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Value Added Tax in the UAE

Value Added Tax in the UAE

The GCC region, often heralded as being a tax-free haven, will see the introduction of Value Added Tax (VAT) in 2018. VAT is an indirect tax based on the consumption of goods and services. The UAE and KSA will be the first GCC countries to introduce the tax, effective from 1st January, 2018. As the deadline approaches, it is worth taking a closer look at the indirect tax as well as some of its implications within the region.

VAT differs from a sales tax as the latter is only imposed on the final sale to the consumer. In contrast, VAT is typically imposed on goods and services at different stages of the supply chain, opening up debates as to whether the impact of VAT should be absorbed by the company or passed on to the end consumer.

Whilst VAT is a new phenomenon to many in the region, it is actually quite common in the rest of the world. In fact, over 150 countries have VAT (or a close equivalent). Though the level of VAT in the GCC is likely to increase in the future, 5% remains a comparatively low level of VAT to start off with, especially when compared to other countries such as Sweden (25%), France (20%), UK (20%) and India (15%).

One of the key advantages of implementing VAT is that it will provide GCC countries with a new source of income, helping to ensure the continuous provision of high quality public services and infrastructure. It also represents a vital step in reducing dependence on oil revenues and ultimately building a more sustainable economic foundation. 

Despite the comparatively low rate, individuals and businesses alike must be prepared for the introduction of VAT. At the individual-level, the cost of living is likely to increase slightly. Whilst a number of goods and services will be exempt, lower to mid-income families especially should consider better financial planning to avoid being caught unawares.

As for businesses in the UAE, entities that produce a turnover of over AED 375,000 will be required to register for VAT. Those that produce a turnover between AED 187,500 to AED 375,000 will have the option to register. Whilst good bookkeeping is a vital aspect of any business, small or large, attention must be made to ensure compliance with government reporting requirements. For some companies, this may take the form of hiring full-time accountants or contracting professionals such as tax advisors.

Enlisting additional professional services such as those offered by consultants can help further assess the impact of VAT on sales price and profitability, and determine an effective course of action that minimizes any potential negative impacts of the added tax.

One example where such services would be especially relevant is the luxury sector, where items are already priced 20% higher than in Europe. In an era of mobile consumers with the ability to easily and quickly compare prices in different markets, an additional 5% price increase is likely to have considerable negative implications on local distributors unless they offer alternative services or benefits that compensate for the greater price disparity.

As the GCC countries transition away from economies that are primarily fueled by oil-related revenues, the introduction of VAT represents a logical step in the journey to developing a mature and sustainable economy. Individuals and businesses alike however, must take steps to ensure they are prepared for VAT when the time comes.