As many countries from the Western part of the world already know, Tax is the means by which governments raise revenue to pay for public services. Government revenues from taxation are generally used to pay for public hospitals, schools and universities, defense, etc…

There are different types of taxes, such as direct taxes – collected directly by governments (income tax, corporate tax) and indirect taxes (collected for governments by an intermediary).

Value Added Tax (or VAT) is an indirect tax. It can also be referred as a consumption tax. VAT is generally imposed on most supplies of goods and services that are bought and sold.

VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.

The United Arab Emirates (“UAE”) located in the southeast end of the Arabian Peninsula does not have any federal income tax. However, the UAE cannot be qualified as a Tax haven country due to various resources. An income tax decree has been enacted by each Emirate, but in practice, the enforcement of these decrees is restricted to foreign banks and to oil companies.

But a change across the UAE came as VAT was introduced on January 1st, 2018 at a rate of 5%. The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT is intended to provide the country with a new source of income, which will contribute to the continued provision of public services into the future. It will also help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.

The Gulf Cooperation Council (GCC) States adopted a standard VAT system with a single rate applying to most goods and services. However, basic food items, healthcare, education and newly constructed residential properties, are exempted from VAT.

On May 2018, the UAE Cabinet adopted a law to introduce the VAT Reversed Charge mechanism for investors in gold, diamond and precious metals. However, on June 2018, the Federal Tax Authority (FTA) clarified that the new Cabinet decision issued about VAT reverse charge mechanism for the gold and diamond industry will only pertain to commercial transactions between registered dealers.

VAT was intended to help improve the economic base of the country. Therefore, it includes rules that require businesses to be clear about how much VAT they are paying for each transaction.

The introduction of VAT across the UAE was not intended as an excuse to increase prices. That is why throughout the month of January 2018, the Department of Economic Development conducted 3,520 inspections, shutting down around 15 businesses that increased their prices to collect VAT – without being registered with the Federal Tax Authority.