In anticipation of the introduction of VAT in the UAE, the Ministry of Finance recently announced that businesses with an annual turnover of Dh3.75 million will be required to register for VAT although no indication has been given as to when registrations will be opened.
In addition to this compulsory threshold, the Ministry of Finance announced that businesses with an annual turnover between Dh1.87 million but below Dh3.75 million will have the option to voluntarily register for VAT. While the announcement of registration thresholds was expected, what was interesting was the suggestion that compulsory registration will be phased in to include all businesses making taxable supplies in the UAE.
No further details have been given as to the time frame over which this phased reduction in the compulsory threshold will occur, but one would expect this to be some years down the track so as to allow time for the administration to handle the registration of these larger businesses.
It is worth noting that some form of registration threshold is common among VAT regimes around the world, what is less common is requiring all businesses making taxable supplies to register — as has been suggested by the Ministry of Finance. Only four OECD countries have no general exemption threshold.
Earlier in the year, there was discussion in the UAE that this move could increase the cost of doing business and the cost of compliance for small and medium sized enterprises (SMEs) in the UAE. The incremental cost and requirements associated with taxes and their compliance would need to be carefully factored into business models and would vary according to the approach to registration adopted.
The introduction of a voluntary threshold is a common feature of VAT regimes for two principal reasons:
1. This allows many SMEs to be carved out of the VAT regime and therefore reduce their costs of compliance which are often higher the smaller the business; and
2. Reduces the demand on the administration’s resources that have to register businesses and verify their credentials in the lead up to VAT’s implementation.
However, often this policy objective is frustrated by the realities of the market place. For example the experience in Australia has been that many businesses below the compulsory registration threshold indeed “choose” to register and so collect and pay VAT.
The figures on registration in Australia suggest that around half of the 2.6 million registered businesses in Australia have registered voluntarily. One reason for this may be that VAT businesses required to be registered are insisting that their suppliers are also VAT registered.
The general thinking is that where a supplier is not VAT registered, then the VAT on their inputs is not recoverable by them and this additional cost becomes embedded in the price of their supplies (if they are to maintain existing profit margins) and is not recoverable by their customer.
On the other hand, if the supplier is VAT registered, the VAT flows through the supply chain and it is generally recoverable by each registered business such that the VAT does not become a hidden cost for their business and, alternately, their customers.
Ultimately, whatever the threshold, it comes down to a trade-off between minimising compliance and administration costs and the need to avoid jeopardising VAT revenue or distorting competition.
What does this mean for UAE businesses should the VAT be introduced?
It means that they will need to communicate with their suppliers and identify whether their supplier will be registered for VAT and if so, very importantly, that they will be prepared to issue them with a compliant invoice to enable them to recover the VAT that they will be charged on their taxable purchases. A delay in receiving a compliant invoice will delay any VAT recovery and impacting adversely on business cash flow.
It is clear that not only will registered businesses need to ensure that they are ready for VAT, but they will need to ensure that their suppliers are as well. For those suppliers below the compulsory registering threshold, they will need to seriously consider if they should apply for voluntary registration.
The introduction of any new taxation system is a major change and individuals and organisations, as well as the government itself, are going to take some time to adapt to any new taxes. Businesses want to be complaint and will be looking to the government to provide proper guidance and support to all the UAE businesses to acquaint themselves with the requirements.
Further motivation in the form of a reasonable adjustment period, training and revenue threshold exemptions has to be provided to businesses in order to facilitate transitioning to a new tax system and preserve the business attractiveness of the UAE.
As Christine Lagarde (of the IMF) pointed out during her visit to the UAE early this year — “Developing economies need more domestically generated revenue to achieve the new Sustainable Development Goals.”
Any revenue collected through corporate tax, excises and VAT will support the government to sustain the UAE’s development pace and fuel the economic growth agenda in the long run.