The UAE has formally established a new authority mandated to collect data, information and statistics related to federal taxes in the country, a step toward introducing value-added tax (VAT) from the beginning of 2018.

The Federal Tax Authority (FTA), set up through a decree by UAE President Shaikh Khalifa bin Zayed al-Nahyan, will maintain records on taxpayers and on taxes paid. It will also issue guidelines and clarifications on matters concerning federal taxes and related fines, according to the local Gulf News.

The decree will be published in the UAE’s official gazette, and comes into effect 90 days from the date of its issuance.

Businesses in the UAE that earn yearly revenues of more than AED3.75m ($1.02m), will have to register with the authorities to be taxed under the VAT system, Younis al-Khoury, undersecretary at the Ministry of Finance, said in June.

Firms recording revenues between AED1.87m and AED3.75m can choose to register under the system during the first phase of rolling out of the VAT system. Registration will eventually become obligatory for all firms when the government rolls out phase 2, but the ministry is still discussing a date for that, Al-Khoury said at the time.

The introduction of a 5 per cent VAT across most GCC countries is scheduled to be introduced in 2018, which will open up an alternative revenue stream for the Gulf states that are struggling with the decline in oil prices, their main source of revenue. The IMF, earlier this year, estimated that oil exporting countries in the Middle East and North Africa lost more than $340bn in oil revenues from their budgets in 2015, amounting to 20 per cent of their combined GDP.

The UAE has committed to introducing the tax on 1 January 2018, while other GCC countries have until 1 January 2019 as both the public and private sectors will need time to prepare.

About 100 basic food items as well as healthcare and education will be exempt from the tax in the UAE. Although the size of the new revenue is difficult to estimate, it should be a higher proportion of GDP in the UAE due to its high levels of private consumption, and lowest in Qatar.

Analysts believe that revenues from a VAT rate of 5 per cent could reach about AED9bn-AED10bn annually, based on estimates from point of sales (POS) terminals in the UAE for 2015.

The new tax authority will coordinate with the federal government, local governments and taxpayers, and will represent the UAE in regional and international meetings and conferences concerning taxes.

It will receive and analyse tax returns and auditing reports, and will issue certificates related to federal taxes and implementing mechanisms for settling disputes with taxpayers. It will also be able to request information in the possession of a third party that concerns a taxpayer who is being audited, the report added.

The FTA’s board will be chaired by a minister and its members will be appointed through a resolution issued by the UAE Cabinet. The board will submit annual reports to the cabinet on its performance.

An article in the decree stipulates that federal tax revenues and fines that are collected by the FTA will be deposited in an independent account pending their distribution to the federal and local governments. Taxes and fines acquired due to this law will be divided between the federal and local governments. The mechanisms for dividing the taxes and fines will be set by a resolution issued by the UAE Cabinet, the news report added.