Accounting Equation and VAT in the UAE: Navigating Taxation and Reporting

The UAE – E-commerce Tax Reporting and Error Reporting Rules

There have been some notable VAT changes in the UAE:

  1. A new reporting demand will apply to certain businesses as of 1 July 2023; and
  2. As of March 1, 2023, all issues in VAT returns have to be reported to the Federal Tax Authority (FTA).

Reporting needs

On February 24, 2023, the FTA issued comprehensive guidelines for a new reporting law affecting resident taxpayers whose e-commerce taxable income or sales surpass AED 100 million (approximately USD 37.5 million) within a 12-month period. According to this law, businesses that exceed the threshold must determine the emirate in which their business was conducted and report their sales to the government on an emirate-by-emirate basis as part of their Value Added Tax return. The UAE is made up of seven emirates, including Ajman, Abu Dhabi, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and.jman, Abu Dhabi, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and.jman, Abu Dhabi, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and.

Taxpayers need to check if they must adhere to the reporting laws and take responsibility for managing controls, processes, and systems that capture their customers’ location and address details.

For UAE reasons, the place where e-services are received is usually:

  • For individuals, the living address of the user (this takes preference over the IP address also bank account details) and
  • For business consumers, the place of the establishment is most closely connected to the supply.

The rules for nonresident taxpayers are still the same, who were already supposed to report on an emirate-by-emirate basis.

Taxpayers should check if they fall under the reporting laws and ensure they manage controls, processes, and systems to capture customers’ location and address details.

Voluntary disclosure of errors

Starting March 1, 2023, all errors in Value Added Tax returns must be voluntary to the FTA. Previously, voluntary revelation was required only when the problem exceeded AED 10,000 (approximately USD 3,750). The limit has been removed so that even the tiniest of errors must be reported.

There are fixed punishments for errors: AED 1,000 for the first disclosure and AED 2,000 for later disclosures. In addition, late payment fines may also be imposed. As a consequence of the removal of the limit for voluntary disclosures, the penalties for tiny errors may be several times larger than the Tax involved.

How to Check the Value of Supply in UAE VAT?

Starting from 1 January 2018, all registered businesses must charge VAT at 5 percent on taxable products and Accounting Services. The businesses are responsible for paying the VAT collected from their consumers to the FTA. It is crucial for businesses to pay attention to the value on which VAT needs to be levied, as undervaluation may lead to short payment of tax and non-compliance, resulting in legal trouble. Similarly, overvaluation may result in a loss of revenue for entities due to additional taxes.

The method of determining the rate at which taxes have to be levied is also known as valuation. The UAE VAT legislation ‘Value of Supply’ provision gives the guideline to determine the appropriate value of supply on which VAT needs to be levied. This will remove the ambiguities that end up in undervaluation or overvaluation and avoid litigation in determining the value.

Let us understand how to determine the supply value or valuation in UAE VAT.

Value of Supply in UAE VAT

Before determining the value of supply, let us understand ‘Consideration,’ which determines the scope for seeing the value of supply.

  • The entire consideration received in monetary
  • Full or partially in non-monetary consideration

Compliance solutions, from invoicing to filing returns, are just a click away.

Consideration received in monetary

If the entire consideration is monetary. This is where the value of the supply shall be the standard less the Tax. In other words, the supply value is the sale value, including all other financial dealings and expenses such as a discount, packing costs, etc.

Let us understand this with an example.

Ali Spares Ltd sells spare parts worth AED 400,000 to their customer who pay through a Debit Card. They also charge a packaging charge of 10000 AED.

Spare Parts

500,000 AED

Packaging Charges

10000 AED

In the above case, the important thing is entirely monetary. Hence, the supply value will be the net value before applying VAT, i.e., 510,000 AED ( Spare Parts 500,000 AED + Packing Charges 10,000 AED). And 25500 AED (510,000 AED *5%) will the tax.

In the above situations, the values were exclusive of Tax, and it was rather easier to check the value.

How do we determine if the value is inclusive of Tax?

It is pretty simple. You must reduce the VAT amount from the total consideration (inclusive value). To do that, you need to back-calculate to arrive at the VAT amount using the formula below:

VAT Amount = Total Consideration * 5 (Rate of Value Added Tax) / (100 + 5% VAT)

Let us look at the above formula with an example to understand this.

To arrive at the value of the supply, you need to reduce the VAT from 535,000 AED.

Deciphering the Financial Narrative: A Comprehensive Guide to Understanding Financial Statements

All financial statements communicate a company’s financial health and prospects. Comprising the balance sheet, income of the business, and cash flow statement. These reports weave together a narrative of a company’s fiscal performance. This article aims to serve as your compass as we navigate through these documents. We did this by using the fictitious ABC Corp as our case study.

We’ll start our journey with the balance sheet. This sheet is a financial snapshot capturing a company’s assets, liabilities, and Equity at a particular moment. ABC Corp’s assets may include items like cash of AED 1,000,000, inventory of AED 500,000, and property worth AED 5,000,000. The other side of the balance sheet outlines ABC’s liabilities. This includes accounts payable of AED 300,000 and a long-term loan of AED 2,000,000). Also, Equity (share capital of AED 4,000,000 and retained earnings of AED 200,000). The fundamental accounting equation, Assets = Liabilities + Equity, underlies the balance sheet.

Next on our agenda is the income statement, or the profit and loss statement, which lays out the revenues, costs, and profits over a specific period. ABC Corp’s income statement may reveal revenues of AED 3,000,000, cost of goods sold of AED 1,000,000 leading to a gross profit of AED 2,000,000, operating expenses of AED 500,000, and a net income of AED 1,500,000. This statement provides insights into ABC’s operational efficiency and profitability.

Our final stop is the cash flow statement, a critical report tracking the inflow and outflow of funds from operating, investing, and financing activities. This statement helps assess a company’s liquidity and financial flexibility. ABC’s cash flow statement might indicate a net cash inflow from operations of AED 2,500,000, cash outflow from investing activities of AED 1,500,000 (due to capital expenditures), and cash inflow from financing activities of AED 500,000 (stemming from new loans).

Each statement tells a unique yet interconnected part of ABC Corp’s financial tale. When interpreted cohesively, they provide a comprehensive picture of the company’s financial health and future viability, enabling stakeholders to make informed decisions.

By navigating these financial documents, we equip ourselves with the tools to understand a company’s financial language. With this knowledge, we can confidently steer the business ship, even in turbulent waters.

3 thoughts on “Accounting Equation and VAT in the UAE: Navigating Taxation and Reporting”

  1. Pingback: Dubai VAT: Comprehensive Guide for Businesses

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