GCC VAT System in UAE

January 1, 2018 saw the introduction of 5% VAT in the UAE. VAT or Value Added Tax is levied on goods that are in the manufacturing or production process. Since its value increases as it progresses closer from production to consumption, VAT is applied as a consumption tax. Revenues from VAT in the UAE are expected to be in the region of 10-12 billion AED and hence holds immense importance for the government.

Companies that have annual revenues of AED 375,000 and above are mandatorily required to pay VAT @ 5%. Companies that have annual revenues between AED 187,500 and AED 374,999 can register for a VAT number. In the second phase, VAT will become mandatory for all companies irrespective of the revenues earned.

Consequences of non-compliance

The government aims to control discretionary spending while protecting the interests of those at the lower end of the economic strata. As per GCC VAT regulations, legislation is to be made for VAT compliance by each emirate / member state. The core principle underlying the VAT architecture is that it is to be self-assessed by nature. This means that the onus is on the VAT registered company to record, assess, and report its VAT obligations.

Some pointers for compliance

• Non-compliance in maintaining the required records as needed by the tax authorities
  • – AED10,000 for first violation.
  • – AED50,000 for every subsequent instance of non-compliance.
• Non-compliance in submitting the needed records in Arabic when requested by the Authority
  • – AED20,000
• Non-compliance in submitting a registration application inside the timeframe required by the tax law.
  • – AED20,000
• Non-compliance in submitting a deregistration application inside the timeframe required by the tax law.
  • – AED10,000
• Non-compliance in informing the Authority of an update to tax records that need to be submitted.
  • – AED5,000 for first violation.
  • – AED15,000 for every subsequent instance of non-compliance.
• Non-compliance in notifying the authority that a legal representative has been appointed for the business within the required timeframe.
  • – AED20,000 (The fine to be charged to the legal representative.)
• Non-compliance of the legal representative in filing a tax return within the specified timeframe.
  • – AED1,000 for the first violation.
  • – AED2,000 for repeat offence within 2 years. (The fine to be charged to the legal representative.)
• Non-compliance in submitting a tax return within the timeframe specified by the tax law.
  • – AED1,000 for the first violation.
  • – AED2,000 for repeat offence within 2 years.
• Non-compliance in submitting paying a tax as mentioned in the tax return/tax assessment form within the timeframe. Here the late payment penalty will be as below:
  • – 2% of the overdue tax needs to be paid immediately.
  • – 4% of the overdue tax in case the timing crosses seven days after the deadline.
  • – 1% daily penalty will be charged on unpaid amount after one calendar month post the deadline for payment, up to a maximum of 300%.
• Submission of incorrect tax returns
  • – AED3,000 for first violation.
  • – AED5,000 for subsequent instances of non-compliance

Importance of staying in compliance with VAT in UAE

The government aims to control discretionary spending while protecting the interests of those at the lower end of the economic strata. As per GCC VAT regulations, legislation is to be made for VAT compliance by each emirate / member state. The core principle underlying the VAT architecture is that it is to be self-assessed by nature. This means that the onus is on the VAT registered company to record, assess, and report its VAT obligations.

Some pointers for compliance

• Compulsory VAT registration necessary for companies that fall under the VAT payment benchmarks
• Regular and timely payment of VAT and its filing with the appropriate tax authorities
• Paying due VAT amount by a pre-determined date.
• Record keeping to be followed for all business transactions including
  • – Tax invoices
  • – Debit or credit notes
  • – Import and export records
  • – Zero rated or VAT exempt supplies and purchases

Introducing the concept of Double Taxation Treaty

UAE has been a strong advocate of fairness and transparency in international business dealings. In order to alleviate problems of international tax avoidance, UAE has signed Avoidance of Double Taxation Agreement (DTA) with 115 nations it carries out trade with. This not only brings down hardships due to possible double taxation, but also promotes international trade and investment flows.

If you have a foreign company located in any of these nations with whom UAE has signed the DTA treaty, then you need not pay tax in the host nation as well as the UAE. You can mitigate the burden of tax paid on profits to avoid double taxation in the UAE as well.

Countries UAE signed with for double taxation treaty

UAE has signed the DTA treaty with 115 nations as below (based on chronological order of passing of decree)

Tax Residency Certificate for companies and individuals to avoid double taxation

A Tax Domicile Certificate or Tax Residency Certificate is issued by the UAE Finance Ministry. It helps a company to avoid double taxation and operate without unnecessary burdens of being taxed twice. The certificate is valid of 1 year from the date of issue. It takes nearly two weeks for the application approval and another two weeks for certificate delivery.

Who gets the tax residency certificate?

A Free Zone company, a company operating in Dubai mainland, or a sole proprietor can avail of this certificate. This facility is not available to a branch of a foreign company, an offshore company, or a non-employed person.

How EBS can help?

Having a taxation expert can come in handy when dealing with the compliances to be followed for VAT payment or obtaining tax residency certificate to avoid double taxation. Our team has got more than a decade worth of experience in highly efficient tax consultation. For any advice on procuring tax residency certificates or VAT compliances in payment, filing, or submission of returns, you can count on us to get the job done as per regulatory protocols. Avoid paying double taxes, augment your profitability, and enable a high ROI when you appoint us at EBS as your tax consultant in UAE.