How will you be affected by the new UAE VAT Registration regime?

The GCC VAT Registration Framework Agreement, a pivotal initiative awaiting distribution, has garnered approval from all six nations within the GCC. Its release is anticipated immediately upon formal ratification by all member states.

Key Principles of the GCC VAT Registration Framework Agreement

The agreement delineates overarching principles for GCC member nations to adhere to while affording individual states some flexibility to adopt varied VAT treatments for specific issues. Each GCC nation will enact its domestic legislation to implement VAT in line with the foundational principles outlined in this collective framework.

Timeline of Implementation

All GCC countries have committed to implementing VAT by January 1, 2018, with a deadline set no later than January 1, 2019. Notably, the UAE, spearheading the GCC VAT initiative and showcasing advanced progress in implementation, has officially announced its VAT rollout on January 1, 2018.

However, challenges and obstacles are expected for other GCC nations in finalizing domestic legislation and achieving implementation by the stipulated deadline. Thus, simultaneous implementation across all GCC nations may not be realized as initially projected.

Anticipated Implementation Schedule

VAT Registration is slated to become effective in the Kingdom of Saudi Arabia in the first quarter of 2018 and in Bahrain by mid-2018. Conversely, Qatar, Oman, and Kuwait have yet to make official announcements regarding their respective timelines.

The UAE's VAT Registration Administration and Legislative Framework

The establishment of a Federal Tax Authority ("FTA"), currently in the process of staff registration, was initiated last year to oversee the management, collection, and enforcement of VAT.

Recently, the Federal National Council approved the tax procedures law, expected to be issued before Ramadan (June 2017). This law will govern all existing and future taxes, including VAT, delineating procedures for tax registration, collection, audits, penalties, appeals, etc.

VAT regulations and obligations will be governed by a distinct Federal VAT law, supplemented by executive regulations providing detailed directives on its implementation. With several key strategic decisions pending, the VAT law is projected to be released around mid-2017, followed by the executive regulations later in the year.

Comprehending VAT Fundamentals

VAT is a consumption tax levied on the value added at each stage of the supply chain. VAT-registered businesses will levy VAT on goods and services supplied to customers and remit VAT on goods and services procured from suppliers. The difference will be accounted for by the business and remitted to or reclaimed from the government as applicable.

While businesses collect VAT on behalf of the government, it is primarily borne by the final consumer. Unless exempted or zero-rated, the supply of goods or services is subject to VAT at the standard rate.

Distinguishing between zero-rated and exempt supplies is crucial. Businesses engaging in zero-rated supplies may qualify for VAT registration and reclaim VAT on their purchases, whereas exempt businesses will not.

Insights into VAT in the UAE

In alignment with the GCC VAT Registration Framework Agreement, VAT will be levied at a standard rate of 5% across the GCC. Further insights emerged from the inaugural Ministry of Finance VAT awareness session on the forthcoming VAT regime in the UAE.

However, the VAT treatment outlined herein is subject to potential revisions pending formal approval of the VAT law.

VAT will be charged based on the destination principle concerning local supply and importation of goods and services (i.e., VAT applies where goods and services are consumed in the UAE), with exports subject to VAT at zero rates.

Businesses will be mandated to register for VAT if their annual turnover exceeds the prescribed registration threshold of AED 375,000 – reduced from the previously proposed AED 3.75 million.

An option for voluntary VAT registration will be available if taxable supplies and imports fall below the mandatory registration threshold but surpass the voluntary registration threshold of AED 187,500 – reduced from AED 1.875 million.

While the initial thresholds were set relatively high to alleviate the compliance burden on businesses, a significant reduction has been made to facilitate VAT recovery, aligning with the overarching aim of the system.