About VAT in the UAE
VAT stands for Value Added Tax. This is a tax which is levied on the consumption of goods and services at each point of sale. Because VAT is an indirect tax, the end consumer pays it. Businesses collect and account for the tax on behalf of national governments.
The United Arab Emirates (UAE) introduced the VAT in January 1, 2018. The rate of VAT in the UAE is currently 5%. The UAE governments introduced VAT because it wanted to generate another source of revenue which will be used to fund high quality public services. The UAE governments also want to use the income generated from the VAT to reduce its dependence on oil and hydrocarbons as the main source of economic activity and income in the region.
The VAT is a general consumption tax which will be levied on most goods and services in the UAE. Some exceptions are granted. The UAE governments expect the cost of living for most UAE citizens to increase slightly as a result of the tax. However the overall cost of living for the average UAE is impossible to calculate because it depends on the person’s total yearly expenditures, which is directly correlated to his or her lifestyle. People who buy items and services which do not levy a VAT will not see much change in their overall cost or standards of living.
The UAE governments intend to include rules which stipulate and mandate that businesses clarify the amount of VAT an individual must pay for each transaction. It is based on this information that individuals can decide whether or not they want to make the purchase. The government will hold businesses responsible for carefully documenting their VAT charges and business income costs.
VAT Accounting in UAE
The VAT was introduced in the UAE and GCC member nations on January 1, 2018. All applicable organizations are expected to implement the tax as soon as possible. The GCC nations that will implement the tax simultaneously are: KSA, UAE, Qatar, Bahrain, Kuwait and Oman. The current VAT is 5%, but there is no guarantee that this number will not increase. Businesses must register for VAT if their turnover, and/or imports exceed the mandatory registration threshold of AED 375,000. Businesses may elect to register for VAT if their expenses exceed the voluntary registration threshold of AED 187,500, but are not in excess of the mandatory threshold. Businesses whose expenses exceed the voluntary threshold may also register.
The Federal Tax Authority (FTA) implements the VAT, and supporting legislation in the UAE. Articles 50, 51, and 52 of the Decree-law 8 stipulates that designated zones are considered to be out of state. Fenced free zones may also be considered to be designated zones. Open free zones may be treated as local companies that are awaiting clarification from the executive legislation of the UAE. Imports are subject to the VAT tax, while exports are exempt. Services imported from a non-GCC country will be subjected to the reverse charge mechanism.
Businesses are also advised to reorganize their business records to accommodate VAT. For example, they are advised to keep separate ledgers for sales, with local sales falling under the purview of the normal VAT procedure. They should also have separate ledgers for taxable export sales since not all member states are implementing the VAT at the same time. They should keep separate ledgers for zero-rated export sales, and for sales of VAT exempt products.
Regular Accounting services
Aim Storm Solutions also provides regular accounting services for all businesses. This includes weekly visits from our staff to ensure that all transaction records are up to date. Our staff will prepare reports generated from specialized accounting software programs to be generated and discussed with management. These reports include: the statement of financial position, the statement of comprehensive income, cash flow statements, receivables aging lists, payables aging lists, comparative reports on sales performance, and variance/ratio analyses. Our staff also generates quarterly reports which include ratio analyses, breakeven points, and margins of safety analysis.
Our staff makes monthly visits for our clients who engage in periodic transactions. They ensure that the accounting books are kept up to date on these visits and visit the client at the end of each month, and at the beginning of the subsequent month to ensure that all transactions are included and kept updated. The staff also generates reports from specialized software programs which present, analyze, and explain data. These reports include: the balance sheet, the income statement, cash flow statements, receivables and payables aging lists, inventory analyses, comparative reports on sales performance, and expenses, financial ratio, and working capital analysis, and break even point, and margin of safety analysis.