Although expats have always flocked to the UAE for its well-known status as a tax haven, that’s all going to change slightly from the beginning of next year with the introduction of 5% Value Added Tax (VAT) in the six countries of the Gulf Corporation Council (GCC), including the UAE, on 1 January 2018.
Originally announced at the beginning of this year, on 31 July 2017 its was confirmed that President His Highness Sheikh Khalifa bin Zayed Al Nahyan has now issued the landmark Federal Law No. 7 of 2017 for Tax Procedures, which sets the foundations for the planned UAE tax system and defines a clear set of common procedures and rules to be applied to all tax laws in the UAE, namely (at present) VAT and excise tax laws.
"The Tax Procedures Law is a significant milestone towards establishing the UAE’s tax system and diversifying the economy," said H.H. Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai, UAE Minister of Finance and FTA Chairman.
While this is expected to bring in a welcome $25 billion (Dh91.8 billion) in revenue for the GCC, families are understandably concerned about how it will impact their weekly food budgets and monthly bills.
“The monthly bills of an average expat are likely to increase by around 2%, given that residential rents will be exempt from VAT and other costs such as education fees and medical costs will be subject to VAT at zero rate,” says Shiraz Khan, senior tax advisor at the Middle East’s largest law firm, Al Tamimi.
However, brace yourself for even higher supermarket food bills: although GCC countries have the ability to apply a zero rate of VAT to around 100 items of food, Khan says that the authorities have announced that “the UAE will subject all food items to VAT at 5%”.
You also might want to stock up on nappies, children’s clothes and baby wipes before the end of December, as any products that are not medicine or medical equipment will also be subject to 5% VAT.
Nevertheless, although bills are certainly set to rise, the 5% VAT rate is very low when compared to other countries and expat hotspots across the world. Shiraz Khan explains: “The 5% rate in the UAE will be significantly lower than the global average VAT or GST (Goods and Services Tax) rate. For example, the average VAT across Europe is around 19%, whereas the GST rate in Singapore and Malaysia is 7% and 6% respectively.”
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And the burning question: now that the GCC is introducing tax for the first time, can we expect to see more taxes – even income tax – being introduced in the near future? “In addition to VAT in 2018, excise tax on certain goods will also be introduced in the UAE later this year,” says Khan. “Although the introduction of a personal income tax is highly unlikely over the next five years, a tax on expatriate remittances abroad was reportedly considered. A new corporate tax system was also under discussion. At this stage, it is unlikely that a new corporate tax or remittance tax will be introduced in the next 5 years.”
It’s also worth noting that if you’re a mumpreneur or part-time freelancer, you will be required to register and account for VAT if the value of your services exceeds the mandatory registration threshold of Dh375,000.
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Breakdown of VAT to be applied on the average family’s monthly outgoings
GCC countries have the ability to apply a zero rate of VAT to around 100 items of food, however, the UAE will subject all food items to VAT at 5%.
Children's products like nappies, wipes and clothes
All products that are not medicine and medical equipment will be subject to VAT at 5%.
Housing/ rent prices
Residential rents will be exempt from VAT whereas commercial rents will be subject to VAT at 5%.
School and nursery fees
School fees should benefit from a zero rate of VAT.
Extracurricular activities like swimming classes
These are likely to fall within general services and subject to VAT at 5%.
Kids’ entertainment venues/ cafes/ cinema
These should attract VAT at 5%.
Medical/ maternity bills/ insurance rates?
Medicine and medical equipment will be zero rated. All insurance will be subject to VAT at 5% except life insurance which will be exempt.
International transportation are expected to be zero rated.
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