Value Added Tax (VAT)Everything you need to know about VAT implementation in the UAE
This page provides general information on Value Added Tax that was introduced in January 2018 (at a rate of 5%), its role in effective fiscal management at the federal level, and the impact it has on individuals and businesses throughout the UAE.
THE FTA – overseeing VAT in the UAE
The Federal Tax Authority (FTA) was established under Federal Law by Decree No. 13 of 2016. The authority takes charge of managing and collecting federal taxes and related fines, as well as distributing tax-generated revenues and applying the tax-related procedures in the UAE.
The authority’s Chairman is His Highness Sheikh Hamdan bin Rashid Al Maktoum Deputy Ruler of Dubai, and the UAE Minister of Finance, while His Excellency Khalid Al Bustani takes up the position of Director General directly from his role as the Assistant Undersecretary of International Financial Affairs at MoF – a role he held for more than 37 years. FTA will work alongside MoF in its drive to achieve economic diversification in the UAE, with a focus on profits derived from non-oil sources. It will work towards enhancing the financial stability of the UAE, and will provide guidance and assistance to businesses and consumers to ensure they meet their liabilities and understand fully the application of taxation in the country.
What is Tax?
Tax is the means by which governments raise revenue to pay for public services. Government revenues from taxation are generally used to pay for amenities such as public hospitals, schools and universities, as well as defence, infrastructure and other important aspects of daily life.
There are many different types of taxes, namely:
What is Value Added Tax (VAT)?
Value Added Tax (or VAT) is an indirect tax. Occasionally, it might be referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the “supply chain”. Ultimate consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to the government reflect the “value add” throughout the supply chain. Below is a simple, illustrative example explaining how VAT works (based on a VAT rate of 5%):
The difference between VAT and Sales Tax
A sales tax is also a consumption tax, just like VAT. For the general public there may be no observable difference between how the two types of taxes work, but there are some key differences. In many countries, sales taxes are only imposed on transactions involving goods. In addition, sales tax is only imposed on the final sale to the consumer. This contrasts with VAT which is imposed on goods and services and is charged throughout the supply chain, including on the final sale. VAT is also imposed on imports of goods and services so as to ensure that a level playing field is maintained for domestic providers of those same goods and services.
Many countries prefer VAT over sales taxes for a range of reasons. Importantly, VAT is considered to be a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
VAT implementation in the UAE
The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for using government budgets. VAT provides our country with a new source of income, contributing to the continued provision of high quality public services in the future. It also helps the government move towards its vision of reducing dependence on income derived from oil and other hydrocarbons. VAT was introduced across the UAE on 1st January 2018 at a standard rate of 5%.
Many countries prefer VAT over sales taxes for a range of reasons. Importantly, VAT is considered to be a more sophisticated approach to taxation as it makes businesses serve as tax collectors on behalf of the government and cuts down on misreporting and tax evasion.
VAT implementation in coordination with other GCC countries
The UAE is part of a group of countries which are closely connected through “The Economic Agreement between the GCC States” and “The GCC Customs Union”. The GCC group of nations have historically worked together in designing and implementing new public policies as we recognise that such a collaborative approach is best for the region.