The UAE’s president, Sheikh Khalifa bin Zayed Al Nahyan, has just approved a law to introduce the new 5% value-added tax (VAT) starting January 2018.
Federal Decree-Law Number 8 of 2017 sets the general rules for the implementation of the new tax, the ministry of finance said on its website.
Full details of the scope of VAT implementation will be revealed in the law’s regulatory framework, which is expected to be released by the fourth quarter of this year.
According to the Decree-Law, all UAE residents or business entities need not register for VAT unless they fall into the threshold limit as defined by the tax authority.
In simple terms, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT. That is, many small businesses will not need to register for VAT.
According to the details of the law released on Sunday, some goods and services will be subject to a zero rate of VAT, which allows suppliers to claim back VAT paid on business costs.
Those products and services include goods that will be exported outside of the Gulf Cooperation Council states that are implementing VAT.
Certain investments in precious metals will also be subjected to a zero rate VAT.
Recently-built residential properties will also be subject to VAT at a zero rate for the first three years after a property’s completion, to allow developers to recover VAT on construction costs.
Some services and sectors related to education and healthcare will also be zero-rated, including schools and universities that are funded or owned by the federal government.
The new VAT law also listed a number of products and services that will be exempted from paying VAT, which, unlike zero-rated VAT, does not allow for the reclamation of VAT paid on business costs.
The products and services that are exempt include residential properties, local transport, empty lands and some financial services.
Are Businesses Ready?
The majority of GCC firms are not yet ready to implement VAT, according to a recent report by Deloitte.
The consultancy said 69% of GCC businesses expressed concerned that they may not be prepared for VAT introduction in January 2018.
About 71% of the manufacturing industry respondents said they would need help of VAT specialists, whereas 52% of respondents from energy, resources and utilities sectors said specialist advice would not be needed.
While 96% of respondents confirmed they were aware that VAT is going to be introduced in the GCC, less than half believe that VAT will be introduced in the very near future, according to the survey.
As a means to enhance non-oil revenues, the rest of the GCC nations, whose finances are battered by declining oil prices, have also made plans to adopt VAT by early next year.
However, economists and officials have previously opined that simultaneous introduction in all countries may not be feasible as creating the administrative infrastructure to collect the tax remains a challenge.
It is also difficult to train companies to comply with the news tax in a region where taxation is minimal.
Accounting firm Ernst & Young recently said VAT will considerably enhance revenues per year for the UAE and other Gulf Cooperation Council (GCC) countries.
VAT at 5% will generate an extra income of more than $25 billion (Dhs 91.8 billion) every year for the six GCC countries, which will be substantial enough to boost infrastructure spending in the region.
While the introduction of new tax on goods and services may seem daunting to consumers and businesses, the overall impact is not that huge, according to David Stevens, VAT implementation leader at EY.