UAE Taxation System – Analysis
The United Arab Emirates is a federation of seven emirates, with autonomous emirates and local governments. The UAE’s openness to international business and strategic location adds an extra advantage to the region.
History of Taxes in UAE – Taxation System in UAE
At present, there are no tax laws that apply to individuals in the UAE.
However, the Federal Tax Authority does issue tax Residence Certificates to individuals who satisfy the requirements specified by the Authority to take advantage of DTAA. The UAE has entered into a 115 DTA agreement with its trade partner.
Income Tax and Corporate Taxes in UAE – Taxation System in UAE
The Income-tax decrees have been issued in five of the seven Emirates in UAE, being–Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, and Fujairah, but they are not currently enforced on most businesses. Hence, resulting in no corporate taxation in most industries.
However, the UAE levies the corporate tax on oil and gas exploration and production companies. Also, the branches of foreign banks are subject to income tax under separate banking tax decrees in certain Emirates (E.g. Dubai, Abu Dhabi).
Excise Duty / Tax
The excise tax was also introduced across the UAE in 2017. The Federal Tax Authority in UAE pointed out that the application of Excise Tax laws achieved remarkable success since their implementation, reflecting positive results primarily in the accelerated pace of building a safe and healthy society by reducing the consumption of harmful goods.
Custom Duty in UAE –
UAE is a hub for international trade hence, Customs Duty plays an important role. A customs duty of 5%–is imposed on the cost, insurance, and freight (CIF) of the value of imports. Other rates may apply to certain goods, such as alcohol and tobacco, and certain exemptions and reliefs may also be available.
The United Arab Emirates is part of the GCC Customs Union, which was established in 2003 to remove customs and trade barriers among the GCC member states.
Most significant tax reform – VAT
The year 2018 had been major for the UAE taxation system. It was the year when Value Added Tax impacted the country in a whole new way.
Understanding VAT – Most Significant Tax in UAE
The UAE government implemented a value-added tax (VAT) in the country from January 1, 2018, at a standard rate of 5%.
VAT has provided the UAE with a new source of income. It has also aided the government is moving toward its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
VAT applies equally to tax-registered businesses managed on the UAE mainland and in the free zones. However, if the UAE Cabinet defines a certain free zone as a ‘designated zone, it must be treated as outside the UAE for tax purposes. The transfer of goods between designated zones is tax-free for certain transactions.
There are basically three categories of VAT Rates in UAE–When the tax treatment of financial services, residential buildings (subject to conditions), bare land, and local passenger transport services are exempt; there is another big list under the zero-rated category. The export of goods, export of services, export of telecommunication services, certain means of transport, international transportation of services for passengers and goods, residential buildings (Subject to conditions), Education Services, and healthcare services. All other supplies which are not exempt or zero rates are subject to a VAT Standard Rate of 5%.
Criteria for VAT Registration
If a person is a resident in the UAE, he would be required to get registered for VAT mandatorily if the total value of their taxable supplies and imports made within the UAE exceeds the Mandatory Registration Threshold of AED 375,000 over the previous 12-month period or if the person anticipates that the total value of their taxable supplies or imports will exceed AED 375,000 in the next 30 days.
There is also an option for businesses to get registered for UAE VAT Voluntarily if, at the end of any month, the total value of the person’s taxable supplies and imports or their expenses that were subject to VAT, in the previous 12 months exceeds the Voluntary Registration Threshold of AED 187,500 or the total value of the person’s taxable supplies and imports or their expenses which are subject to VAT, in the next 30 days is expected to exceed the Voluntary Registration Threshold of AED 187,500.
Filing of Returns under VAT
Taxable businesses must file VAT returns with FTA on a regular basis and usually within 28 days of the end of the ‘tax period’, as defined for each type of business. The standard tax period in UAE is quarterly for businesses with an annual turnover below AED150 million and monthly for businesses with an annual turnover of AED150 million or more. The FTA may, at its choice, assign a different tax period for certain types of businesses.
SOME KEY FEATURES OF UAE VAT
Foreign Business Refunds
The Federal Tax Authority (FTA) allows foreign companies to claim back Value Added Tax (VAT) incurred while doing business in the UAE.
To be eligible for the VAT refund, the first condition is that foreign businesses must not have a place of establishment or fixed establishment in the UAE or in any of the VAT-Implementing GCC States that fully comply with the provisions of the Common VAT Agreement of the Cooperation Council for the Arab States of the Gulf. Such foreign businesses must not be Taxable Persons in the UAE. They must also be registered as an establishment with a competent authority in the jurisdiction in which they are established. And finally, they must be from a country that implements VAT and that equally provides VAT refunds to UAE businesses in similar circumstances.
UAE Designated Free Zones
UAE has specified areas termed “Free Zones”, which are considered different from the UAE Main Land.
Historically, Free Zones have been excluded from the territorial scope of the UAE. However, for VAT purposes, this is not automatically the case. Only those Free Zones listed in a Cabinet Decision qualify for special VAT treatment and that special VAT treatment has certain limitations. These nominated Free Zones are known as Designated Zones for VAT purposes.
The effect for businesses operating in Designated Zones will be that many supplies of goods will be outside the scope of UAE VAT, subject to strict criteria and detailed record keeping. However, supplies of services are subject to the normal UAE VAT rules.
VAT Refund for tourists:
VAT refunds for tourists are carried out through a fully integrated electronic system that connects retailers registered in the ‘Tax Refund for Tourists Scheme’ with all ports of entry and exit from the UAE.
“Planet” is the exclusive operator of the tax refund system for tourists, which the Federal Tax Authority executes in the UAE. The tourist, however, should have met certain conditions laid by the authority specifically to claim the VAT Refund.
Tourists will receive their refunds through a special device placed at the departure port–airport, seaport, or border port–by submitting the tax invoices for their purchases from the outlets registered in the Scheme, along with copies of their passport and credit card.
Once these documents are submitted, tourists can either recover the VAT in cash in UAE dirhams or have it transferred to their credit card.
VAT IN The Gulf Cooperation Council
When VAT in UAE is getting big and better with each passing day, let’s also see where is UAE and other GCC Countries standing.
The Kingdom of Saudi Arabia has seen a leap in the VAT rate from 5% to 15%. The increase came as a part of additional measures taken by the country in response to the economic impact of the Covid-19 crisis.
Bahrain, having implemented VAT with effect from 1st January 2019, is continuing to issue new sector and topic-specific VAT guidance, to provide support and clarity to businesses operating in the state. Qatar imposes no VAT or sales tax on operations in Qatar.
However, the introduction of VAT in Qatar under a common GCC framework is expected to be introduced in the near future with an anticipated tax rate of 5%. The tax authorities in Kuwait recently announced that it will finally introduce Value Added Tax (VAT) at 5% from 1 April 2021.
Oman is set to be the fourth GCC state to implement VAT since the signing of the GCC VAT Agreement at the end of 2016, with an effective date of 16 April 2021. The Oman VAT Law was published in the official gazette on 18 October 2020. This triggered a 180-day countdown to the effective date of 16 April 2021.