Companies that trade with internal legal entities, persons, or legal persons as defined in the Act are considered to be conducting internal business operations. This is a special reminder for the e-commerce industry. Some allowances are exempt, but for most people, the above applies.

Value Added Tax (VAT)

Value Added Tax or Value Added Tax is the tax levied upon customers' consumption or use of goods and services. VAT is a common type of consumption tax in the world. Over 150 countries have implemented VAT, and the UAE implemented VAT on January 1, 2018. The VAT tax is a general consumption tax that will apply to most transactions of goods and services. The VAT rate is typically 5% in the UAE. Companies must register for VAT if their taxable supplies and imported goods exceed the declared limit of AED 3,75,000.

The VAT law in the UAE consists of three levels of legislation. GCC framework, federal statutes, and administrative regulations.

Currently, there is no indication of a GCC-wide method. This means that transactions with entities in Saudi Arabia, whether domestic or foreign, are not subject to Corporate Tax UAE on the commodity itself. Finally, there will be no third layer: the fine print. Alternatively, these details could be specified in a Cabinet Resolution.

Trade in the free zone is tax-free and does not fall within the scope of value-added tax. However, when the tax period ends, companies registered for VAT must file a VAT return with the FTA. VAT provides the state with an additional source of revenue to fund various objectives funded by the government budget.

VAT Exemption

Specific industries are exempt from VAT, and the following list of supplies will be exempt from VAT under the VAT Act:

• Provision of certain financial services (explained in VAT legislation)
• Residential real estate
•  Bare ground
•   Domestic passenger transport

VAT Registration Standards

Companies must register for VAT if their taxable supplies and imports exceed AED 375,000 annually. It is optional for companies whose annual supply and import value exceeds AED 187,500.

Commercial establishments pay the government the taxes they collect from their customers. At the same time, it received refunds from the government for the taxes it paid to suppliers. Foreign companies can also refund VAT incurred when visiting the UAE.

VAT registration and collection

Companies can register for VAT through the electronic services section of the Federal Tax Office website. At the same time, an account is needed to be created first.

Contact the Federal Tax Office for general tax registration and application inquiries via the Contact Us page. A VAT-registered company collects taxes on behalf of the government; consumers are subject to VAT on an increment of 5% in the cost of taxable services and goods purchased in the UAE.

The UAE charges VAT on tax-registered companies at a 5% rate on the supply of taxable services or goods at every supply chain step. Travelers in the UAE also pay VAT at the point of sale.

Difference between Corporate Tax and VAT  

The core difference between both forms of taxation is the nature of the taxation. Corporate tax is a tax that is profit-based, whereas VAT is a tax that is consumption-based.

Businesses levy and pay corporate tax, while consumers bear VAT on their goods and services.

Value Added Tax is computed by adding value at each production stage, while corporate tax in Dubai is on profits.

Understanding the different types of taxes is essential for businesses to operate efficiently in the UAE. For example, corporate tax can be summarized as a tax on profits, while VAT can be defined as a consumption-based tax on consumer goods and services.

Will corporate tax replace VAT?

Value Added Tax (VAT) is a slightly different type of tax. In Uae, it will continue to be collected. If the entity is subject to VAT and corporate tax, the tax must be paid separately. Those not registered for VAT may still have to pay corporation tax.

Submitting a VAT return

At the end of each taxation time, a VAT-registered company or "taxable person" must file a "VAT return" with the Federal Tax Agency (FTA). The VAT return summarizes the value of the taxpayer's supplies and purchases for the tax period and shows the taxpayer's VAT liability.

 VAT advantages

The VAT advantage is the difference between the output tax (VAT output on delivery of goods and services) payable in a given tax period and the input tax (VAT output on purchases) that will be recovered in the same tax period.

 When the departure tax exceeds the entry tax difference will go to the FTA, the difference must be paid to the FTA. On the other hand, when the subsidy tax is higher than the passed tax, the taxpayer will be refunded the surplus of the subsidy tax; you will be entitled to use subsequent payments from the FTA to compensate you.

 How to file a VAT return?

You must file your tax return electronically through the Federal Tax Service portal: eservices.tax.gov.ae. Before submitting your VAT return on the online portal, make sure you meet all tax filing requirements.

 When does a company need to file a VAT return?

Taxable businesses must file VAT returns with the FTA regularly, usually within 28 days of the end of the "tax period" specified for each type of business. A "tax period" is a specific period during which tax due is calculated and paid. The standard tax periods are:

• Quarterly for companies with annual sales below AED 150 million
• Companies with a yearly turnover of AED 150 million or more per month.

TLCs may choose to designate different tax periods for certain types of businesses. Failure to file tax returns within the stipulated deadlines will result in violators being held accountable for fines (PDF, 1MB).

Impact of VAT

The impact of VAT on individuals

VAT acts as a general consumption tax and applies to most transactions of services and goods. However, a limited number of offers may be granted. Therefore, the cost of living may increase slightly, depending on lifestyle and spending behavior. However, if one spends mainly on things exempt from VAT, one is less likely to face a substantial increase.

The government will include rules and regulations requiring companies to specify how much VAT an individual must pay on each transaction. Based on this information, people can decide whether to buy something.

 Impact of VAT on Companies

Businesses will be responsible for carefully recording their income, costs, and related VAT charges. Registered companies and merchants will charge all customers VAT at the prevailing rate and will charge VAT on their purchases from suppliers. The difference between these amounts is claimed or paid to the government.

Companies generally registered for VAT:

• VAT must be given on the taxable goods or services they provide
• They can declare any VAT they pay on work-related goods or services
• Maintain various business records and let the government verify everything.
• VAT-registered businesses must report the amount they charge and regularly pay the government. This will be a formal presentation, which will be done online.

Final Thoughts

The UAE's VAT has yet to show any impact on the country's business sector and investment climate. Therefore, implementation will not affect the status and competitiveness of the country. The UAE has the lowest VAT rate in the world. The VAT will support the economic development of the UAE, enabling it to compete with the most advanced economies in the world. In addition, VAT will help the country strengthen its economy by diversifying revenue sources and helping fund public services.

After its launch in 2018, the long-term impact will take a few years to materialize, especially since the system will take time to improve across all industries. However, construction companies and property developers will directly impact VAT on cash flow, among other things.