The United Arab Emirates revised its VAT regulations in 2018, aligning with global VAT practices. With purchases of VAT goods and services impacted, businesses must remain informed about the evolving VAT regulations in 2023.
The updated VAT rules in 2023 aim to enhance taxation in the UAE, promoting compliance and averting penalties. Amendments to the UAE VAT Decree-Law directly impact businesses, necessitating adherence to new VAT regulations as they arise.
VAT in UAE
VAT, or Value Added Tax, is an indirect levy imposed on the consumption of goods and services. Widely employed in many nations, VAT is applied to most transactions involving the exchange of goods and services, making it a common form of consumption tax.
Before delving into the intricacies of VAT laws in the UAE, it’s crucial to grasp the fundamental concept. Essentially, VAT serves as a revenue-generating mechanism for governments, funding essential public services like infrastructure, education, healthcare, and other vital amenities.
New VAT Rules in UAE
The UAE has introduced three new VAT regulations scheduled to take effect in 2023, with implementation dates set for
January, February, March, and June of that year.
UAE VAT Rules on Statute of Limitation in January 2023
In January 2023, the UAE implemented new VAT regulations, effective from Jan 1, following an announcement in October 2022. Among these regulations:
– Article 15: Allows registered individuals to request VAT registration exceptions if all their supplies are zero-rated or if they only make zero-rated supplies.
– Article 55: Permits taxable individuals to recover VAT paid or declared on imported goods or services incurred before registration, subject to specific requirements.
– Article 62(2): Mandates issuing a Tax Credit Note within 14 days if adjusting the output tax, aligning with tax invoice timelines.
– Article 65(4): Requires taxable persons to pay VAT to the FTA if they issue a tax invoice indicating VAT or receive VAT amounts.
– Article 26: Sets the tax invoice issuance for continuous supply at 14 days from the supply date.
– Article 33: Defines the principal’s place of residence as the agent’s place of residence.
– Article 21: Grants the FTA the authority to forcibly deregister registered persons in specific cases, without forfeiting the FTA’s right to claim tax dues or administrative penalties.
Regarding the statute of limitation:
– The statute of limitation of five years does not apply if the FTA issues an audit notice and completes the audit within four years from the notice’s issuance date.
– If a taxable person files a voluntary disclosure in the fifth year from the end of the relevant tax period, the statute of limitation extends by one year.
– A voluntary disclosure cannot be filed after five years from the end of the relevant tax period.
– Tax evasion has a 15-year limit, an exception to the general statute of limitation.
February 2023 VAT Reporting Update
The Federal Tax Authority (FTA) announced new regulations on February 24, 2023, concerning VAT reporting for UAE resident taxpayers. Businesses with annual sales exceeding AED 100 million must comply with this requirement.
Entities surpassing the AED 100 million threshold in the fiscal year ending December 31, 2022, must adhere to the new reporting obligation from July 1, 2023. By March 15, 2023, affected taxpayers must inform the FTA. Future businesses exceeding the threshold post-2022 will also be subject to this requirement.
These companies must now specify the emirate of service usage and report sales on a per-emirate basis in their VAT returns. The UAE comprises seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and Umm Al Quwain.
Reporting Requirements:
– New reporting requirement for certain businesses effective July 1, 2023.
– All VAT return errors must be reported to the FTA beginning March 1, 2023.
March 2023 Update on Voluntary Disclosure of VAT Errors
Commencing March 1, 2023, all VAT return errors must be voluntarily disclosed to the Federal Tax Authority (FTA). Previously, only errors exceeding AED 10,000 (approximately USD 3,750) required disclosure. With the removal of this threshold, even minor errors must now be reported.
Fixed fines of AED 1,000 for initial disclosures and AED 2,000 for subsequent ones have been introduced. Additionally, penalties for late payments may apply. Eliminating the threshold for voluntary disclosures means penalties for small errors could exceed the actual tax liability.
VAT Input Apportionment Update :
In March, the UAE issued guidelines on VAT input apportionment procedures. The issuance outlines the input tax apportionment process and alternative methods for specific business types where conventional methods don’t provide a fair outcome.
The guide includes:
– General input tax apportionment rules
– Special methods for input tax apportionment
– Procedures for applying for a special apportionment method
– Required information for completing the application form.
June 2023 VAT Update on Tax Clarification
A Tax Clarification, issued by the FTA, offers official guidance on tax treatment for specific transactions in response to inquiries. It’s tailored to the applicant’s details and transactions, without establishing a precedent for others.
Other Highlights from New VAT Rules in 2023:
- Tax authorities can conduct audits up to nine years if notified within the initial five years.
- FTA may audit one year after a voluntary disclosure in the fifth year.
- Cases of tax evasion can be investigated up to 15 years after the occurrence.
- FTA can audit non-registrants up to 15 years from the registration deadline.
- Businesses with solely zero-rated supplies can seek VAT registration exemption.
- Taxpayers must retain VAT-compliant invoices for imported services to claim input credit.
- VAT may apply if there’s over a year’s delay between service stages and retention payment claims.
- Providing goods or services to related parties free of cost may not incur VAT liability under updated laws.
Consequences and Compliance
The amendments to the UAE VAT Decree-Law align with global shifts in Tax regulations, reflecting authorities’ dedication to addressing Taxpayer concerns. Business owners should assess the impacts of these changes and adjust operations to ensure compliance. Further adjustments to executive regulations are expected to follow suit.
VAT Services in UAE
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