Value-added tax, commonly referred to as VAT, is now an integral part of the UAE’s tax ecosystem. The UAE introduced and implemented VAT on 1 January 2018. Therefore, firms must plan and strategize to deal with their impacts, both legal and operational. Appreciatively, there are sufficient regulations and guides available to keep businesses on track and avoid any compliance issues. In this blog, we discuss the basics of VAT for corporations in the UAE, with a focus on key obligations and their impacts.
VAT – The Basics
It is an indirect tax and is one of the most common types of consumption tax around the world. The VAT Law defines VAT as: “a tax imposed on the import and supply of goods and services at each stage of production and distribution, including the deemed supply.”
The value-added tax system applies taxes at various stages of the supply chain. However, the ultimate cash outflow is borne by the end user, the consumer. Generally, a business pays the tax to the government it collects from the customers. On the other hand, it also claims a refund from the government for the money it paid to its suppliers. The net result is the tax receipts of the government, which reflect the “value added” in the supply chain. The amount of purchases is usually lower than the amount of sales; therefore, the net result is usually tax payable to the government.
VAT for Corporations in the UAE
Businesses often look at the impacts of corporate tax; however, value-added tax also demands planning and the right information.
VAT Registration
The first and foremost compliance duty of a business is to register for VAT if it meets the threshold. A business must register for VAT if the taxable supplies and imports exceed the mandatory registration threshold of AED 375,000. However, a business can also register for VAT voluntarily in the case of taxable supplies and imports of less than AED 375,000 but higher than the voluntary registration threshold of AED 187,500. Furthermore, a business can also register for VAT if its expenses exceed the voluntary registration threshold. This is mainly for startups that have no turnover.
Corporations’ Duties
In the UAE, every business must record its financial transactions and ensure that financial records are correct and up-to-date. If a business meets the turnover requirement, it must register for VAT. Furthermore, if a business establishes that it does not need to register for VAT, it must keep and maintain records in case of an investigation by the tax authority. As a business, you:
- Must charge VAT on the taxable goods and services supplied.
- May claim VAT on business-related purchases of goods and services.
- Maintain all the relevant records.
- Must file for VAT with EmaraTax.
It is worth noting that record-keeping is a must for every business in the UAE, as it becomes crucial to have records in certain circumstances.
Documentation & Record-Keeping
As per UAE laws, every business must maintain accounting records that include payments, receipts, purchases, sales, profits, and expenses. These include the following:
- Financial Statements.
- Wages and salaries.
- Fixed assets register.
- Inventory records and statements.
- Any records as specified in tax law and other legislation.
Additionally, the VAT-registered business must maintain the additional documents mentioned below.
- Records of all supplies and imports of goods and services.
- All tax invoices, tax credit notes, and alternative documents were received and issued.
- Records of goods and services that have been disposed of or used for matters not related to the business.
- Records of goods and services purchased for which input tax has not been deducted.
- Records of exported goods and services.
- Records of adjustments or corrections to accounts or tax invoices.
Furthermore, a VAT-registered business must maintain a VAT account or record that shows the following items:
- The output tax due on taxable supplies.
- The output tax due on taxable supplies via the reverse charge mechanism.
- The accrued output tax after correction of any errors or adjustments.
- Input tax recoverable on supplies or imports.
- Input tax is recoverable after the correction of any errors or adjustments.
General Impact
Businesses must plan and ensure effective cash flow management to cover any VAT-related liabilities. Firms need to manage cash flow effectively to ensure they have enough liquidity to pay VAT and recover VAT on their sales and purchases, respectively. Furthermore, businesses now need to adjust their pricing strategies to account for the VAT charged on goods and services. This, in turn, can affect their competitiveness and profitability.
Conclusion
In light of our discussion, it is clear that corporate tax is not the only tax responsibility of a business. Understanding and planning VAT for corporations is equally important. Therefore, entities must strategize and optimize the value-added tax responsibilities. This, in turn, will keep a business running smoothly and compliant with the tax laws and avoid hefty penalties. Depending on the nature and circumstances of a business, an entity might face challenging responsibilities. For instance, corporate tax management and filing, along with monthly VAT returns, can be hectic and complex duties. Therefore, firms must consider consulting with a tax consultant, such as CZTA.
Creative Zone Tax & Accounting (CZTA)
It is necessary to understand VAT for corporations in the UAE. However, every business has distinct circumstances; therefore, not all strategies fit in every company. At CZTA, our esteemed tax experts can assist you in choosing the best tax strategies customized to your specific conditions. Thus, we can say with confidence choose us for the best and smoothest tax compliance in the UAE. Contact us now.
