A word of advice

The UAE Minister of State for Financial Affairs announced early last year that the UAE will implement value added tax (VAT) at the rate of 5% on 1 January 2018.

The VAT law aims to generate additional revenue to enable the government to continue to provide high quality public services. It will also help the government achieve its intended vision of reducing dependence on oil and other hydrocarbons as a source of revenue. It is estimated that the UAE will generate more than $3.2 billion (Dh12 billion) additional revenue in the first year after implementation of this new tax.

The VAT framework provides that VAT on the supply of goods or services will be charged at a standard rate of 5% unless the goods are exempt or zero-rated. Basic food items, essential medicines and exports of goods and international services are expected to be zero-rated supplies. Financial services and supply of residential properties are expected to be exempt. The flexibility to choose whether to treat the education and medical sectors, the leasing of residential property and local transport as zero-rated or exempt has been left to the discretion of the member states. The distinction is important as a supplier of zero-rated goods or services is entitled to a credit for the VAT incurred on such entity’s costs while suppliers of VAT-exempt supplies cannot claim credits on the VAT incurred on their costs. This will result in higher costs for VAT-exempt suppliers. The UAE are planning to implement on 1 January 2018 while other Gulf Cooperation Council (GCC) countries may do so at the same time or by 1 January 2019 at the latest.

Although there have been uncertainties around implementation dates as the UAE has yet to publish its VAT law and the exact details of the VAT regime, and national legislation is yet to be made available, there is no reason for companies not to start undertaking the necessary steps in order to be ready for the VAT and fully VAT-compliant. Businesses will have to adapt to the changes by identifying the impact of VAT on their business. Ecovis’ team of experts advise that the key things to consider include development of a VAT implementation strategy, training of staff before VAT introduction, assessing the need to replace or update IT systems and assessment of the impact of VAT on current and future contracts. Moreover, companies will also have to plan strategically, carefully considering pricing strategies and the effect of VAT on demand, in order to remain competitive.

A word of advice
The new VAT will probably also have an impact on long-term contractual relationships. It will apply both to contracts already concluded and valid beyond 2017 and to newly concluded contracts which come into effect in 2017. We recommend examining every contract to see whether it might be possible to add a supplementary agreement stipulating that any future VAT and sales taxes be added on top of the prices quoted in the contract. If this is not done, the supplier will be stuck with the VAT.