
In exchange for providing citizens and residents with an assortment of high-quality public services, including hospitals, roads, public schools, parks and civic facilities, this year, the government of the UAE decided to implement a new value-added tax or VAT.
The funding from this tax will give the government a new source of income to secure a continued provision of high-quality public services, while also enabling the government to decrease its dependence on oil.
The VAT is relatively small (5%) and helps the government of the UAE to create a sustainable knowledge economy for the future. The majority of UAE residents don’t have a significant issue with the new tax, especially considering the country is one of the most developed nations in the world that maintains no income tax.
CEOs and smart investors from around the globe continue to flock to Dubai and Abu Dhabi for the free zones which provide tax-free environments (as well as 100 per cent foreign ownership) and are a fruitful place to conduct business.
Here are five things to know about VAT in the UAE.
1. VAT is…
Value-added tax or VAT is a consumption tax that gets added to an individual product over the course of its production. Generally, the amount of VAT that is added is calculated as a percentage of the retail sale price of a product. In other words, a business decides how much to price a product to ensure that they can cover the VAT tax that it then pays to the government.
Most developed countries in the world have VAT taxes on consumer items.
2. In the UAE, VAT is added to…
In the UAE, a five per cent VAT is now added to the majority of consumer items that are considered part of discretionary spending that is done by purchasers. Things such as electronics, cell phones, automobiles, clothes and accessories, food and beverage, home bills, entertainment, fuel, transport, and hotel prices will be included.
In the UAE, some essential consumer items (such as medications, medical and school costs, and other social services) are exempt from the VAT.
3. You need to do VAT registration if…
VAT Registration is mandatory if you run a business that creates taxable goods or services and your annual turnover is equal to or more than Dh375,000.
On the other hand, if your firm has a turn over in the range of Dh187,500 to Dh375,000, then you can volunteer to register for the tax. If your firm provides health and education services, then you can recover the value-added tax from the FTA.
4. Those feeling the burden will be…
When the new VAT requirements were announced, many businesses were worried that they would drastically impact their profit margins. However, as VAT is an indirect tax on consumers, they are the party that will notice a small increase in price.
However, because VAT in the UAE is only five per cent (a lot lower than in most countries), consumers are unlikely to make any changes in their spending habits.
5. If you want to avoid tax penalties…
For an individual who violates tax laws in the UAE, the fines are incredibly steep. You don’t want to put yourself in a position where you have to pay as much as AED 50,000 because you overlooked what you needed to do.
To avoid tax penalties, ensure that you are know how to register for VAT and that you are doing it within the appropriate time frame. Additionally, maintain regular accounting books and records, file your VAT returns and pay your VAT prior to the due date, and make sure that your staff are aware of the new VAT rules and what they need to be doing.
Do you have any more questions about VAT in the UAE? Are you looking to set up an offshore company bank account? What are the significant challenges you are facing in this regard? Let us know in the comments below!
Raj Herry is the Founder and Chairman of Flying Colour Business Setup Services. His extensive experience comes from more than 15 years in the field of company incorporation for Dubai Mainland, all Free Zones across the UAE and offshore companies worldwide. He also owns several business centres offering furnished and ready-to-move offices in Dubai.