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Effective from 1 January 2018, VAT at a rate of 5% has been implemented in the UAE to diversify its revenue base and further reduce its dependency on oil revenues. VAT in UAE will be applicable to virtually all goods and services, with the exception of some exempt supplies and zero-rated supplies, an inclusive definition taking in supplies, healthcare, education, and exports. This was a huge shift from the prior regime of no taxes at all and hence aligns the UAE with international tax standards.

Companies that have an annual turnover of more than AED 375,000 are liable for registration under the UAE’s VAT. VAT is administrated by the Federal Tax Authority of UAE, and periodic audits ensure compliance. Stiff penalties will be levied for non-compliance. Companies need to maintain proper records, file VAT returns periodically, and pay due taxes without delay. Obviously, this entails numerous changes in accounting systems and procedures, along with employee training in regard to VAT compliance in UAE.

UAE’s VAT came with increased operational cost to the businesses because of change in accounting systems and procedures, which were complicated. The cost of living to the consumers moderately increased to the charged tax over the goods and services. Despite the challenges, VAT has managed to increase the base of revenues for the UAE; therefore, serving as a practical and fundamental step to the economic stability and growth.

As part of the CT Law, the UAE introduced General Anti-Abuse Rules (GAAR), Transfer Pricing rules, and Thin Capitalization rules. The UAE also has Economic Substance rules. However, the UAE does not have CFC rules.

The Dubai International Financial Centre (DIFC), and the Abu Dhabi Global Market (ADGM) have introduced trust and foundation laws.Double Tax Treaties (DTTs)The UAE has a broad network of DTTs, including with most of the G20 countries.

The UAE has BITs and FTAs with a number of countries for the protection against expropriation of investments that provide for international arbitration.

The UAE has implemented CRS for the automatic exchange of account information, but has elected not to receive information under the non-reciprocal MCAA.

The UAE has implemented CRS for the automatic exchange of account information, but has elected not to receive information under the non-reciprocal MCAA.

The UAE is embracing digital transformation in the aim of smoothing tax administration and improving compliance. Several advanced technologies will be adopted by the FTA, such as blockchain and artificial intelligence, to guarantee accuracy in data, investigate and avoid fraudulent activities, and innovative solutions for efficient tax collection. Businesses are invited to adopt digital solutions that integrate seamlessly with that of the FTA for smoother compliance and reporting.
Increased Focus on Sustainability
The policy on taxation in the UAE is increasingly being driven towards issues of sustainability. The government would be imposing taxes on activities with negative impacts on the environment and would subsidize green initiatives, which help in reducing carbon footprints. Enterprises in renewable energy among other sustainable practices could stand a chance to be recipients of government rebates or tax incentives under this initiative, which aligns with the UAE Vision 2021 and the UN Sustainable.

The UAE contributes actively to international cooperation in tax matters and works on combating tax evasion and enhancing transparency. Its membership of the OECD Inclusive Framework on BEPS is an affirmation of its seriousness in implementing the international standards of taxes. The Common Reporting Standard for automatic exchange of information on financial accounts enhances tax transparency, avoiding cross-border tax evasions that have been a negating factor toward the UAE as a trusted destination for business internationally.

Though, in the present times, value-added tax is offering a low rate of 5%, it cannot be assumed that implements of further changes will not be carried out. Greatly fluctuating economic conditions and fiscal adjustments are likely to propel the government to go ahead with the future increases of VAT. These respective changes should continue to be updated regarding the business concerns to find substitute measures for mitigating the burden that such an increase would imbue on operations and profitability.

The State ushers in a new epoch for the taxation environment of the country, specifically with the imposing of corporate tax in the UAE. Changes to the government at different times in taxation policies and rates might occur to achieve sustainability in the economy with imperatives of business competitiveness. Revision to the framework of corporate tax can be expected driver by economic performance, feedback from businesses, and international models. Readiness to this would come through understanding the implications and compliance provisions which change with time.

The introduction of VAT and corporate tax in the UAE is part of the strategic shift toward diversified sources of revenue and sustainable economics. Short-term challenges that businesses and consumers will encounter include rising operation costs and a modest rise in the cost of living, though clearly worth the benefits to be gained in the long term for having a robust tax system. In the path to the future of tax, besides digital transformations, sustainability, and international cooperation will be a big challenge confronted, since the UAE is continuously adjusting to international tax standards.
Any business looking to get ahead of the competition needs to be dynamic in understanding prevailing trends and planning for developments in the future. This means investing in tax expertise, developing digital solutions for efficient tax management, and strategic tax planning that optimises a company’s overall tax position.