Value Added Tax is a tax that generates revenue for the Government in an effective manner throughout the value add process from raw material to finished product. So for the businesses and consumers, we do need to understand a few basic principles of UAE VAT.
Gulf Cooperation Council (GCC) is a common grouping of countries in the middle-east, where significant trade and other agreements exist to facilitate the growth of the countries and bring in uniformity. Based on IMF recommendations, the GCC agreed on a broad framework for the implementation of VAT across GCC countries as early as 2015. This agreement gave each of the GCC countries flexibility to define the administrative processes and also limited scope for including or excluding products and services in the rates proposed for VAT in GCC.
GCC common aspects:
- Three rates agreed: – Exempt, Zero, Standard ( 5 % ) across the GCC region.
- An indicative list of goods and services identified for inclusion in these three rates with flexibility for participating countries to choose a few or all of the items for a specific rate.
- Each country to introduce laws and set up the infrastructure to manage the VAT laws, implementation and ongoing management
- The VAT registration thresholds defined at a common level of USD. 100,000 equivalent for each country.
How does UAE VAT operate?
UAE VAT is a tax on goods and services. As the term suggests, Value Added Tax is a tax that is applied at each stage of the value add for a product or service until the final consumer. The burden of VAT is borne by the final consumer.
The following example is being presented on a generic level to give a basic understanding of VAT for non-tax professionals and businessmen.
A farmer sells the wood to a furniture manufacturer for X amount. The farmer collects VAT at applicable rates as part of the sales proceeds. Let us call this VAT collected as “A”
The farmer files his tax returns as per due dates and reflects the output VAT “A” collected and deposits the same with the Authorities within the stipulated period. Let us assume for ease of understanding that the Farmer did not have any other transactions during the tax period.
The Manufacturing firm takes around 5 months to use the wood to build furniture say 100 chairs.
The Manufacturer can take credit for the VAT paid to the farmer i.e. A as soon as he has received the goods and gets the Tax invoice with details of the farmer’s VAT registration number, etc as stipulated
This credit is availed by the manufacturer by including this tax paid A in their tax return for the period in which the Tax Invoice date exists in the section for expenses. Which results in reducing these amounts from the total tax collected.
As and when the Manufacturer sells the chairs to his dealers or customers for a price which includes the cost of the product plus his profit margin, he needs to add and collect the VAT from his dealers or customers and reflect the same in a Tax Invoice issued by the manufacturer. Let us call the VAT charged by the Manufacturer as “B”.
So in the first month, the manufacturer gets a credit of A in the reporting to the authorities (monthly/quarterly reporting are mandated in most geographies) and every month where there has been a sale a VAT liability of B to the authorities is reflected in the Tax Return.
The net VAT paid by the manufacturer to the Tax Authorities will be B – A at any point in time.
What role do businesses assume when they register for UAE VAT?
All businesses (apart from exempted ones) assume the role of tax collectors for the Government. They become responsible to maintain a standard set of records and transparency in all their dealings to avoid regulatory strictures or penalties.
The key takeaway from the above is the need to have clear accounting records to be able to deliver on the tax collector responsibility adequately and maintain the reputation of the businesses.
Who should register for UAE VAT?
Any business registered in UAE can register for VAT subject to meeting the VAT registration threshold criteria defined in the UAE VAT laws. There are two thresholds defined, Voluntary Threshold (USD. 50000/- Equivalent in local currency) and Mandatory Threshold (USD. 100000/- equivalent in local currency)
The threshold is for either the turnover (as in gross sales) or the total expenses exceeding the threshold value over a period of 12 months. The 12 months can be considered as the past 11 months and the current 30 days.
The voluntary threshold is set for businesses to voluntarily register for UAE VAT. There are no penalties for non-registration by businesses if they decide not to register when they cross the voluntary threshold. The Mandatory threshold is the red-line. When a business crosses the mandatory threshold they need to immediately register for VAT, failing to register will invoke stiff penalties under the VAT law.
Only businesses that are registered for VAT and have been issued a Tax Registration Number (TRN) can charge VAT on their sales and get the benefit of input credit for VAT paid on their purchases.
How to register for UAE VAT?
The FTA website is the online resource for all your VAT requirements. The site not only provides you the scope to register online, but also to file your returns and pay your taxes. The site also has a wealth of resources by way of the actual laws, guides and easy to understand infographics for specific aspects of the VAT in UAE.
tax.gov.ae is the website. Open the website on your browser. The default language is Arabic, an option to change the language to English is available on the website. Choose the menu option E-Services and register for E-Services by providing the requested details. Email verification is undertaken as part of the registration process. Once verified and logged in, the dashboard opens up. Here you have the option to register for VAT and also if required Excise.
Selecting the register for the VAT option will open up the VAT registration form spread over multiple tabs. Fill in the application and provide the requested attachments. Post completion a review and submission option is available, hence you can review the details and submit the registration form online.
The information and documents required are in the nature of business details, owners and manager details, revenue and expenditure details with documents supporting the same by way of Trade License, MOA, Passport copy, Emirates ID, income statements, etc
You can find more details on our blog on the subject How to register company for VAT in UAE
What is TRN Certificate?
Once the registration request is submitted online, it is taken up for scrutiny in the back-end. In case, the FTA authorities need any additional information or corrections in the online submitted form, they will communicate with you by email of the same. Post rectification and resubmission, the FTA will notify you of your VAT registration success. Logging into the E-services portal will reflect the details of your VAT registration, by way of TRN number, GIBAN number, etc and also give you the option to download your TRN Registration certificate. This certificate if the official document of your business registered with the FTA for VAT.
How to file UAE VAT returns?
The go-to place to file your VAT returns is the FTA website under E-Services. As mandated by the UAE VAT laws, if you have been maintaining complete records of your business transactions and accounting for them in an accounting system it should be easy to file the tax returns. FTA has also notified several accounting systems as compliant to UAE VAT guidelines, using any of these makes it a no-brainer as it generates a Tax Return report which replicates the online Tax Return that is to be filed. So it is just a matter of filling in the blanks.
The TRN registration certificate details the specific tax period cycle for your business. The first tax period may be an irregular count of months, but subsequent periods are quarterly. Once the tax period is over, you have 28 calendar days to file your return and settle the tax as per the tax return.
Once the accounts for the tax period is finalized and you are confident of the accuracy of the numbers, you can log in to the E-Services portal, navigate to VAT, select the VAT return 201 tab. Generate VAT return button will only be available when any VAT return is due for your business, click on the button and it will open up the Tax Return form.
The initial part of the form will be pre-populated with details from your tax registration, scrolling down will start the sections from 1 for inputting the output VAT details. Post this, the next section is for Input VAT and the return will automatically calculate the net VAT payable or refundable. The bottom part is also pre-populated except for your email ID and confirmation of completeness and accuracy of the information provided, once completed clicking the submit button will conclude the return filing exercise.
Key considerations are:
- The section on goods imported into UAE will get pre-populated in the online return based on information made available to FTA by the Customs for goods imported into UAE using your Customs number linked TRN number. This needs to be reconciled prior to return filing
- 0 is a number any rows where no value is available in your return should be populated with 0. The system will not allow submission of returns unless all the values are populated
- The total of supplies subject to reverse charge plus the goods imported into UAE should match the expenses subject to reverse row under expenses.
- Once submitted any changes would invoke administrative penalties.