FAQ

FAQ 1: What is Tax?

A: Tax is how governments collect money to fund important things like hospitals, schools, and defense. They use this money to improve our daily lives and provide essential services for everyone.

Taxes are classified into two types: direct tax and indirect tax. Direct taxes, like income or corporate tax, are collected directly from the person who owes them. Indirect taxes, like VAT or sales tax, are managed by someone else (like a store) from the person who buys something. Put, taxes are like the little payments we make to make our society a better place for everyone.

 FAQ 2: What is VAT?

A: Value Added Tax (or VAT) is an indirect tax. Occasionally, it is referred to as a type of general consumption tax. In a country with a VAT, it is charged on the majority of products and services purchased and sold.

FAQ 3: What is the difference between VAT and Sales Tax?

A: The main difference between VAT and Sales Tax lies in their application and scope:

1. Application: VAT and Sales Tax are consumption taxes, but their application differs. Sales tax is typically imposed only on the final sale to the consumer. Simultaneously, VAT is charged along the supply chain, from manufacture to distribution to final sale.

2. Scope: Sales tax is usually applied only to transactions involving goods. On the other hand, VAT is levied on both goods and services. This broader scope allows VAT to capture a more comprehensive range of economic activities.

3. Charging Mechanism: Sales tax is collected at the point of sale when the end consumer purchases the goods. VAT, on the other hand, is collected incrementally at each stage of production or distribution, allowing businesses to offset the VAT they paid on their purchases against the VAT they collect on their sales.

4. International Transactions: Another significant difference is how VAT and Sales Tax treat imports. VAT is imposed on imports of goods and services, ensuring that domestic and imported goods are subject to the same tax treatment. Sales tax, on the other hand, may not apply to imported goods in some jurisdictions.

While both VAT and Sales Tax are consumption taxes, VAT has a broader scope, applies throughout the supply chain, and is levied on goods and services, making it a more comprehensive tax system.

FAQ 4: How will the government collect VAT?

A: The government collects VAT through a process involving businesses and traders:

1. Documentation: Businesses must carefully record their income, costs, and the VAT charged on their sales and services.

2. Charging VAT: Registered businesses and traders charge VAT to their customers at the applicable rate on the goods and services they sell.

3. Incurring VAT: Businesses also pay VAT on the goods and services they buy from suppliers.

4. Reclaim or Payment: The difference between the VAT imposed to customers and the VAT paid to suppliers is calculated. If the VAT collected is more than the VAT paid, businesses reclaim the excess from the government. Companies pay the difference to the government if the VAT paid is more than the VAT collected.

This process ensures that customer VAT is eventually remitted to the government. At the same time, businesses can offset the VAT they pay on purchases against the VAT they collect on sales. The government ensures that VAT is effectively implemented and accurately accounted for by involving businesses in the collection process.

FAQ 5: Will VAT cover all products and services?

A: Yes, VAT will generally apply to most transactions involving goods and services. The basic VAT rate is 5% and will be imposed on the sale of goods and services unless they come under one of the specified exclusions listed in Article (46) of Federal Decree-Law No. (8) of 2017.

Additionally, some goods and services may be subject to a zero-rate VAT as per Article (45) of the Federal Decree-Law. This means that while VAT is still applicable, it will be charged at a rate of 0%, effectively making the transaction tax-free.

Overall, VAT will cover most products and services. Still, certain exceptions and zero-rate provisions will apply based on the specific regulations outlined in the law.

FAQ 6: When are registered businesses required to file VAT returns?

A: Registered businesses are required to file VAT returns with the Federal Tax Authority (FTA) regularly. The filing deadline is within 28 days after the end of the Tax Period. The Tax Period depends on the annual turnover of the business:

• Businesses with a yearly turnover below AED 150 million should file VAT returns on a quarterly basis.
• Businesses with a yearly turnover above AED 150 million should file VAT returns on a monthly basis.

So, depending on their turnover, businesses need to make sure they file their VAT returns promptly to comply with the regulations set by the FTA. This helps ensure accurate reporting and timely payment of VAT to the authorities.

FAQ 7: What kind of records are businesses required to maintain, and for how long?

A: Businesses must maintain records that allow the Federal Tax Authority (FTA) to review and identify their business activities and transactions. Federal Law No. (7) of 2017 on Federal Tax Procedures and Cabinet Decision No. (36) of 2017 on the Executive Regulation of Federal Law No. (7) of 2017 on Tax Procedures detail the documents required and the term for which they must be preserved.

The records that businesses are generally required to maintain include the following:

1. Invoices and Receipts: Copies of all invoices issued and received for goods and services.

2. Expense Records: Records of all expenses incurred by the business, such as purchases, salaries, and operating costs.

3. Sales and Income Records: Details of the business’s sales and income.

4. VAT Records: VAT collected from customers and VAT paid on purchases.

5. Accounting Records: Financial statements, ledgers, and other accounting documents.

6. Contracts and Agreements: Copies of contracts and agreements with suppliers, customers, and other parties.

As for the duration of record-keeping, businesses are generally required to maintain these records for a minimum of five years. This timeframe allows the FTA to review past transactions and ensure compliance with VAT regulations.

Proper record-keeping is essential for businesses to demonstrate transparency and compliance with tax laws. It also facilitates the accurate filing of VAT returns and reduces the risk of penalties for non-compliance.

FAQ 8: Will there be VAT grouping?

A: Yes, VAT grouping is allowed in the UAE for businesses that meet specific criteria outlined in the legislation. Businesses must meet conditions such as being UAE residents and related or affiliated parties to be eligible for VAT grouping.

VAT grouping provides a helpful tool for certain businesses as it simplifies accounting for VAT. For VAT purposes, businesses registered as a VAT group are treated as a single taxable entity. This means that transactions between the group members are not subject to VAT, reducing the need for internal VAT calculations.

VAT grouping is particularly beneficial for businesses with multiple subsidiaries or related entities, as it streamlines the VAT compliance process and ensures consistency in VAT treatment within the group.

However, not all businesses are eligible for VAT grouping, and it is essential to meet the specified criteria and follow the proper procedures for registration. Businesses must seek professional advice and guidance to evaluate whether VAT grouping is appropriate for their situation and ensure VAT compliance.

FAQ 9: What is the difference between tax credits and tax deductions?

A: Tax credits and tax deductions are both ways to reduce your overall tax liability, but they operate differently. Tax deductions reduce your taxable income, thereby lowering the amount of income subject to taxation. On the other hand, tax credits directly reduce the amount of taxes you owe. For instance, if you have a $1,000 tax credit, it will directly subtract $1,000 from your tax bill. It’s crucial to understand the distinctions between the two and leverage both to optimize your tax savings.

FAQ 10: How can I determine which tax deductions I qualify for?

A: Identifying eligible tax deductions involves understanding your financial situation and staying informed about tax laws. Common deductions include those for education expenses, home mortgage interest, and medical expenses. Keep detailed records of your expenditures and consult tax professionals or reliable online resources for updated information on available deductions. Additionally, consider hiring a tax professional to ensure you don’t miss any potential deductions specific to your circumstances.