Tax in the UAE: excise tax and VAT

First published in 2023 as an introduction to the tax system introduced in 2017 and 2018. Corporate tax, introduced in 2023, is covered in our separate article on VAT and corporate tax.

Tax, in general, is an amount of money that a person or a company must pay to the government so that it can fund public services such as healthcare, education and social services. The UAE, as part of the GCC, introduced tax to diversify its sources of revenue and to support government departments in providing high-quality public services. The introduction covered two types of tax: excise tax and value added tax (VAT).

Legislation

The UAE issued the following tax legislation:

1. Federal Decree-Law No. 13 of 2016 establishing the Federal Tax Authority.
2. Federal Law No. 7 of 2017 on Tax Procedures, since replaced by Federal Decree-Law No. 28 of 2022.
3. Federal Decree-Law No. 7 of 2017 on Excise Tax.
4. Federal Decree-Law No. 8 of 2017 on Value Added Tax.
5. The executive regulations of each law, which set out the detailed rules.

Together these laws provide the legal procedures, the financial rules and the grounds for tax registration, tax returns, exempt supplies, tax evasion, legal representatives, tax agents, violations and penalties.

Excise tax

Excise tax is an indirect tax levied, since 1 October 2017, on specific goods such as carbonated drinks, energy drinks and tobacco, later extended to sweetened drinks and electronic smoking devices. Any person or company involved in producing, importing or stockpiling these goods must register with the Federal Tax Authority through its website before starting the activity.

Value added tax

VAT is a consumption tax placed on a product whenever value is added at a stage of production and at the final sale. The UAE introduced VAT on 1 January 2018 at a rate of 5 per cent, levied at each stage of supply, manufacture, import and sale of goods or provision of services, and ultimately borne by the customer or end user. A business whose taxable turnover exceeds AED 375,000, the mandatory registration threshold, must register with the Federal Tax Authority. The executive regulation defines the exempt and zero-rated activities.

Duties of the taxable person

The legislation sets out the general obligations of a taxable person or entity, whether an individual or a company: registration with the Federal Tax Authority, keeping proper financial records of day-to-day activities, submitting tax returns and paying the tax due on time, and giving the Authority's officers access to all records relating to the business.

All supplies of goods and services are subject to VAT at the standard rate of 5 per cent, except specific supplies that are zero-rated and those exempted by the law. A supply of goods includes the transfer of ownership of goods or of the right to use them as an owner, and a contract between two parties that triggers a transfer of goods at a later time. A supply of services is any supply that is not a supply of goods. Two exceptions are made: the issue or sale of a voucher, unless the consideration exceeds its face value, and the transfer of a whole business, or an independent part of it, to a taxable person who continues that business.

Record keeping

Every taxable person must keep books of account under the VAT law, and the Authority may ask for additional documents such as annual accounts, the general ledger, purchase day books, invoices issued and received, credit and debit notes and the VAT ledger. Records must be kept for five years, and longer for real estate.

For most businesses VAT returns are filed every three months, online through the Authority's portal. Businesses are strongly advised to ensure that every commercial contract they sign contains a clause allowing the VAT burden to be passed on to the customer, and to adjust their systems so that VAT is calculated and added to invoices automatically.

VAT is not only a finance issue. It flows through every operational department, because wherever a company buys products or services it may pay VAT, and it must capture all the related documentation to claim the input tax back.