The business establishment is a challenging operation, and it is considered that tax filing is one of the most challenging jobs on the planet. When it has to deal with foreign relations and pursue international taxation policies, the process becomes more complicated. An organisation wants a tax plan to tackle this. This approach should be aligned with the corporate strategy and should not be removed from the corporate structure and require comprehensive tax risk preparation and recognition. Constructing a tax plan allows a business organisation to compare the tax situation on demand. The country has re-framed its tax system to be more appropriate for investors and entrepreneurs worldwide, recognising the advantages of single taxation in the UAE. For the United Arab Emirates government, this change was massive, as this would boost the country's economy and help draw more entrepreneurs to the country.
The United Arab Emirates nation has been recognised for being highly business-friendly for decades now, what with the famous 'zero-tax' scheme. It has encouraged the growth of the nation's hundreds of thousands of enterprises and millions of jobs and has made Dubai the land of dreams for entrepreneurs with endless opportunities. The 'zero-tax' concept may seem easy on the face of it, but if you dig deeper, you'd realise that it's not that simple.
There are fundamentally three types of direct and indirect taxes in the UAE, and Dubai in particular:
- Direct Taxes
- VAT/Sales Tax
- Service Tax
Most of the business in Dubai is carried out by ex-pats worldwide, often living in their home countries with families. At times, vacant property in the home country is enough to indicate a 'connection' to the person and can trigger tax liability in both the home and the host country. It can be a legal issue to be a tax defaulter in any country, and it is likely to be costly and time-consuming to get out of it.
The Value Added Tax was proposed to be introduced in the UAE to raise government revenues and decrease oil revenues dependency. The added expense is passed on to clients either partially or entirely. There is little understanding among the masses of a new form of tax that will come into play in the UAE.
If the tax entity in question is a corporate entity, the business can physically reside in the UAE or a virtual office. In this case, to benefit from tax benefits in the UAE, the company must show that factual management is in the UAE.
The UAE also has different tax arrangements with various countries to prevent double taxation based on the undertaking’s relevant conditions. It helps save needless deductions from taxpayers.
The UAE does not levy individuals' income tax. It levies the corporate tax on oil companies and overseas banks, however. Excise tax is imposed on particular products that are usually detrimental to the environment or human health. The bulk of products and services are subject to Value Added Tax.
An excise tax was introduced across the UAE in 2017. Excise tax is a type of indirect tax levied on specific goods that are generally harmful to the environment or human health.
The Purpose behind Levying Excise Tax
The UAE government levies excise taxes to reduce the sale of harmful and dangerous goods, while also increasing government revenues that can be spent on beneficial public services.
How will it Affect Customers?
Consumers will need to pay more for products which are harmful to human health or the environment.
Businesses Required to Register for Excise Tax
Under the UAE Federal Decree-Law No. 7 of 2017 on Excise Tax, paying for excise tax is the responsibility of any business engaged in:
- the importation of excise products into the UAE
- the consumption of excise products where they are issued for consumption in the UAE
- the accumulation of excise products in the UAE in some instances
- anyone responsible for managing an excise warehouse or designated region, i.e. a warehouse keeper.
FTA is committed to providing thorough assistance and advice to help with this; moreover, it is the organisation’s duty to ensure that all relevant enforcement obligations are met.
The FTA has the authority to perform taxable corporate audits and eventually enforce disciplinary action on those who do not comply with the rule.
How to Apply for Excise Tax?
Businesses may register for excise tax via the e-services section on the FTA website. However, first, they need to sign up and create an account.
There is no excise tax registration threshold; thus, any company planning to engage in any of the activities mentioned above must register an account for excise tax before the implementation date, i.e. 1 October 2017.
Value Added Tax
Value-added tax or VAT is the tax imposed at each sale point to consume or use goods and services. VAT is a form of indirect tax and is set worldwide in more than 180 countries. The end-consumer finally bears the price. On behalf of the state, corporations raise and pay for the levy.
VAT will provide a new stream of revenue for the UAE to deliver high-quality public services. It will also help the government move towards its vision of reducing dependency as a source of income on oil and other hydrocarbons.
Criteria for Registering for VAT
- If its taxable supplies and imports surpass AED 375,000 per annum, a company must file for VAT.
- It is optional for companies whose annual supplies and imports exceed AED 187,500.
- The government, the tax it receives from its clients, is paid by a company house. Around the same time, it collects the government's rebate on the tax it has paid to its suppliers.
- When visiting the UAE, international businesses can also recover the VAT they incur.
How to Apply for VAT Registration?
Through the eServices section on the FTA website, businesses can register for VAT. However, they need to build an account first.
How is VAT Collected?
On behalf of the government, VAT-registered ventures collect the amount; customers bear the VAT in the form of a 5% rise in the cost of the taxable products and services they buy in the UAE. At each phase of the supply chain, the UAE imposes VAT on tax-registered enterprises at a rate of 5 per cent on the taxable supply of goods or services. In the UAE, tourists pay VAT at the point of sale, too.
Implications on VAT
The following are the implementation of VAT on individuals and companies
Implications of VAT on individuals
- VAT would be applied, as a general sales tax, on most goods and services transactions. A limited number of exemptions may be granted to them.
- Consequently, the cost of living is expected to rise marginally, but depending on a person’s lifestyle and spending behaviour, this may differ. If an individual spends primarily on items that are relieved of VAT, it is unlikely to see any substantial increase.
- The government will have laws requiring businesses to be open about how much VAT is required for a company to charge for each transaction. Based on this knowledge, individuals can determine whether to buy something.
Implications of VAT on Companies
- Businesses will be responsible for recording their business profits, expenditures and related VAT charges carefully.
- At the prevailing pace, licenced companies and traders would charge VAT to all their customers and incur VAT on goods/services they buy from suppliers. The difference is recovered or billed to the government between these sums.
VAT-registered businesses generally:
- VAT must be charged on the taxable goods or services they offer.
- It is possible to recover any VAT paid on business-related goods or services.
- Keep a variety of business records to help the government check that they have it right.
VAT-registered companies must report annually to the government the amount of VAT they have charged and the amount of VAT they have received. It will be a formal submission and will be done online for news.
If they charged more VAT than they paid, they have to pay the government the difference. If they paid more VAT than they owed, they would be entitled to refund the difference.
How to Pay VAT and Excise Tax?
VAT and excise tax licensed companies must pay their taxes electronically via the Federal Tax Authority's website.
You are required to file your excise tax return by the 15th day after the end of each tax year after you have registered for excise tax.
After you have enrolled for VAT, you are required to file your VAT return and make related VAT payments within 28 days after the end of your tax period.
Channels for Tax Payment Due
Licensed companies must only pay their due tax online via the Federal Tax Authority's website, using one of the following options:
- Payment by eDirham or a credit card
- Via eDebit
- Local transfer via bank transfer
- International transfer through bank transfer
Being in various types of companies, as you can see, it may be easy to get caught up in the specifics and lose track of which taxes you need to pay and which tax benefits you can gain from. To help you streamline your tax processes, avoid paying excess taxes and be compliant with the tax laws of the UAE, it is best to engage tax consultants in Dubai. At Commitbiz, we have years of experience in helping our clients be compliant with the tax code of the UAE and to steer clear of any pitfalls they may likely face. Contact us today for more details.
1. How many tax policies are there in the UAE?
VAT (Value Added Tax)
2. What is the rate of individual taxation in the UAE?
UAE nationals will pay 5%, and the employer will pay the remaining 12.5%.
3. What is the new corporate tax structure?
Businesses with net profits of AED 375000 will have to pay a federal tax of 9%.
4. When will be the new corporate tax implemented?
June 1, 2023.
5. What is the VAT rate in the UAE?