Value added tax (VAT) is an indirect tax paid by consumers for goods and services. VAT is collected by registered businesses who then must report it to the government.
The amount of VAT in the UAE is 5 % and is applied to all stages of the process of selling goods and services. For example, a manufacturer sells their product to a wholesaler, and charges them 5 % VAT on top of the cost of the goods. The wholesaler then resells the product to a retailer, again adding 5 % VAT to the retailer’s price for the goods. Finally, the retailer resells the product to the consumer with yet another 5 % VAT on the final cost of the goods. Each seller in this process gets a refund (tax credit) of the VAT paid.
Goods and services that have a zero VAT rate
The majority of goods and services offered are subject to a 5 % value added tax rate. However, there are exceptions, and in this case, the following goods and services have a 0 % VAT rate:
- those that are exported outside of the Arabian Gulf Coast countries;
- international transportation;
- certain types of goods for the health and education industries;
- certain types of precious metals that are used as investment assets;
- residential property;
- undeveloped land;
- public transportation services;
- life insurance services;
- certain financial services.
Additionally, some goods may not be subjected to VAT if the transactions were carried out between companies registered within the free economic zones. As for services conducted within the free economic zones, the 5 % VAT rate still applies.
Voluntary and obligatory registration of companies to pay VAT
Companies are required to register to pay VAT if the total value of their taxable sales and imports in the UAE meets or exceeds AED 375K (USD 102K) in either the past 12 months or the past 30 days. If the amount is equal to or higher than AED 187.5K (USD 51K), then registration for VAT is voluntary. The same goes for start-ups and small businesses whose total taxable sales and imports are AED 187.5K (USD 51K) and above - registration is on a voluntary basis, though they will receive a tax credit if they do register.
Once a company is registered for VAT, a legal entity must keep tax credit and debit invoices. Accounting records must be kept for a minimum of 5 years from the date of the transaction.
Further information on the VAT system in the UAE can be found on the Metropolitan Consulting website. Every company must have audits of their operational and business activities.