The United Arab Emirates amended its VAT rules in 2018 followed by the widespread use of VAT around the world. However, since the purchase of VAT goods and services gets affected by the new tax regulations in the country and Businesses need to stay updated on the new VAT rules in 2023.
The new VAT rules 2023 for better taxation in UAE are implemented by the government to ensure compliance with taxation requirements and avoid penalties. These changes have been made to the UAE VAT Decree-Law and the changes affect the businesses in the Country. Businesses in the UAE must abide by any new VAT rules that come occasionally.
VAT in UAE
Value Added Tax, sometimes known as VAT, is an indirect Tax that is levied on the total amount of goods and services consumed. It is a Tax that is extensively used in numerous countries and is imposed on the majority of transactions involving the buying and selling of goods and services. As a result, it is among the most often used types of consumption Taxes.
It is essential to understand the basic idea behind VAT laws in the UAE before diving into their complexities. Essentially, a Tax is a means the government employs to raise money. The financing for public services, such as infrastructure developments, schools, hospitals, and other essential facilities, is then allocated from this revenue.
What are the New VAT Rules in UAE?
UAE has announces 3 new VAT regulations that come into force in 2023 on the following Dates,
- January 2023
- February 2023
- March 2023
- June 2023
January 2023 UAE VAT Rules on Statute of Limitation and so
This VAT Regulation has been announced on October 2022 and came into action on Jan 1, 2023.
- Article 15: Registered individuals can request an exception from VAT registration if all their supplies are zero-rated or if they no longer make any supplies other than zero-rated supplies.
- Article 55: Taxable individuals can now recover VAT paid or declared on the import of goods or services incurred before registration, subject to certain requirements.
- Article 62(2): A Tax Credit Note must be issued within 14 days if the taxpayer intends to adjust the output tax, following the time frame set for issuing tax invoices.
- Article 65(4): Taxable persons must pay VAT to the Federal Tax Authority (FTA) if they issue a tax invoice stating VAT or receive an amount as VAT.
- Article 26: The date of issuance of a tax invoice for continuous supply will be 14 days from the date of the supply.
- Article 33: The place of residence of a principal is now defined as the place of residence of the agent.
- Article 21: The FTA has the authority to forcibly deregister registered persons in specific cases, without forfeiting the FTA's right to claim tax dues or administrative penalties.
statute of limitation:
- The statute of limitation of five years will not apply if the FTA issues an audit notice and completes the audit within four years from the date of issuance of the notice.
- If the taxable person files a voluntary disclosure in the fifth year from the end of the relevant tax period, the statute of limitation will be extended by one year.
- A voluntary disclosure cannot be filed by the taxable person after five years from the end of the relevant tax period.
- Tax evasion has a 15-year limit, which is an exception to the general statute of limitation.
February 2023 Update on VAT Reporting
The Federal Tax Authority (FTA) released comprehensive regulations on February 24, 2023, regarding a new reporting requirement for UAE resident taxpayers. Businesses that sell taxable goods online and have annual sales of beyond AED 100 million (about USD 37.5 million) are subject to this obligation.
Businesses that exceeded the AED 100 million threshold in the fiscal year that ended on December 31, 2022, will be subject to the new reporting requirement starting July 1, 2023. By March 15, 2023, taxpayers who expect to be impacted by these regulations have to inform the Federal Tax Authority (FTA). Any more businesses going forward that surpass the threshold in the years after 2022 will also be subject to this obligation.
These companies are now required to identify the specific emirate where their services are used and report their sales in their VAT returns on an emirate-by-emirate basis. It's important to note that seven emirates that make up the United Arab Emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and Umm Al Quwain.
Reporting Requirements
In the UAE, there have been two notable events regarding VAT:
- A new reporting requirement for certain businesses will take effect on July 1, 2023.
- All VAT return errors must be submitted to the Federal Tax Authority (FTA) starting from March 1, 2023.
March 2023 Update on Voluntary Disclosure of VAT Errors
Starting from March 1, 2023, any VAT return errors must be voluntarily disclosed to the Federal Tax Authority (FTA). Previously, only errors that exceed AED 10,000 (or around USD 3,750) were subject to voluntary disclosure. Now that the threshold has been removed, it is necessary to disclose even the smallest errors.
Fixed fines of AED 1,000 for the initial disclosure and AED 2,000 for subsequent disclosures have been introduced for such errors. Penalties for late payments may also be applied. As a result, due to the threshold for voluntary disclosures being eliminated, the penalty for small errors can sometimes be far higher than the actual tax liability.
VAT Input Apportionment update
UAE issued about Tax Apportionment in March and announced the procedure of VAT input Apportionment. The issuance provides guidance on Input tax apportionment and unique input tax apportionment techniques that may be utilized by specific types of companies where the conventional input tax-based apportionment approach does not give a fair and reasonable outcome.
The Guide provides
- An overview of the general input tax apportionment rules and the available special methods of input tax apportionment;
- An overview of the process for applying for a special method of input tax apportionment
- The information required to complete the application form for a special apportionment method.
June 2023 VAT update on Tax Clarification
A Tax Clarification is an official document issued by the FTA in response to a query, providing guidance on tax treatment for specific transactions. It is based on the information provided by the applicant, without verification by the FTA. The Clarification only applies to the applicant and the specific transaction(s) mentioned, without setting a precedent for others or different transactions by the same applicant.
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Other Takeaways from New VAT Rules in 2023
The following are the key takeaways from the new vat rules in 2023 that companies, registrants, taxpayers, VAT consultants in UAE should keep updated.
1. Extended time for a Tax Audit
The Tax authorities typically cannot Audit your Tax returns five years after the end of the Tax period for which you must pay taxes on a monthly or quarterly basis. However, if they give you notification that an Audit will begin within those five years, they have an additional four years to carry out and complete the Audit.
2. Tax Audit after Voluntary Disclosure
The Tax Authority (FTA) will have an additional year to perform a Tax Audit if you make a Voluntary Disclosure for a monthly or quarterly Tax period in the fifth year following that period. The extra time gives the FTA the chance to process the Voluntary Disclosure and conduct additional Audits using the data submitted.
3. Tax Evasion
Unlawful actions taken by a person, whether or not they are registered, with the intent to reduce their Taxes, avoid paying them completely, or fraudulently get a Tax Refund are referred to as Tax Evasion. A Tax Audit may be conducted in cases of Tax Evasion up to 15 years after the end of the Tax period in which the Evasion took place.
4. Failure to obtain VAT registration
It's a misconception that the tax authorities wouldn't be aware of someone's conduct if they failed to register for VAT. However, the Federal Tax Authority (FTA) has the power to conduct a tax audit within 15 years of the date the individual was required to do so if they fail to register for taxes.
5. Good news for 100% exporters
The law does not require business owners to undertake the typical VAT compliance procedures if all of the goods or services offered by a company are zero-rated for VAT. These companies can choose to request a VAT registration exemption instead.
Businesses that were already registered for VAT but were previously unaware of this provision were required to keep up with their standard VAT compliance obligations. However, starting from January 1, 2023, businesses that are registered for VAT will also have the option to request an exemption from registration.
6. Additional compliance for input credit on import of service
Many companies pay foreign service providers to comply with agreements rather than requiring them to furnish invoices. But as a result of recent amendments to the VAT laws, Taxpayers are now required to obtain and retain invoices that adhere to the VAT laws to claim input credit for imported services.
7. Construction sector and retention payments
VAT might still need to be paid if there is a delay of more than a year between the progressive stages of providing goods or services and filing retention payment claims. For VAT purposes, a specific date of supply is one year after the day the goods or services provided have been introduced.
8. Deemed supplies to related parties
Giving goods to related parties "free of cost" (FOC) was an instance that might have led to a VAT liability under the previous VAT laws. The recipient company may be eligible to fully recover input credit on its purchases, which means that under the updated VAT laws, a company may not be liable for VAT while providing FOC goods or services to related parties.
Consequences and Compliance
The recent changes to the UAE VAT Decree-Law reflect the global trend of changing Tax laws to suit changing economic conditions. It demonstrates the commitment of the Tax authorities to resolving the issues of Taxpayers. Considering the modifications to the VAT laws, business owners should have evaluated the consequences of the amendments and made any necessary adjustments to assure compliance. In addition, it is anticipated that comparable changes would be made to the executive regulations shortly.
VAT Services in UAE
BMS Auditing is a leading tax firm in UAE with Tax consultants in Dubai to offer complete VAT services in Dubai, United Arab Emirates, covering every aspect of the procedure. Our VAT Services include,
Kindly contact us if you need VAT services that are FTA-compliant in Dubai. Our team includes qualified and experienced Tax specialists that are skilled at handling a wide range of challenging VAT issues. We attentively handle VAT concerns to strictly adhere to the rules and regulations of the Federal Tax Authority (FTA).
Frequently Asked Questions (FAQ)
- What are VAT rules?
Businesses in the United Arab Emirates are required to abide by the VAT (Value Added Tax) system. In simple terms, these serve as tracking rules for an additional tax that is applied to the cost of goods and services.
The summary is as follows:
- Only companies exceeding a certain annual sales volume need to register for VAT, and these companies track both the VAT they pay on purchases and the VAT they collect from customers.
- They also have to regularly submit reports to the government.
- By abiding by these regulations, companies are prevented from dodging taxes, maintaining the UAE's robust economy.
Businesses can avoid penalties and demonstrate their responsibility as contributors to the UAE's financial system by adhering to the VAT regulations.
- What is the VAT in the UAE?
Imagine a 5% tax added to most things you buy in the UAE, that's VAT. But some essentials you need to live, like food, medicine, and healthcare, get a special discount - they're zero-rated, meaning no VAT is added (like a permanent 0% tax coupon!). Certain financial services might also be exempt from VAT, like a special category that doesn't get taxed at all. For everything else, the standard 5% VAT applies. Businesses need to understand these differences so they charge the right amount of tax and follow the UAE's VAT rules. This ensures everyone plays fair and contributes to the country's financial system.
- How many types of VAT are there in the UAE?
Within the United Arab Emirates, the Value Added Tax (VAT) system operates with two fundamental rates. The standard rate, applicable to a majority of goods and services, sits at 5%. However, a designated zero rate of 0% is applied to specific categories of essential items. This ensures that crucial products remain exempt from taxation. Comprehending these VAT rates is of paramount importance for both businesses and individuals. Such knowledge empowers them to accurately evaluate their tax liabilities and guarantee adherence to the established tax regulations set forth by the UAE.
