United Arab Emirates: Introducing a 5% VAT Regime

UAE | April 2016 |

The United Arab Emirates will be implementing Value Added Tax (VAT) at the rate of 5% on January 1st, 2018, as stated by his Excellency, the UAE Minister of State for Financial Affairs.

The statement was made following a joint press conference in Dubai, held by the United Arab Emirates Minister of State for Financial Affairs Obaid Humaid Al Tayer, and the Managing Director of the International Monetary Fund (IMF) Christine Lagarde.

More specifically, the Gulf Cooperation Council (GCC) countries have agreed to the introduction of VAT at the rate of 5%, while the corresponding framework on this implementation across all GCC countries is expected to be available within 2016. Furthermore, once the framework agreement is reached, the countries can proceed with implementing it between January 1st, 2018 and January 1st, 2019, with each country maintaining flexibility of introducing the VAT regime within this timeframe. Understandably of course, a lot of ground work will need to be placed prior to VAT implementation, including the preparation of the private sector of these countries in order to ensure compliance with the new tax rules, which is another reason for the timeframe provision.

Furthermore, it is anticipated that the UAE will be introducing the 5% VAT rate, but will be exempting from this 100 basic food items, healthcare services, and education. It is projected that as a result, during the first year, the corresponding tax revenue from this measure will be over 10 billion dirham.

Additionally, as the anticipated common VAT framework will form the foundation for the introduction of a national VAT system by each GCC member state, this will be also assisting the governments to economically diversify away from oil, while still being able to support social and economic programmes.

As for the views of the IMF on this development, these are that even with such a low tax regime of 5% VAT, there exists a good possibility that the GCC states will generate tax revenues of up to 2% of their gross domestic product (GDP).

Moreover, any corporate income tax (CIT) – when compared to VAT – is considered more likely to act as a disincentive to businesses wishing to invest in the region. Thus in order to protect GDP growth, any launching on new direct taxation is currently avoided as it might prove to be a challenge to the otherwise tax-free branding that is serving the region so very well by now.

Eurofast’ s take
Here at Eurofast, our accountancy and tax advisors, teaming up with our Taxand colleagues around the globe, are ready to assist all affected taxpayers, companies and business persons in the UAE region in order to ensure a smooth transition to the upcoming new VAT regime.

Our team can readily facilitate UAE businesses to adjust to the new VAT environment by identifying the potential effect of VAT on their transactions, assess the capacity of the existing in-house systems to accommodate the changes, draft for you a projected VAT implementation strategy, and check upon and filter business activity and contacts that will need VAT related amendments.

Conclusively, as a new VAT regime is likely to also affect consumer behavioural trends as well, this development presents an opportunity for commercial entities to re-evaluate their corporate plans and strategic direction, a field, which our international finance specialists can offer valuable assistance with.

Christiana Nicolaou
Tax Consultant
E: christiana.nicolaou@eurofast.eu