UAE, Federal Decree-Law No. 8 of 2017 on Value-Added Tax, A Practical Guide for Businesses

Federal Decree-Law No. 8 of 2017 on Value-Added Tax is the foundation of the UAE VAT system. It entered into force on 1 January 2018 and levies tax on every taxable supply and deemed supply made by a taxable person, and on the importation of relevant goods. The standard rate is 5% of the value of the supply or importation. Responsibility for the tax falls on the taxable person making the supply, on the importer of relevant goods, and on a registrant who acquires goods under the oil and gas reverse charge. The law works together with its Executive Regulations and with the Tax Procedures Law, which governs returns, audits, penalties, and disputes.

Registration is mandatory for a person with a place of residence in the UAE or another Applying State, meaning a GCC state that has implemented VAT, whose taxable supplies exceeded the Mandatory Registration Threshold over the previous 12 months, or are expected to exceed it within the next 30 days. A non-resident who makes supplies in the UAE must register where no other person in the UAE is obliged to account for the tax. Voluntary registration is available once supplies or taxable expenses pass the lower Voluntary Registration Threshold. The thresholds themselves are set in the Executive Regulations. Related parties that meet the conditions may register as a Tax Group and be treated as a single taxable person, and a person generally holds only one Tax Registration Number. A registrant must apply for deregistration if it stops making taxable supplies, and may apply to cancel if its supplies over the previous 12 months fall below the Mandatory Registration Threshold, although a voluntary registrant cannot cancel within the first 12 months.

The law then answers three questions for every transaction: when the supply happens, where it happens, and how much it is worth. The date of supply is generally the earliest of the transfer or availability of goods, completion of services, receipt of payment, or issue of the tax invoice, with special rules for periodic payments and deemed supplies. The place of supply of services is, as a rule, the supplier's place of residence, with exceptions that move it to the recipient where the recipient is a registered business in another Applying State, to the place of performance for services related to goods, hospitality, cultural and educational services, to the location of real property, and to the point of departure for transport. Telecommunications and electronic services follow where they are actually used and enjoyed. The value of a supply is the consideration less tax, advertised prices must include tax, and discounts and subsidies reduce the taxable value. Supplies between related parties at below market value can be taxed at market value where the recipient cannot fully recover the tax.

Most supplies are taxed at 5%, but the law carves out two special categories. Zero-rated supplies are taxable at 0%, which preserves the supplier's right to recover input tax. They include exports outside the Applying States, international transport and related services, certain means of transport, investment precious metals, the first supply of a residential building within three years of completion, crude oil and natural gas, and qualifying education and preventive and basic healthcare. Exempt supplies carry no output tax but also give no right to recover related input tax. They cover financial services, residential property sales and leases other than the zero-rated first supply, vacant land, and local passenger transport. Confusing the two is a common and costly error, because zero-rating protects recovery and exemption removes it.

A distinctive feature for businesses in the energy sector and for importers is the reverse charge. A taxable person that imports goods or services for its business treats itself as having made a taxable supply and accounts for the tax on its own return. Where one registrant supplies crude or refined oil, natural gas, or pure hydrocarbons to another registrant that will resell them or use them to produce or distribute energy, the supplier does not charge tax and the recipient accounts for it. This depends on the recipient confirming in writing, before the date of supply, that it is a registrant and the purpose of the purchase. If the supplier knew or should have known that the recipient was not registered, both are jointly and severally liable. A person who falsely claims to be a registrant to obtain goods this way is treated as committing tax evasion.

The tax payable for a period is output tax less recoverable input tax. Input tax is recoverable on goods and services used or intended for taxable supplies, and for supplies made outside the UAE that would have been taxable or specified as exempt had they been made inside it. Recovery requires a valid tax invoice, or an electronic invoice where the e-invoicing system applies, and payment of the consideration as set by the Executive Regulations. Input tax paid before registration can be recovered on the first return, subject to limits such as the five year look-back for services. A newer Article 54 bis allows the Authority to deny recovery where a supply was part of a chain connected with tax evasion, and it must deny it where the taxable person knew of the connection. It may also deny it where the person should have known, which is deemed to be the case if the person failed to carry out the verification the Authority requires. Excess recoverable tax is carried forward and offset against future tax and fines, a refund can be requested, and any surplus not claimed or used within five years lapses.

The law also covers the adjustments that follow a supply. Output tax must be adjusted if a supply is cancelled, its consideration changes, goods are returned, or tax was charged in error, using a new tax invoice for an increase and a tax credit note for a decrease. Bad debt relief is available once the debt is written off and more than six months have passed since the supply, with a matching reduction of input tax by the customer. Capital assets are subject to a capital assets scheme, and records on them must be kept for at least ten years. Tax invoices must be issued within 14 days of the date of supply, must carry the Tax Registration Number, and amounts in foreign currency are converted to dirhams at the Central Bank rate on the date of supply. Registrants subject to the e-invoicing system must issue invoices and credit notes in electronic format.

Enforcement sits in Part Nine and the general provisions. The Authority issues an Administrative Fine Assessment within five working days for failures such as not displaying tax-inclusive prices, not issuing a tax invoice or credit note on time, not notifying use of the profit margin scheme, and not following the e-invoicing requirements. Any person who receives an amount as tax must pay it to the Authority, whether or not they were entitled to charge it. Taxable persons must keep supply and import records, all invoices and credit notes issued and received, records of exports and adjustments, and a tax record. The Authority cannot audit or assess after five years from the end of the tax period, rising to 15 years for tax evasion or failure to register, and no Voluntary Disclosure may be made after five years.