ebs Resources
ResourcesVAT
Basics
Understanding Value Added Tax
Why is the VAT being introduced?
How does VAT work?
Registering for VAT
Headquarter business
VAT Rates
Understanding
Value Added Tax
A direct tax is collected directly by the government from the taxpayer.
An indirect tax is collected by the government through an intermediary, who collects the tax on behalf of the government from the taxpayer.
How does
VAT Works
Consider a manufacturer who produces Microwave oven sets and sells a unit to a wholesaler for AED 500. Under the new tax system, the manufacturer collects a VAT of 5% (AED 25) from the wholesaler on behalf of the government. The wholesaler then pays a total amount of AED 525
The wholesaler increases the selling price to AED 1000 and sells it to a retailer. The wholesaler collects a VAT of 5% (AED 50) from the retailer on behalf of the government, while also receiving a refund of the VAT paid to the manufacturer in the previous step. The retailer pays a total amount of AED 1050.
The retailer further increases the selling price to AED 1500 and sells it to the end customer. The retailer collects a VAT of 5% (AED 75) from the end customer, while also receiving a refund of the VAT paid to the wholesaler in the previous step.
The end customer pays a total amount of AED 1,575 for the microwave oven set
A value added tax applies at every step of the sales process, while the registered business receives a refund (or tax credit) on the VAT paid at the previous step. The Federal Tax Authority (FTA) has specified a fixed VAT rate of 5% for the sale of goods and services in the UAE.
Why is the VAT
being introduced?
VAT allows governments to enhance and diversify their sources of income to continue providing a good standard of living for UAE residents. The implementation of VAT is expected to generate AED 12bn of revenue in its first year and up to AED 20bn in the second year.
Registering
for VAT:
Registration for VAT can be both mandatory or voluntary, depending on the business revenues generated.
VAT registration of a business is mandatory if the total value of their taxable sales and imports within the UAE exceeds the mandatory registration threshold of AED 375,000 for the previous 12 months or within the upcoming 30 days.
VAT registration for any business is mandatory if the total value of their taxable sales and imports within the UAE exceeds the voluntary registration threshold of AED 187,500 for the previous 12 months or within the upcoming 30 days.
Startups and small-scale businesses can register voluntarily if their expenses exceed the voluntary registration threshold, thereby making them eligible for tax credit.
VAT came into effect starting on January 1st, 2018. The electronic registration portal for VAT was opened from the fourth quarter of 2017 on the FTA website.
VAT
Rates:
The VAT rate is fixed at 5% for most goods and services except for these exempted or 0% tax categories:
International transportation.
Certain investment-grade precious metals (e.g. gold and silver of 99% purity).
Certain education and healthcare supplies.
Goods and services exported outside the GCC.
Newly constructed residential properties sold within 3 years of construction.
Public transport.
Life insurance.
Undeveloped land.
Certain financial services.
Residential properties.
Need for
bookkeeping:
The VAT regime will revolutionize business account operation and maintenance. Businesses must register for VAT that meet the minimum annual turnover requirement. Businesses not registered for VAT should maintain their financial records in any case should the government need to establish whether they should be registered. Every business owner registered under VAT must maintain the following records:
Invoices
An invoice is documentary evidence having details of a taxable supply or a service. Only VAT registered businesses are authorized to issue tax invoices. The receipt of a valid tax invoice is the only primary documentary evidence to support the VAT recovery for a purchaser.
Credit notes
When products are returned for a refund, credit notes are issued. It is a document sent by a seller to a buyer notifying them that a credit has been made to their account against the goods returned by the buyer.
Debit notes
Debit notes are issued when the amount payable by a buyer to a seller increases (due to extra goods delivered or goods already delivered charged incorrectly). These can be issued as a letter or formal document specifying future liability.
Excise Tax
What is an excise tax?
Excise tax is an indirect tax imposed on the sale of a commodity. This tax is levied on goods when they are imported into the UAE, manufactured in the UAE, or stockpiled in the UAE.
Excise tax is normally levied on products that have harmful consequences to people or the environment. The primary purpose of the excise tax is to reduce the consumption of those goods to restrict unhealthy practices. In certain scenarios, goods will be physically labeled to show that the excise tax has already been paid to the government.
Which products are subject to excise tax?
Carbonated drinks
All aerated beverages except for unflavored aerated water. Products used for making aerated beverages, including concentrates, powders, gels, and extracts will also be considered excise goods.
Tobacco and tobacco products
Tobacco products generally comprise of Cigarettes (of all types including Bidis (pronounced "bee-dees" which are small, thin hand-rolled cigarettes ), Cigars, Cigarillos and little Cigars, Chew-able tobacco, dis-solvable tobacco, Electronic cigarettes/vapes, Hookahs incl. Sheehsha, Pipes, and Smokeless tobacco including snufs
Energy Drinks:
Certain beverages include energizers which provide mental and physical stimulation, such as caffeine, taurine, ginseng, and guarana. Any concentrate, powder, gel, or extract that is made into an energy drink is also subject to excise tax.
Scope of Excise Tax
A person must register and pay excise tax if they are in the following activities
Importing excise products.
Producing or manufacturing excise goods.
Stockpiling excise goods in the normal course of business.
Transferring excise products out of a Designated Zone
Selling excise goods in the UAE. The excise tax will be borne by the seller and the tax amount will be included in the total sale price of the excise product.
Tax Residency
Certificate – TRC
What is TRC?
In the UAE, a Tax Residency Certificate is one of the official documents issued by the Ministry of Finance. UAE has signed tax treaties with 55 countries to avoid double taxation. A certificate of tax residency that certifies that an individual or company is resident in a specific country. Foreign investors and companies from other taxable jurisdictions will be able to avoid double taxation. It is issued to companies which have already registered in the UAE or to individuals who have received a residency visa.
For individuals who have lived in the UAE for more than 180 days are eligible to receive a tax residency certificate.
Companies in the UAE can make full use of the advantages of double taxation since the UAE has signed double tax treaties with dozens of countries around the globe. It is a bilateral agreement to protect the interests of foreign investors and companies from other taxable jurisdictions. Because offshore companies are not listed with the tax treaties in UAE, they cannot receive the tax residency certificate. Tax exemption certificates can be obtained instead of tax residency certificates by offshore companies. In the UAE, it only allows companies to be tax exempt.
There are some procedures for applying for a tax residency certificate in the UAE. Once the necessary documents are submitted with the application, the certificate will usually be obtained within two months. The company must have been in the UAE for a minimum of three years before applying for the TRC.
Documents
Required for TRC
For Companies
All Company Documents
Tenancy contact copy and EJARI
Request letter from the company
Government fees will be approximately AED: 5,000.00
Shareholder passport copy, visa page, ID copy
Audited financial statements
For Individuals
Passport copy and visa page, Emirates ID
Immigration report state that, the person is stayed in Dubai number of days in UAE
Tenancy contact and EJARI
Government fees will be approximately AED: 2,000.00
Source of income / Salary certificate
