates has drawn in international investors due to its strong base of expatriate consumers and its tax-free approach to trade. While the UAE remains an attractive haven for international trade and investment, a new value-added tax (VAT) is making trade in the Middle Eastern nation slightly more complicated.
The new VAT-associated costs aren’t related solely to the tax itself, but also the changes required to the technological and administrative infrastructure that will ensure compliance with the new tax law.
About the new VAT
For the uninitiated, the member states of the Gulf Cooperation Council (GCC) in 2015 signed the Unified VAT Agreement that proposed a VAT in all GCC countries. The UAE published the Federal VAT Law on August 27, 2017, implementing the domestics rules for VAT and introducing a standard five per cent VAT effective January 1, 2018. The stated aim is to reduce reliance on oil-generated revenue, and to invest more in the nation’s infrastructure.
Business requirements
A company is required to register for VAT if the value of its taxable supplies exceeded AED 375,000 (around US$ 100,000) over the previous 12-month period. Businesses are also expected to register if their supplies and imports are expected to exceed AED 187,500 annually. These registration thresholds apply irrespective of whether the business is onshore or based in a free zone where businesses are typically exempt from payment of import duty.
Opportunity for exemption
Although the standard VAT rate is charged on most business products and services, several goods and services considered vital to the economy do not incur VAT. They are either zero rated or exempted from the VAT. Suppliers of goods and services that are zero rated can reclaim VAT they have paid on inputs into their business. Suppliers of exempt goods and services do not have to register for VAT but, they cannot reclaim VAT they have paid on inputs.