So, you know value added taxation is coming – but do you know why, what it will apply to, or how to make savings in preparation for its arrival? Our experts have got you covered…
While most UAE residents are acutely aware that VAT is coming, and that it’s going to push day-to-day living costs up, until now, there has been little detail on what VAT would and would not apply to. With VAT applications and exemptions now being unveiled in preparation for its arrival on January 1, 2018, good asked DIFC-based attorney, John Peacock, to talk us through what it really means for working families here in the UAE.
“The introduction of VAT in the GCC has been driven by the World Bank and its initiatives to move GCC states’ economies away from a reliance on oil and gas, with the introduction of VAT aimed at securing more state income and counteracting the current slump in the oil price,” John explains. “All the GCC states have signed the Unified Agreement on VAT, mandating its introduction at a rate of five per cent in all GCC member states in 2018. However, the agreement also gives each state the discretion to zero-rate and exempt certain industry sectors, and as a result, VAT will apply to different products and industries around the region.”
How VAT works
VAT is a consumer-based tax on the supply of both goods and services, and is designed so that only the ultimate consumer bears the burden. With the exception of exempt and zero-rated supplies of goods and services, VAT will be payable on consumer goods and services by everyone and, as such, will affect each person’s pocket to a greater or lesser extent. The principle of “the more you spend, the more VAT you will pay” applies.
As previously mentioned, each GCC member state has discretion over certain industry sectors when it comes to the application of VAT, namely education, healthcare, residential real estate, certain financial services, local transport and international travel.
What will be exempt?
With education, healthcare, residential real estate, local transport and international travel making up a UAE resident’s biggest monthly expenses, the exemption or zero-rating of most components in these sectors radically reduces the impact of VAT on the consumer’s pocket. It is apparent that the UAE at this stage will not exempt or zero-rate non-essential food items or petrol, and that all other goods and services in the UAE will attract VAT, even if supplied by the governing authorities themselves.
No VAT will be payable on nursery school, pre-school, elementary school and government-funded university fees as these will be zero-rated. Non-government funded university fees will, however, be subject to VAT. And while further clarification is due in the soon-to-be-published Executive Regulations, the application of VAT to privately-provided educational goods and services is expected to include the supply of school books, stationary, school meals and extra-curricular activities.
Preventative and basic healthcare services and related goods and services will not attract a VAT charge – though it is important to note that cosmetic surgery and services are not considered preventative or basic, and will thus be subject to VAT. Medical insurance products will not be exempt or zero-rated, so VAT will be payable on annual premiums.
Financial services and life insurance
Certain financial services will be exempt from VAT, such as loans, mortgages and life insurance products, and Islamic banking will be treated in the same way as standard banking. Yet-to-be-published Executive Regulations will clarify further, however, all fees charged by financial institutions are expected to attract VAT at the standard rate of five per cent.
Local and international transportation
Although VAT will be added to the price of petrol, the supply of local passenger transport, such as taxis, buses and the metro will be either exempt or zero-rated, and consumers will not be affected. International transport, whether by air, sea or road, will also be free of VAT, though with the cost of the supply of these services set to increase in many circumstances, this will no doubt be passed on to the consumer in the way of price increases.
The ‘first time’ supply of residential properties (by developers) within three years of completion, for both rental or purchase, will be zero-rated, while subsequent residential leases from a ‘first time’ purchaser will be exempt from VAT. The tax will, however, be payable at the standard rate on all commercial properties, both for rental and purchase. Don’t look past the fact that the associated costs relating to properties will attract VAT. These will include service charges, cleaning services and utility charges, and accordingly the associated costs of renting or owning a property will increase. This should be budgeted for in assessing the affordability of property transactions, whether for renting or for owning.
Small and medium business operations
Any business enterprise that has an annual turnover of Dhs375,000 or more is obliged to register as a ‘vendor’ and charge VAT on the supply of goods and services, unless these fall into the VAT exempt category. This places an onerous burden upon small businesses that may not have the resources or expertise to deal with these issues, and VAT may become a significant administrative cost. Small and medium business owners and operators are urged to obtain assistance from competent VAT consultants to avoid suffering penalties and other sanctions arising from not being able to comply with UAE VAT Law by January 1, 2018, and to make sure that they have compliant systems in place.
As previously stated, due to most of the major monthly family expenses being non-VAT-able, the overall impact of VAT on the average family should not be as much as five per cent of total household spending, but families should be aware that the cost of living will increase and conscientious budgeting should prevail. It is said that there are only two things certain in life, those being death and taxes, and the inevitable certainty of taxes is now upon the residents of the UAE too.
Did You Know? The advertised price of any goods or services will be deemed to be VAT inclusive. The seller will not be allowed to add VAT in addition to the advertised price of anything you are buying.
John Peacock is Senior Associate at BSA Ahmad Bin Hezeem & Associates LLP in DIFC, where he specialises in corporate and property law.