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Free Zones UAE VAT

UAE publishes long awaited Cabinet Decisions on Free Zones and Medical Supplies

UAE publishes long awaited Cabinet Decisions on Free Zones and Medical Supplies

The Designated Zones are special zones for VAT purposes which are generally considered outside of the UAE for VAT purposes. While VAT applies throughout the UAE, in the Designated Zones VAT generally does not apply. Only fenced free zones with special controls on goods and services going in and out could benefit from this status. As expected, important free zones such as JAFZA, DAFZA and KIZAD are on the list.

The wait for these decisions has caused a lot of confusion with importers, exporters, clearing agents and forwarders. It is good that clarity has been brought.

The other long awaited cabinet decision is on medical supplies. Certain supplies of medication and medical equipment which are registered with the Ministry of Health can benefit from a zero rate. This however does not extend to services related to medical equipment although hospitals often rent equipment. The practical issues with registering goods with MoH shall now also have a tax impact.

Both decisions work retroactively back to 1 January 2018. This means that quite a number of invoices need to be corrected, as VAT will have been applied on certain imports and sales in the DZ’s and on medical supplies. Unduly invoiced VAT is not deductible.

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UAE VAT

EU May Remove UAE From Tax Haven Blacklist : Practitioners

EU May Remove UAE From Tax Haven Blacklist : Practitioners

The United Arab Emirates was wrongly included in a European Union blacklist of tax havens and will likely be removed, according to local practitioners.

The European Union flagged 17 countries considered “non-cooperative jurisdictions in taxation matters” in a list released Dec. 5. The list prompted a strongly worded official response. Blacklisted countries could face sanctions in the future.

“It was very surprising to see the UAE on the list,” said Shiraz Khan, a senior tax adviser at Al Tamimi and Co. law firm in Dubai. “The UAE has recently taken a number of measures to improve tax transparency and information exchange.”

UAE ‘Disappointed’

The EU said that the countries on the list “failed to take meaningful action to address deficiencies” in compliance related to tax transparency, fair taxation and the implementation of anti-BEPS measures, and didn’t make a “commitment at a high political level” before Dec. 5 to address them.

The UAE was among several countries that made last-minute submissions to meet EU criteria for either bank information exchange or corporate tax reforms. Thus, officials were “surprised and disappointed” to see it wind up on the list, according to a Dec. 7 government statement.

“We have committed to a reform process which will be finalized by October 2018, and we are absolutely confident this will ensure the UAE is swiftly removed from the list,” Younis Haji Al-Khouri, the Ministry of Finance undersecretary, said in the statement.

Steps to Improve

The UAE has “done enough to demonstrate that it is fully committed to compliance with international standards and regulations,” including adopting the OECD’s Convention on Mutual Assistance in Tax Matters, committing to sign the Multilateral Competent Authority Agreement on automatic exchange of financial account information, and signing double tax treaties with 25 of 28 EU member nations, Khan said by email on Dec. 20.

The EU has placed several dozen countries on a “gray list,” a warning shot to governments it considers uncooperative. While the UAE is in the process of implementing the OECD’s minimum base erosion and profit shifting (BEPS) standard, other countries at that stage weren’t blacklisted, Khan said.

“Notorious tax havens have been omitted from both lists. I fully expect the UAE to be removed from this list in due course,” he said.

The UAE’s signature on the Convention on Mutual Assistance in Tax Matters hasn’t yet entered into force, which remains “an important hurdle,” said Thomas Vanhee, a founding partner at Aurifer tax advisers in Dubai.

The blacklisting has “no effect” on a European level “but on the individual member state level, some countries may no longer grant the benefits of the double income tax treaties to businesses in the UAE or make it more difficult to obtain these benefits,” Vanhee said by email on Dec. 20.

Without a central company register, the country “barely has any information to exchange,” said Vanhee, a situation which will change with registration for value-added tax, which begins on Jan. 1.

‘Political Sentiment’

The exclusion of EU member nations from the blacklist suggests that it’s not based solely on matters of transparency, said Sam Instone, CEO of AES International, a wealth management firm in Dubai.

“That’s political sentiment, that people within the European Union don’t want assets flowing to other parts of the world,” Instone said Dec. 20. “I see a very well-governed financial system, very transparent,” he said. “I believe it will move very fast to bring itself into line.”

The EU is trying to “unilaterally impose their own rules,” said Sabah al-Binali, an Abu-Dhabi-based investor and former chief investment officer of SHUAA Capital.

“If the EU has trouble regulating its own citizens with respect to EU taxes then that is the responsibility of the EU, not the UAE. If the EU has problems with the UAE, then they should simply require the UAE and its citizens to refrain from investing and trading with the EU. I dare them,” alBinali said by email on Dec. 19.

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UAE VAT

UAE’s Gold, Diamond Industries Plead for Lenience on VAT

UAE’s Gold, Diamond Industries Plead for Lenience on VAT

The value of the UAE’s diamond trade in 2016 was $26 billion, up from $300 million in 2002, making it the third-largest wholesale market in the world after Antwerp and Mumbai, said Peter Meeus, chairman of the Dubai Diamond Exchange. “This story should continue in the next decade and all the odds are in favor of further growth. However, the announcement of a possible introduction of VAT on loose diamonds would strongly jeopardize this,” Meeus told the Dubai Diamond Conference Oct. 16 in remarks first reported by Khaleej Times.

The UAE and Saudi Arabia are set to lead the six nations of the Gulf Cooperation Council in introducing VAT from January 2018, with the other members following within 12 months, according to an agreement reached last year. The Gulf states are seeking to replace lost revenues from oil, whose price has fallen by about half since 2014.

Industry Concerned

“The introduction of VAT here in the UAE next year—though lowest in the world—leaves our member companies and even industry generally concerned,” Ahmed bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC), told the conference, adding that volumes in the Dubai gold market were “down 30-40 percent compared to 2016.”

“I’m already aware of two gold refineries in the UAE looking to move to Hong Kong. This sends a very negative message if it becomes a reality. Diamonds and gold are critical for Dubai, jointly accounting for $75 billion annually,” Bin Sulayem said, comparing the UAE to Germany and the Netherlands, which he said had hosted Europe’s largest gold and diamond markets respectively until the introduction of tax caused them to migrate to Luxembourg and Belgium.

Under Art. 45 of the Federal Decree Law No. (8) of Aug. 23, 2017, the “supply and import of investment precious metals” is zero-rated, but it isn’t clear if that applies to jewelry. The Ministry of Finance is “still in the process of preparing the executive regulation of VAT,” said Younis Haji Al Khoori, Ministry of Finance undersecretary, in an Oct. 17 online statement.

The jewelry industry has faced similar issues in India, where a 3 percent general sales tax was introduced in July. “Small businesses are being heavily impacted by compliance issues and we are hoping the government will move to reduce these demands,” said Praveen Shankar Pandya, chairman of India’s Gem and Jewellery Export Promotion Council, according to a DMCC online post on Oct. 11.

The comments by Meeus and Bin Sulayem are “the most vocal challenge to date” against the introduction of VAT in the UAE, said Thomas Vanhee, founding partner at Aurifer tax advisers in Dubai.

“As demonstrated by historic precedent, the diamond and gold trade is a highly mobile market which is very sensitive to taxation,” Vanhee said by email on Oct. 19. “In the diamond center of the world in Antwerp, sales of diamonds to traders and services associated with the sale of these diamonds are subject to a zero rate.”

“Because of the high sensitivity to taxation, the gold and diamond sector will be more at unease than other sectors,” he said. “However, the UAE economy as a whole is currently nervously waiting for the VAT Executive Regulations to be published by the Federal Tax Authority and there is a certain amount of unrest with companies on how VAT will apply to their specific businesses.”

Too Late?

The jewelry trade is “unfaithfully mobile,” said David Daly, an accountant and lead partner at Argent Gulf Consulting in Dubai. “Unlike the City of London where a material amount of finance jobs couldn’t practically be moved in reaction to a change, the same doesn’t hold in the gold and diamond market,” Daly said by email on Oct. 18.

Even though there is some justification for their concern and the executive regulations aren’t yet finalized, the jewelry executives had left their protest very late, he said.

 “VAT was formally announced at the beginning of Q3-2016. The question we should ask is why these conversations are happening now, over twelve months later,” he said. “The reality is that most entities are either ignorant of VAT, believe the government will withdraw its launch at the last moment, or refuse to act until the final detailed legislation is released in the executive regulations. Surveys suggest that only 30-40 percent have in any way begun preparing for VAT.” 

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UAE VAT

UAE FTA opens VAT registration portal

UAE FTA opens VAT registration portal

With January 1, 2018 rapidly approaching, companies now have a mere three months to get registered for VAT. We advise businesses operating in the UAE to already start applying for a Tax Registration Number (TRN) well ahead of the implementation date. Doing so will allow them to fully prepare for the launch of VAT and avoid any technical difficulties which may occur as the year-end (and thus the implementation date) approaches.

Aurifer’s tax advisors have already familiarised themselves with the registration process and are ready to assist your company in obtaining its VAT number. Hereafter we will discuss certain aspects of the UAE VAT registration process.

Which businesses can / must apply for a VAT registration?

It is important to know whether or not you are required or eligible to register for VAT. As a basic principle, every person operating a business is obligated to register for VAT. A person can be an individual (i.e. when an individual is operating as a sole trader) or a legal person. The term person also covers other entities (e.g. an unincorporated body such as a charity or club, a partnership or trust).

Businesses established in the GCC (‘Resident Businesses’) whose turnover exceeds the mandatory VAT registration threshold must register for VAT. Where the turnover of a business is below the mandatory VAT registration (AED 375.000 / USD 100.000) threshold, that business may still opt to register, provided that its turnover exceeds the  optional VAT registration threshold (AED 187.500 / USD 50.000).

Both the mandatory and the optional threshold must be assessed in two different ways. The thresholds must be evaluated, both in terms of effective turnover in the last 12 months as in terms of the expected turnover in the next 30 days.

It should be noted that there is no threshold in place for businesses which are established outside the GCC (‘Non-resident Businesses’). These businesses are required to register as from the first supply of goods or services in the UAE where they are liable to account for the VAT.

A side effect of the optional threshold is that recently incorporated businesses and micro-businesses will not be capable of registering for VAT. In most cases these businesses do not meet the minimum turnover requirement during the 12-month period, let alone the 30-day period. As a result, the optional threshold works as a de facto minimal threshold.

UAE VAT law provides for the possibility to form a Tax group between related parties,. Forming a Tax group can be an interesting opportunity for corporate groups as it allows them to organise their business activities as a whole. Provided that all members of the Tax group are UAE residents and carry out an economic activity, a Tax group can be established through a single VAT registration. This entails a significant administrative simplification for large groups of companies.

Businesses that only make zero-rated supplies (e.g. exports, international transport of passengers and goods), can apply to be exempted from registering for VAT. These businesses will still have to go through the VAT registration process, but will at a certain point have to indicate that they would like to apply for the exemption.

Why should you register?

Businesses not registered for VAT cannot charge VAT on their sales and cannot claim any VAT incurred on their inputs. Furthermore, the FTA may impose an administrative fine of AED 20.000 on every business that fails to comply with the obligation to register within the timeframe specified in the VAT law.

How to get registered?

Businesses can register through the online VAT registration portal (link). Throughout the registration process, you are required to upload copies of various documents. Accepted file types are PDF, JPG, PNG and JPEG. The individual file size limit is 2 MB.

Note that a number of information needs to be communicated in Arabic, such as trade name and authorised signatory. These must be manually entered.

What can Aurifer do for your business?

Aurifer can advise you on whether or not your business is obligated to register for VAT purposes. In addition, Aurifer provides VAT registration services where our tax advisors manage your VAT registration from A to Z. This includes assistance with collecting the necessary documents and information, completing the registration procedure and communicating with the FTA on your behalf.

Providing the wrong documents or information during the registration process may delay your VAT registration and can in some cases lead to your application being rejected by the FTA. Having tax professionals assist you during this process can significantly reduce the headache for your business.

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UAE VAT

UAE releases VAT law

UAE releases VAT law

The UAE Ministry of Finance published its VAT law on 27 August 2017. It constitutes the second piece of tax legislation that will be enforced in the UAE, after the publication of the legislation concerning excise taxes, which will enter into force on 1 October 2017. The VAT law constitutes the basis for the introduction of VAT as of 1 January 2018. This is a landmark law that will massively impact businesses and consumers in the UAE. The VAT law comes a little earlier than expected, the authorities having announced it would be published in September only. It will be followed by the implementing regulations, which will provide more detail on its application.
 
The UAE VAT law implements the GCC VAT Agreement, a treaty signed by all 6 Member States of the GCC. Drafting on the treaty has begun as far back as 2009. In its design, it is loosely based on the VAT directive. The VAT directive is the basis of VAT legislation throughout the countries of the European Union, where VAT originates from. The Member States have committed to introduce VAT throughout the GCC by at the latest 1 January 2019. The Kingdom of Saudi Arabia has already published its VAT law and is currently pending the publication of its implementing regulations.
 
Businesses have to register when they expect to meet the mandatory registration threshold of 375,000 AED. The possibility to register should open as of September through tax.gov.ae. The UAE expects around 350.000 businesses to register for VAT purposes. To calculate whether a business needs to register, there is a retrospective test and a so-called prospective test. For the retrospective test the past twelve months need to be analysed, but remarkably for the prospective test only the next 30 days. 
 
This prospective test is foreseen to be applied differently in the Kingdom of Saudi Arabia, where the next twelve months need to be taken into account, which is also the way it seems to apply under the treaty. If a business makes supplies or incurs expenses of half that mandatory registration threshold, it can also voluntarily register for VAT purposes.
 
Importantly the VAT law confirms the policy adopted by the UAE in terms of the exceptions it will make that all supplies in the UAE are subject to the standard 5% VAT rate. 
 
According to its law, it subjects certain supplies to a zero rate. This means that VAT is not calculated on the supply, but the supplier can still recover all input VAT. This applies for example for international passenger travel. Flights from Dubai to Riyadh or to a third country will not be subject to VAT. This is good news for the tourist sector, which already sees prices for hotels and restaurants increase with 5% VAT.
 
It also confirms that the first supply of residential buildings within 3 years of their completion is subject to a zero rate. This rule has been imported from the UK, but is not widely applied in other European jurisdictions. It is obviously beneficial for prospective buyers of a new home and good news for the UAE real estate sector. Crude oil and gas will also be subject to a zero rate, whereas the Kingdom of Saudi Arabia is not expected to do the same.
 
Very important to the wider public is the subjecting of the education and health care sector to a zero rate. Tuition fees will therefore not increase in price. The same holds for preventive and basic health care. This does not prevent that some of the supplies by educational institutions or health care institutions will still be subject to the standard rate of 5%.
 
Certain supplies are subject to the application of an exemption for VAT purposes. This means that the supplier cannot recover any input VAT. This is the case for certain financial services, the supply of bare land, the supply of real estate not subject to a zero rate and local passenger transport. This is on the face of it goods news for the RTA metro fees. However, importantly, this also means that the RTA will not be able to recover any input VAT charged to it for the extension of the metro in view of Dubai 2020 and therefore its costs will increase.
 
The VAT law sheds some tiny light on the VAT treatment of free zones, hinting at the application of a regime similar to that of the designated zones in the Excise Tax law. Detail on the application of this regime is however deferred to the Implementing Regulations, which are still yet to be published.
 
Governments will remain out of scope for VAT purposes, unless they are not acting as a government or enter into competition with the private sector. A list will be established on the basis of which this distinction will be made and a cabinet decision will be made which governmental entities need to register for VAT. This additional information will be very important as government entities may enter into competition with private actors and the fact that they are not subject to VAT can provide them with a substantial advantage over the private sector. Any subsidies provided by governments can also be deducted from the taxable base on which to calculate VAT. This is the exact opposite of what is applicable in the European Union. Additionally, government entities put on a specific list will be able to reclaim VAT from the Federal Tax Authorities which they paid to their suppliers.
 
In its technical wording, the UAE VAT law deviates substantially from the Agreement and from the legislation published in the Kingdom of Saudi Arabia. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will therefore have to read both legislations closely as different terms may mean the same in both legislations. Businesses with operations in both the UAE and the Kingdom of Saudi Arabia will incur substantial administrative costs due to the different laws, VAT returns and procedures. Whereas in the European Union the European Commission pushes towards harmonisation of the laws and obligations, the GCC Member States have not harmonised their laws and obligations.
 
Time is now really crucial for businesses, as 4 months until 1 January 2018 is a very short implementation period for businesses wanting to being compliant for VAT purposes.   
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UAE VAT

VAT adds complexity to customs

VAT adds complexity to customs

The Gulf Cooperation Council applies a unified Customs Law since 2002. The same GCC Member States have signed an Agreement to implement VAT. The VAT legislation will apply on imports and supplies of goods, amongst others also on supplies of goods between the Member States of the GCC.

Contrary to customs duties though, VAT on imports is recoverable. Customs duties are paid to the Customs authority and import VAT usually follows the same procedure.

Holding compliant customs documentation will now however become even more important since the tax authorities will require importers and exporters to hold compliant documentation. Any customs suspension and associated procedures (e.g. warehousing) will also be followed by the tax authorities for VAT purposes. In other words, getting it wrong will not only impact customs duties but also VAT, increasing potential risks.

Since the GCC Customs Union works in a more complicated way than for example the Customs Union in the European Union, this complexity trickles through in VAT. This is compounded by the fact that not all GCC Member States will implement VAT at the same time.

Pending the implementation of VAT in the UAE and KSA on 1 January 2018, a mapping of the supply chain is required in order to qualify each and every single transaction for VAT purposes and determine what the invoicing, reporting and compliance requirements are. The implementation of these transactions in the IT systems will be the most time consuming process. Although a lot of the legislation is yet to be published, businesses should and can already start preparing.