The UAE is all set to launch VAT which will be applicable to most of the business in the country with effect from 1st January, 2018. Preparations are in full form and authorities are leaving no stone unturned for successful implementation of the law in the country. Though business in the country are apprehensive that they will now have to share a part of their earning with state, but VAT in UAE is not discouraging for multinational corporations operating here. We shall discuss how it is beneficial for MNC’s and giving them a reason for earning higher Profits after tax (PAT).
Why and How?
The UAE Government is diversifying its sources of revenue generation and introduction of VAT is a major reform, as this word “TAX” was an alien to many residents in the country till now. The government is taking an implementing suggestions for diversifying sources of revenues from international institutions. As per a statement made by a senior Government official, UAE is applying best international practices for increasing revenues and coordinating financial policies with sustainable growth. This approach shall inject confidence into the UAE’s economy and investment environment.
UAE is introducing VAT at a rate of five percent and the average rate of VAT around the world is around fifteen percent. Hungary has the highest VAT rate of 27 percent amongst OECD nations. Accordingly, UAE is offering a significantly lower rate of VAT and multinational corporations can still save heavy amount in comparison to VAT rate in their home country. As per the reports published in a leading daily newspaper of the UAE, many top-level executives are happy with the UAE government’s decision to introduce VAT. Therefore, it is now important for businesses to learn the requirements and adjustments that will be required to me made for preparation and filing of VAT returns.
It is important to note here that as VAT is a tax on consumption, so the ultimate burden of tax is generally borne by the end consumer. Businesses only collect VAT on behalf of the Government and submit the same at regular intervals. But, what is more important is that international players find middle east market as growth leader and see a larger scope of penetration to generate higher figures.
What should be your Strategy?
The UAE Government has signed more than 100 treaties for the avoidance of double taxation with different countries and more than 60 agreements for protecting and promoting investments. So, the lower tax rates may benefit if the double tax avoidance agreement is already signed between UAE and your home country as rate of five percent is the lowest around the world.
Introduction of VAT may burden with businesses with additional compliances but that will also bring more transparency, which shall be beneficial in the long run. Secondly, UAE still retains its position of low tax jurisdiction and lesser tax legislations. So, VAT is not unfavorable for multinationals as they can still save high amounts that they otherwise be paying to the government in their home country.