Ben Constance provides a snapshot of the key developments and uncertainties around implementation of the new VAT law in the United Arab Emirates, due to come into force in early 2018.
On 23 August 2017, the UAE Government issued Federal Law No. 8 of 2017 on Value Added Tax (the “VAT Law”), which will come into effect on 1 January 2018. The VAT Law provides for the mechanics and underpinning framework around implementation of Value Added Tax in the UAE and will apply to most goods and services provided in the Emirates. VAT in the UAE and wider Gulf region, like other jurisdictions, is in effect a consumption tax collection scheme by business on behalf of the Government, but which is ultimately borne by the end consumer.
The passing of the VAT Law in the UAE, follows the signing of the Unified Agreement between the six member nations of the Gulf Cooperation Council (the “Unified Agreement”) which itself details a framework for the operation of VAT across the GCC. The VAT Law provides, as expected, that the standard rate of VAT in the UAE will be 5%, subject to certain services that will be exempt or zero rated. Passing of the VAT Law is a key juncture for UAE business to consider VAT implementation plans and procedures and provides further certainty around timeframes for registration and application of the new tax environment.
In addition to the certitude of VAT implementation in the UAE as at 1 January 2018, recent legislative developments have included the passing of Federal Law No. 7 of 2017 on UAE Tax Procedure (the “TP Law”), which provides that the Federal Taxation Authority will be the relevant Government body mandated with administration and responsibility for VAT tax collection and control in the UAE. The TP Law covers areas such as obligations around registration, tax evasion and completion of tax returns, audits and tax refunds among other things. The TP Law also establishes a Tax Disputes Resolution Committee, which will enable hearings and consideration of disputes relating to tax liability, evasion and assessment.
VAT registration and exemptions
For UAE business it is important to consider the detailed information disclosed on the website of the Federal Taxation Authority as it relates to VAT registration requirements. In summary, those businesses in the UAE with annual VAT taxable turnover, or those entities that reasonably believe will receive VAT taxable turnover in the following 30 day period, in excess of AED375,000, will need to register with the Federal Taxation Authority. It is anticipated the registration process will commence in mid-September 2017.
Obviously what will be significant for business is determining whether the underlying provision of goods and services provided by any one entity in the UAE is, in fact, subject to VAT. The Unified Agreement sets out the basic parameters upon which VAT is chargeable. These parameters include:
- Supplies of goods and services by a “taxable person”, where supplies occur in the same GCC member nation;
- Import of goods into the GCC from outside of the GCC;
- Receipt of goods and services from other GCC nation members and others registered for VAT but outside the GCC, subject to a reverse charge mechanism (in essence, an accounting exercise offsetting tax implications).
A key component of the Unified Agreement is the ability for member nations, such as the UAE, to apply exemptions or concessions to various sectors at a country specific level. These exemptions are detailed in the Unified Agreement and cover areas such as the healthcare industry (including medical instruments and equipment), education, real estate, oil and gas and financial services. The VAT Law has confirmed that supplies of goods and services which will be considered zero rated or exempt in the UAE, will include:
- The international transport of goods;
- Primary sale or lease of residential property;
- Certain, but not all, areas of education such as pre-school and nursery and Government-funded higher education;
- Certain, but not all, areas of the healthcare sector;
- Crude oil and natural gas;
- Financial services;
- Gold and other precious metals for investment; and
- Local passenger transport, such as taxis.
The precise application of the underlying exemptions is not yet established in the detail of the VAT Law and will likely be more clearly defined in subsequent tax regulations. Including greater detail in further regulations around areas of concession and exemption will be one aspect to detail, as will greater definition in relation to the application of VAT for those companies established in the many international Free Zones of the UAE.
At present the VAT Law provides that certain “Designated Zones” will be treated as outside the UAE for the purposes of VAT implementation and compliance. What is not clear is what particular geographical areas in the UAE are defined as “Designated Zones”, but initial indications are that any transfer of goods and services which are otherwise taxable from a VAT perspective, will not be so when undertaken between “Designated Zones”. The application of VAT to the provision of goods and services between Designated Zones and those areas subject to VAT (that is “onshore” UAE) also needs to be clarified. It seems that Free Zone companies, in particular, will need to carefully consider the location of the provision of its goods and services, as well as the identity of its end user, with each transaction of a commercial activity.
Commercial agreements and VAT
Another point of ambiguity at this stage relates to those contractual arrangements which commence before tax implementation, but overlap with the introduction of VAT in UAE. Unlike contracts of a commercial nature in established tax jurisdictions, which readily deal with value added and other taxes, UAE governed commercial contracts, broadly speaking, do not deal with supply or service fees and charges and whether these aspects of a contractual relationship include taxes such as GST or VAT. As a result, many contractual counterparties involved with the provision of VAT taxable supplies will be subject to the supply charges or service fees exclusive of VAT, and without contractual recourse to the party to whom the goods or services are being provided.
Commercial contracts outside of the UAE typically deal with fees and charges on a definitive inclusive and exclusive basis. Without relevant provisions included, there is a significant risk on the provider of such goods or services becoming liable for the VAT under the Unified Agreement and VAT Law, without the ability to pass on such costs to the contracting counterparty.