All systems go for 5% VAT in UAE

With just less than a year to go to the planned date of the implementation of the five per cent value added tax (VAT) in the UAE, authorities are seeking to register all companies with an annual revenues exceeding $100,000 (Dh367,300) for the game-changing tax reform for the entire GCC.

While experts on VAT expect 95 per cent or more of companies in the UAE will comply in the initial stage, the government is targeting around Dh12 billion of revenue from the initiative in the first year, which is about 0.9 per cent of the UAE's gross domestic product of $371 billion in 2015.

Experts anticipate that the VAT framework will shortly be made public now that all six GCC countries have signed the unified VAT agreement (the VAT framework).

Younis Al Khouri, under-secretary at the UAE Ministry of Finance, said that the GCC governments were planning for an early, simultaneous adoption.

“By 2018, January 1, we are aiming to adopt a five per cent VAT across the GCC”, he was quoted on Sunday as saying. While the government aims for a five per cent rate across the board, parts of seven sectors – including education, healthcare, renewable energy, water, space, transport and technology – might get special treatment, he added.

However, the consensus among tax experts is that essentials such as food, education and healthcare will be exempted, which analysts believe will help to contain inflationary trends. The overall new tax system would be based on the destination principle.

“This means VAT will be charged on imports and on local supplies of goods and services, and exports are zero-rated. Once implemented all registered businesses will be required to charge VAT on their supplies, and will be entitled to deduct VAT incurred on their purchases, including capital assets and imports,” they said.

Explaining the VAT concept, experts said it is an indirect tax imposed by the government and borne by consumers of goods and services and collected by businesses on behalf of the government. As per the new tax system, business charges its customers a VAT on its sales and routes all collections to the government.

When a business charges VAT on a sale, it can reclaim VAT they have paid on their purchases. The difference between what they have charged on sales and paid on purchases is required to be paid to government, they explained.