The UAE Ministry of Finance published its VAT law on 27 August 2017. It constitutes the second piece of tax legislation that will be enforced in the UAE, after the publication of the legislation concerning excise taxes, which will enter into force on 1 October 2017. The VAT law constitutes the basis for the introduction of VAT as of 1 January 2018. This is a landmark law that will massively impact businesses and consumers in the UAE. The VAT law comes a little earlier than expected, the authorities having announced it would be published in September only. It will be followed by the implementing regulations, which will provide more detail on its application.
The UAE VAT law implements the GCC VAT Agreement, a treaty signed by all 6 Member States of the GCC. Drafting on the treaty has begun as far back as 2009. In its design, it is loosely based on the VAT directive. The VAT directive is the basis of VAT legislation throughout the countries of the European Union, where VAT originates from. The Member States have committed to introduce VAT throughout the GCC by at the latest 1 January 2019. The Kingdom of Saudi Arabia has already published its VAT law and is currently pending the publication of its implementing regulations.
Businesses have to register when they expect to meet the mandatory registration threshold of 375,000 AED. The possibility to register should open as of September through tax.gov.ae. The UAE expects around 350.000 businesses to register for VAT purposes. To calculate whether a business needs to register, there is a retrospective test and a so-called prospective test. For the retrospective test the past twelve months need to be analysed, but remarkably for the prospective test only the next 30 days.
This prospective test is foreseen to be applied differently in the Kingdom of Saudi Arabia, where the next twelve months need to be taken into account, which is also the way it seems to apply under the treaty. If a business makes supplies or incurs expenses of half that mandatory registration threshold, it can also voluntarily register for VAT purposes.
Importantly the VAT law confirms the policy adopted by the UAE in terms of the exceptions it will make that all supplies in the UAE are subject to the standard 5% VAT rate.
According to its law, it subjects certain supplies to a zero rate. This means that VAT is not calculated on the supply, but the supplier can still recover all input VAT. This applies for example for international passenger travel. Flights from Dubai to Riyadh or to a third country will not be subject to VAT. This is good news for the tourist sector, which already sees prices for hotels and restaurants increase with 5% VAT.
It also confirms that the first supply of residential buildings within 3 years of their completion is subject to a zero rate. This rule has been imported from the UK, but is not widely applied in other European jurisdictions. It is obviously beneficial for prospective buyers of a new home and good news for the UAE real estate sector. Crude oil and gas will also be subject to a zero rate, whereas the Kingdom of Saudi Arabia is not expected to do the same.
Very important to the wider public is the subjecting of the education and health care sector to a zero rate. Tuition fees will therefore not increase in price. The same holds for preventive and basic health care. This does not prevent that some of the supplies by educational institutions or health care institutions will still be subject to the standard rate of 5%.
Certain supplies are subject to the application of an exemption for VAT purposes. This means that the supplier cannot recover any input VAT. This is the case for certain financial services, the supply of bare land, the supply of real estate not subject to a zero rate and local passenger transport. This is on the face of it goods news for the RTA metro fees. However, importantly, this also means that the RTA will not be able to recover any input VAT charged to it for the extension of the metro in view of Dubai 2020 and therefore its costs will increase.
The VAT law sheds some tiny light on the VAT treatment of free zones, hinting at the application of a regime similar to that of the designated zones in the Excise Tax law. Detail on the application of this regime is however deferred to the Implementing Regulations, which are still yet to be published.
Governments will remain out of scope for VAT purposes, unless they are not acting as a government or enter into competition with the private sector. A list will be established on the basis of which this distinction will be made and a cabinet decision will be made which governmental entities need to register for VAT. This additional information will be very important as government entities may enter into competition with private actors and the fact that they are not subject to VAT can provide them with a substantial advantage over the private sector. Any subsidies provided by governments can also be deducted from the taxable base on which to calculate VAT. This is the exact opposite of what is applicable in the European Union. Additionally, government entities put on a specific list will be able to reclaim VAT from the Federal Tax Authorities which they paid to their suppliers.
In its technical wording, the UAE VAT law deviates substantially from the Agreement and from the legislation published in the Kingdom of Saudi Arabia. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will therefore have to read both legislations closely as different terms may mean the same in both legislations. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will incur substantial administrative costs due to the different laws, VAT returns and procedures. Whereas in the European Union the European Commission pushes towards harmonisation of the laws and obligations, the GCC Member States have not harmonised their laws and obligations.
Time is now really crucial for businesses, as 4 months until 1 January 2018 is a very short implementation period for businesses wanting to being compliant for VAT purposes.