VAT and Non-Profit Organisations in the UAE

With the implementation of Value Added Tax (VAT) in the UAE from 1 January 2018, the deadline is looming and many charities and non-profit organisations are confused as to their position under the new law. Whilst the position, at the time of writing, remains uncertain for non-profit organisations in the UAE, this article sets out the current status and possible approach that might be taken towards the VAT treatment of non-profit organisations in the UAE.

Current status of the UAE VAT Law and Executive Regulations

Federal Law No. 8 of 2017 on VAT (UAE VAT Law) has been passed and shall come into effect on 1 January 2018. The UAE VAT Law provides for Executive Regulations to be passed, which were issued by the Cabinet on 26 November 2017 (Regulations).

For all practical purposes, whilst the Regulations have been published for the UAE, the position still remains unclear as to how non-profit organisations will be treated for VAT. This situation is somewhat confused by reference in the UAE VAT Law to a possible further Cabinet Decision that will list societies and public welfare associations deemed to be 'Charities' under the UAE VAT Law. This list is not included in the Regulations.

In addition, there is currently no information from the UAE Ministry of Finance on whether another Cabinet Decision is expected to be published or whether any guidance is to be issued for charities and non-profit organisations.

Is the organisation conducting business?

The UAE VAT Law states that VAT shall be imposed where the following occurs:

• the supply of goods and services;
• for Consideration (defined as 'all that is received or expected to be received for the supply of goods and services, whether in money or other acceptable forms of payment'); and
• by an entity conducting Business (defined as ‘any activity conducted regularly, on an ongoing basis and independently’).

The first step for any non-profit organisation is to review their activities and determine whether they are conducting business (further advice is set out below).

Thresholds for registration

The mandatory registration threshold is AED 375,000 of annual turnover of VATable supplies (or an anticipation that the threshold will be met within the next 30 days). The voluntary registration threshold is AED 187,500 of annual turnover (or anticipated turnover) of VATable supplies. The next step for the non-profit organisation will be to review the income and turnover and calculate whether they are over the thresholds for registration (see below).

VAT which a business or organisation is required to account for on its sales or supplies is known as the Output Tax. VAT paid out on purchases is known as the Input Tax. Usually, a business or organisation is able to offset Input Tax against its Output Tax and only pay the balance to the tax authority.

Definition of Charities

Under the UAE VAT Law, charities are defined as ‘Societies and associations of public welfare not aiming to make a profit that are listed within a Cabinet Decision issued at the suggestion of the Minister’ (Charities). As stated above, to our knowledge, this list of defined Charities has not been published. It is possible that the definition of Charities may be narrowly defined to only include registered Public Welfare Associations, or similarly restrictive criteria, rather than non-profit organisations in general.

Special treatment for Charities in the UAE

Article 57 of the VAT Law states that a Cabinet Decision will be issued determining the Charities entitled to recover the full amount of Input Tax paid by them. This suggests that provision is going to be made for defined Charities to recover any VAT that they have paid.

Article 57 states exceptions to this, being: (i) tax excluded from recovery as specified in the Regulations and (ii) tax paid for goods and services used to perform exempt supplies (where no VAT is due and no Input Tax may be recovered).

Article 46 of the UAE VAT Law sets out supplies exempt from tax: (i) Financial services as specified in the Regulations, (ii) supply of residential buildings, (iii) supply of bare land, and (iv) supply of local passenger transport. These activities are unlikely to be common amongst most non-profit organisations. In summary, with the exceptions unlikely to apply, it is possible that a defined list of Charities are going to be given some preferential treatment in being able to recover Input Tax paid by them.

The Regulations do not contain a list of Charities or any detailed provisions in relation to the treatment of Charities for VAT purposes. The Regulations do provide for the zero-rating of buildings, or part of a building, specifically designed to be used by Charities – however this is limited to the first sale or lease of the building.

In addition, the UAE VAT Law (and Regulations) provide no further clarification on whether or not registration is necessary or if some other evidence will be required to show a valid right to reclaim any VAT paid.

Questions to be asked and analogies from other VAT jurisdictions

It is recommended that non-profit organisations review their position and possible requirement to register for VAT. The deadline for all registrations for VAT with the Ministry of Finance was 4 December 2017. Taking an analogy of how the United Kingdom (UK) treats charitable and non-profit organisations for VAT purposes, we set out below an idea of relevant questions to be asked and provide some guidance. However, it should be noted that there is no official guidance from the Ministry of Finance on the approach to be followed in the UAE.

Is the organisation conducting business (the supply of goods or services for consideration)?

The organisation should consider whether it is supplying goods and services for consideration. For example, in the UK income from donations, grant funding and proceeds from fundraising are outside of the scope of VATable supplies. As long as there is no identifiable benefit given in exchange for this income, it is thought that this is likely to be outside the definition of conducting business and Output Tax would not need to be charged.

By contrast, charging membership fees, entrance fees for the admission to events and sponsorship payments has been included within the scope of business in the UK, making it a VATable supply on which Output Tax should be charged. Arguably, this same approach could be taken in relation to the UAE VAT Law (notwithstanding that the organisation is a non-profit making entity).

Is the annual turnover above the threshold limits?

If turnover is below the threshold limits, it will not be possible to register for VAT. If the turnover is over the mandatory threshold, taking into account income from VATable supplies, then registration for VAT should be completed, to avoid penalties. If turnover is over the voluntary threshold limit, the organisation should review whether it is likely to be subject to Input Tax on the goods and supplies it is purchasing, to see whether there is an economic benefit in being able to register for VAT and offset Input Tax against Output Tax.

Is the non-profit organisation likely to come within the defined list of Charities or have the benefit of an exemption?

Although it is uncertain at the moment, it is possible that Charities are going to be defined narrowly, possibly limited to registered Public Welfare Associations or registered charitable or non-profit associations listed with a Federal or Emirati-level authority. There is no indication that any exemptions are going to be extended to all non-profit organisations, however registered. For example, in the United Kingdom charities must provide evidence of their registration of charitable status and the authorisation of this by the relevant tax authority to be afforded special status under the VAT rules.

Also, as stated above, the current wording in the UAE VAT Law refers to a list of Charities entitled to 'recover the full amount of Input Tax paid by them'. It is uncertain whether registration will be required to reclaim this VAT paid out.

Will charities pay VAT on a reduced-rate or zero-rate basis on some defined goods and services?

There is a narrow list of exempt and zero-rate supplies of goods and services under the UAE VAT Law, including the supply of educational services and related goods and services being zero-rated (excluding higher education unless government owned and funded) and the supply of preventative and basic healthcare services and related goods and services. These supplies apply to all taxable entities, not specifically to non-profit entities.

In the UK there is a wider, but specified, list of goods and services that when supplied to charitable organisations are permitted to be supplied at a reduced or zero rate of VAT. At present, there is no indication that this approach will also be followed in the UAE and there is no information on a specified list of goods and services that could be provided at reduced or zero-rates to charitable and non-profit organisations (outside of the standard list of zero-rated supplies).

Is the organisation an end-user of goods and services or a part of a supply-chain for goods and services?

Under the VAT rules, a supplier can only recover VAT that they have paid out (Input Tax) against VAT that they have charged on goods and services that they are supplying (Output Tax). In many cases, non-profit organisations will not be engaged in the VATable supplies of goods and services.

Unless the UAE VAT Law is going to allow for this recovery of VAT paid on goods and services, non-profit organisations can be at a possible disadvantage - in effect the organisation becomes the end-user in the supply chain and will have a 5% increase in their costs of operation. This is similar in other jurisdictions, such as the UK, and is often a bone of contention in the charity sector.

Conclusions and Next steps

Outside of a narrow category of defined Charities, subject to a further Cabinet Decision being published, it is possible that non-profit organisations will be treated the same as other businesses for the purposes of VAT. It is also possible that there will be a future Cabinet Decision published allowing defined or a list of charities to recover VAT paid. The uncertainty is of course unfortunate given the deadlines for registration and implementation of VAT.

With the deadline of 4 December 2017 for all required organisations to register for VAT, notwithstanding the uncertainty that exists, to avoid penalties for non-registration it is recommended that charities and non-profit organisations err on the side of caution. If the organisation has reviewed its operations and concluded that it is suppling goods or services whilst conducting business for consideration, and it is above the mandatory threshold limits, steps should be taken to register for VAT purposes.

For other organisations, not coming within this test and not registering for VAT, unless further guidance is issued by the Ministry of Finance, the purchase of goods and services will get 5% more expensive moving forward.

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VAT on ATM Withdrawals (for same banks and other banks) in UAE

According to tax experts, Five percent VAT will not be levied from the UAE customers in case they withdraw money from ATMs of other Banks, however, VAT will still be applicable on the Dh2 fee deducted by banks on such inter-bank ATM transactions.

Let’s consider an example. Suppose that a customer has an account in X Bank and he withdraws cash, Dh5,000 from Y’s ATM. In that case, the VAT will not be charged from the customer on withdrawing amount of Dh5,000.

Nirav Shah, Director of Fame Advisory said, “When you withdraw from your account, there is no transaction, so VAT does not apply in such case.”

According to the GCC agreement, From 1st January 2018, VAT at the standard rate of five percent will be applied to specific goods and services. Saudi Arabia is another member of GCC country which will be implementing VAT from 1st January.

The five percent VAT will be imposed on the Dh2 fee charged by banks when the customers withdraw money from ATMs of other Banks – which converts to approximately 10 films per transaction.

Mayank Sawhney, Director of MaxGrowth Consulting said, “The VAT will be payable only on the fee charged by the banks which is a nominal amount of Dh2 per transaction in general. So after applying five percent VAT, it will become Dh2.10 from January 1, 2018, onwards. In essence, it does not hit customers’ pockets because even if you do 50 such transactions in a month, your total cost is going to rise maximum by Dh5.”

Sawhney further said that it is anticipated that the banks might increase their transaction fee, in respect of cash withdrawn from ATMs by using other Bank cards, from Dh2 to Dh3 or Dh5, after the implementation of VAT reform from 1st January 2018.

According to Nirav Shah, banks will be liable to impose VAT on all kinds of fees which customers would be liable to pay, for which they are required to maintain compliance from their side. Banks will have to face the burden of new administrative and the fees are likely to increase.

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UAE Government Announced VAT Rates

The items or supplies to be levied by Value Added Tax (VAT) from 1st January 2018 has been announced by the Federal Tax Authority (FTA). The authority has announced the VAT rates of several items or sectors. Sectors such as healthcare, oil, and gas, transportation, real- estate will be levied with the zero-rated tax under VAT Reform.

Supplies such as transportation, real estate, and financial services will be exempted from Value Added Tax (VAT). However, government services will be kept outside of the new taxation system. These comprise services that are exclusively performed by the government authorities or performed by non-profit organizations, and no- competition with the private sector.

It is anticipated that the UAE Cabinet will issue a decision to determine the government bodies and non-profit organizations.

The UAE and Saudi Arabia are the two GCC member countries which will implement Value Added Tax (VAT) Reform from 1st January 2018 whereas the remaining member countries will implement over the coming years.

According to the UAE tax officials, it is anticipated that the new tax reform will help to generate nearly Dh12 billion (around 0.8 percent of GDP) revenue in the initial year after the introduction of the VAT. It might increase to Dh20 billion (around 1.2 percent of GDP) in the succeeding year (2019).

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VAT in UAE: Impacts on Middle Class

 Even though the 5 per cent tax rate of VAT in UAE is much lower as compared to the tax rates in other countries around the world, it is still going to impact the lives of common citizens, especially the middle-class residents of the country. These people will definitely be affected by the price change of the daily-use items and services.

VAT Impacts on common people

The VAT will effectively increase the cost of basic food items and related services. Many tax professionals believe that the new tax will mostly affect the people having a monthly income of around Dh20,000. Whereas people with monthly income below Dh5,000 are not going to experience much impact as they are already consuming less according to their income level. Since the VAT will mostly affect the cost of food and related items, the highest impact will be on the middle class. It is estimated that somebody spending Dh5,000 currently will have to spend around Dh5,250 after VAT.

It is also being expected that not the entire VAT will be passed on to consumers and some of it might be absorbed by other parties involved in the supply chain process.

Experts also believe that the biggest impact on the cost of living will be because of the VAT on food items. Those people who are spending around Dh5,000 on food will see a major impact in the form of price change. VAT is also applicable on water and electricity bills but it may not have any big effect due to the low tax rate. As for the education, middle-class families will experience an increase in the cost of books, school fees, bus fees and other related things.

The new tax rate will also be applicable on the purchase of regular items, such as clothes, cars, jewelry, cosmetics, etc., which is definitely going to have an impact on the overall cost.

Many of the public services, including public transport, accommodation, school education, and healthcare will be zero-rated under VAT, which is a cause of relaxation. Some other services like rental rates, etc. are also going to be cheaper under VAT, which indicates a positive impact on the cost of living. Therefore, the actual impact of VAT on the general cost of living is still hard to ascertain and can be properly understood only after the launch of the new tax regime.

The impact of VAT will largely depend on whether companies decide to increase the salaries of their employees and by how much.

VAT effects on corporate salaries

In order to compensate the added cost of living, some companies in UAE are considering to adjust the salaries of their employees accordingly. Many professionals working full-time in the UAE based organizations are completely dependent on their salaries and might expect to receive VAT allowance to deal with the increased cost. However, there is no such rule or news released by the government.

Many private companies are, however, reported of planning to give a salary hike to their employees to compensate the impacts of the VAT. The increment might not be given to all employees and will depend on factors, like the current salary of the employee, his/her performance, service duration, etc.

Businesses realize that employees will ask for a salary hike to compensate the new taxes or they might even consider looking for another job that offers a better salary. The companies will have to keep the salaries in pace with the market and according to the cost of living.

One immediate effect of the introduction of VAT in the GCC will be in the form of increased demands for qualified accountants and finance experts, who are also familiar with VAT applications and rules. This is the reason why Indian CAs and tax professionals, who are expert in the VAT and other tax provisions, are being summoned by many UAE organizations.

The UAE is all set to launch the VAT structure with a fixed tax rate of five per cent, from January 1, 2018. The VAT will be applied to specific items and services, while some other supplies will be exempt from tax.

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VAT in UAE: How it will impact your pocket?

15 years required for real estate companies to keep their records

The business community and auditing and tax professionals have welcomed further clarity in value-added tax (VAT) following the Executive Regulations and believe that there won't be much impact on consumers as the tax rate is quite low.

They, however, noted that all those businesses - especially SMEs - and individuals who were under the impression of the delay in the implementation of VAT must proceed with efficiency and promptness as the Executive Regulations have also come out and delay will result in penalties.

His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of UAE and Ruler of Dubai, last week approved Executive Regulations for VAT, which would come into effect on January 1, 2018. According to auditing professionals, most of SMEs - especially groceries - are not yet ready and will be struggling to meet the deadline. However, they do not see a major impact on consumers' spending trends.

Dubai Chapter, almost all sectors have been taken cared of under the Executive Regulations and there are no surprises.

The regulations have clarified about all fenced and non-fenced free zones and about imports and exports, for example, the Dubai Multi commodities Center is an open free zone, where no customary boundary is there and goods can move in and out easily.

Another important clarification came with regards to real estate, where companies have to maintain their record books for 15 years compared to five years for other sectors.

The Executive Regulations have made life easier for the businesses and individuals. You can see people appreciating the regulations. It will be an easy and smooth implementation of VAT.

Despite the government giving businesses enough time, many had not started the process. I don't see 100 per cent smooth transition but even 75 per cent will be considerable because every body didn't start at the same time.

Impact on household budgets

Rent, education and healthcare services costs are the highest in the UAE.

By keeping these services at zero rate - subject to certain conditions, government tried to put the least burden on the general public. However, due to VAT, consumers are expected to feel the burden of tax on telecom, electricity and water and food bills, which will also lead to effective utilisation of these items particularly electricity and water. Overall, there will be an impact of around one per cent to 1.5 per cent on household budgets.

According to Panwar, SMEs, which were historically working on cash books without proper accounting, will have to maintain proper accounting records which will help the businesses in monitoring and reviewing their cost structure and do business in a more informed manner.

Thomas Vanhee, founding partner of Aurifer Middle East Tax, noted that any businesses that were still waiting for the publication of the full legislation now no longer have an excuse not to register for VAT purposes.

The Federal Tax Authority (FTA) has communicated relatively extensively on the introduction of VAT, and its message has been consistent with the publication of the current executive regulations.

However, many businesses, including large corporations, still today have not registered for VAT purposes with the FTA.

The majority of our clients who have applied for group registration, still have not received approval of their application. However, since the VAT rate is fairly low in comparison with other jurisdiction such as Europe, we do not expect VAT to greatly affect consumer behaviour. Therefore we can expect the market to stabilise again shortly after the introduction of VAT.

Mayank Sawhney, director of MaxGrowth Consulting, states that the long wait of all UAE businesses and residents on getting some clarifications on a number of grey areas of the VAT Decree Law seems to be over to a great extent. However, it is not completely over, as there are still a number of areas that are still grey, on which further clarifications and guidance are expected from the Ministry of Finance and the FTA over the coming days.

Anthony Peter, director of corporate communications and operations division at Panasonic Marketing Middle East and Africa, says "unlike goods that are essential, consumer electronics do not fall in to that category and as such, consumers may take time to adjust to the increase. This may cause a temporary slowdown of sales but as with all changes, consumers will get used to the same".

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Vat in UAE Brings New Career Opportunities for Tax Experts

The value-added tax will be applicable to around 90 percent of the total 350,000 SME companies and 20,000 large and very-large companies that currently exist in the UAE. All these companies will now need a lot of accounting and tax professionals who are familiar with the concepts of the VAT. This is expected to create a surge of new opportunities for local and international tax experts.

Tax professionals from countries like India who are already familiar with the implementation of complex tax systems like tax are looking for attractive career opportunities in the UAE and other GCC countries.

There are already many Indian chartered accountants working in the Gulf countries and the number is expected to go higher with the introduction of the VAT, as companies prefer to hire professionals with some experience in this type of tax system.

The availability of manpower is also not an issue since India produces more accounting professionals than any other country in the world. Another reason why Indian tax experts are being hired is the presence of many India based business firms in the UAE, who prefer to hire accounting experts from their own home country.

VAT in UAE creates high demand for India based tax experts

According to ICAI Chairman, Naveen Sharma, the demand for chartered accountants in UAE has seen an unprecedented growth in past months. As expected, VAT will impact the entire supply chain of business, creating the requirements for hiring more manpower. The tax and finance professionals and accountants as well as IT professionals from all over the world are getting better career opportunities from companies in the UAE.

At present, there are more than 9,000 chartered accountants working in Abu Dhabi, Dubai, Sharjah and the Northern Emirates, with around 9,000 CAs in the UAE and over 11,000 more CAs in other GCC countries. The number will rise significantly as the time of VAT implementation nears and will continue for the next two years or so.

Besides businesses and companies, accounting firms are also the biggest contenders in terms of hiring. Various accounting firms in the UAE have already started hiring tax professional from all the world with the aim to increase their workforce before the VAT is implemented. Recruitment firms are also playing a major role in all this. They are getting a high demand for taxation candidates who also have some IT skills.

VAT has brought a lot of new opportunities for Indian CAs and expert accountants as they already have experience in dealing with indirect taxes such as VAT and GST (Goods and Services Tax), which is even more complex. The UAE companies are looking forward to benefiting from the experience and knowledge of Indian tax professionals. The fact that tax experts from India are manning and even heading a number of accounting firms in India and abroad is enough to instill a confidence among these UAE firms that these experts are the right choice to tackle the needs for VAT compliance.

This is also a wonderful opportunity for Indian and international tax firms with expertise in accounting, as they will now get a lot of projects relating to tax management for UAE based companies. CAs are already in a very high demand in India ever since the introduction of GST and the demand is soon expected to exceed the supply.

Around 300,000 companies in the UAE would fall under the cover of VAT and will be needing expert guidance to get compliant with the new tax system. VAT is expected to create more than 3,000 new job opportunities in the country. Even the companies that do not fall directly under the ambit of VAT will still need advice for various VAT related things. Many UAE based accounting firms have already started hiring CAs ad accounting professionals from India and other countries to suffice the increasing demand for the talent in this field.

Experts believe that these job opportunities will continue for at least next 1 or 2 years. The companies might need to maintain properly audited financials as a compliance with VAT policies. They will also need professional accounting experts or firms to represent them before the authorities.

As the demand for tax professionals is increasing continuously, many experts are offering their services at low rates to attract more business. It might be a good option for small businesses and startups looking for affordable services, however, the quality of these services may not be good enough.

The major reason for the big demand of Indian CAs in the UAE is the expertise of Indian tax professionals in a variety of tax types and regulations, including direct and indirect taxes. The India based chartered accountants and tax professionals are already proving themselves in the leading business environments at the global level. They should not have any problem managing the needs of the upcoming VAT system in the UAE. Many business entities in the UAE are already getting professional support from India based accounting agencies and may even consider hiring permanent experts after the implementation of the VAT.

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VAT applicability, payments and Penalty in UAE Telecom 

Industry

The value-added tax being implemented in UAE from January 1 will also be applicable to telecom service providers in the region. As per the latest information, most of the UAE telecom firms, including Etisalat and Du, will charge the increased tax on their services and products from their consumers.

The telecom company Etisalat has also said in a statement that they will charge a fine of Dh25 from the subscribers who do not pay their mobile and landline bills on time. “Starting from the 1st of January 2018, most of the Etisalat’s products and services shall be subject to a 5 per cent value-added tax in compliance with federal laws and regulations levying and regulating the tax in the UAE.”

The same thing was confirmed by UAE’s other telecom company du on its website saying that all the company products and services will be available with the standard VAT rate of 5 per cent, starting from January 2018.

The VAT executive regulations were approved by the UAE Cabinet on Monday under the supervision of his Highness Sheikh Mohammed bin Rashid Al Maktoum.

VAT is a consumption-based tax that will be levied on a number of goods and services at a fixed rate of 5 per cent and will be paid by the end user. Companies like Etisalat and others making taxable supplies will collect tax from their customers and pay to the government.

The tax shall be levied at a fixed rate of 5 per cent on all taxable supplies. It means a telecom plan of Dh100 would now cost Dh105.

After the implementation of VAT in UAE, the companies like Etisalat will have to provide a proper VAT invoice for all their supplies of taxable services and products to all their customers. Etisalat has requested its business customers to submit their VAT registration details to the company at the earliest in order to receive a full VAT invoice for their purchases.