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Value-Added Tax (VAT) is a consumption tax applied to goods and services at the point of sale.
In the UAE, most goods and services are subject to the standard VAT rate of 5%, though certain items are zero-rated. VAT registration requirements are based on a business’s annual turnover. The UAE government introduced VAT on January 1, 2018, with a standard rate of 5%.
Input VAT refers to the value-added tax paid on goods or services purchased by a business. If the buyer is registered for VAT, they can reclaim the VAT paid on these purchases by deducting it from their tax liability when settling with the tax authorities.
Output VAT is the value-added tax applied to the sale of goods and services by a business.
For example, this includes transactions such as the sale of bare land, local transportation services, the resale of residential property (from the second sale onwards), and the leasing of residential properties.
A zero-rated supply refers to a taxable supply on which VAT is applied at a rate of 0%. Despite the 0% rate, businesses can still reclaim the input VAT associated with these supplies.
A taxable supply at the standard rate is a supply on which VAT is charged at 5%, and the corresponding input VAT can be reclaimed. Any items that do not fall under the exempt or zero-rated categories are considered standard-rated supplies.
In the UAE, the Reverse Charge Mechanism applies when importing goods or services from outside the GCC countries. With this mechanism, businesses are not required to pay VAT at the point of import.
Instead, the responsibility for reporting VAT is shifted from the seller to the buyer. Under the Reverse Charge Mechanism, the buyer is required to report both Input VAT (VAT on purchases) and Output VAT (VAT on sales) in their VAT return for the same tax period.
The reverse charge represents the VAT amount that would have been due if the goods or services had been purchased within the UAE. The importer must disclose the VAT amount under both the Input VAT and Output VAT categories in their VAT return for that quarter.
This system eliminates the need for overseas suppliers to register for VAT in the UAE, simplifying cross-border transactions.
