The UAE has issued the much anticipated tax legislation, paving the way for establishing the taxation system in the country and the levying of value-added tax (VAT) from the January 2018.

The Tax Procedures Law, issued by the President Sheikh Khalifa Bin Zayed al-Nahyan lays groundwork for the administration and collection of taxes and defining the role of the Federal Tax Authority (FTA).

The Law defines a clear set of common procedures and rules to be applied to all tax laws in the UAE, namely, VAT and excise tax laws, and states the respective rights and obligations of the FTA and the taxpayer, according to a UAE Ministry of Finance statement. The new legislation covers tax procedures, audits, objections, refunds, collection, and obligations – which include tax registration, tax-return preparation, submissions, payment and voluntary disclosure rules – in addition to tax evasion and general provisions.

“The Tax Procedures Law is a significant milestone towards establishing the UAE’s tax system and diversifying the economy,” said Sheikh Hamdan bin Rashid al-Maktoum, the UAE’s Minister of Finance and FTA Chairman. The law, he said was an all-encompassing legislative framework that lays the groundwork for the UAE’s plan to implement taxes as a means to “ensure sustainability and diversify the government’s revenue streams”. The increased resources will enable the government to maintain the momentum of its development and infrastructure for a better future, he added.

UAE, the second largest economy in the region after Saudi Arabia, relies heavily on sale of oil for revenues. A fall in crude prices from mid-2014 peak of the $115 a-barrel has forced the region’s hydrocarbon-dependent economies to generate revenues through alternative revenue lines. They in-principle agreed in December 2015 to prepare to implement VAT at standard rate of 5 per cent across the region.

However, only UAE and Saudi Arabia have said they will introduce VAT from 1 January 2018, a move which IMF estimates could help the GCC economies raise revenues up to 2 per cent of their GDPs. The other Gulf states are on various stage of preparation to levy VAT in their jurisdictions.

When the Tax Procedures Law goes into effect, all UAE-based businesses will be required to keep accurate records for five years. The law also sets penalties for non-compliance, as well as clear processes for appeals which align with international best practices, and establishes a fair and transparent environment for the FTA to carry out its mandate, according to the statement.

“The UAE is committed to meeting the most stringent international standards,” Sheikh Hamdan said. “We are working to establish an optimal legislative and executive environment to ease the nation into the VAT and excise tax systems. Implementing these taxes gives the UAE further leverage when it comes to international competitiveness and brings us one step closer towards building the future envisioned by our wise leaders, who have called on all those in charge to innovate and strive to spread happiness among citizens and residents.”

The new legislation also establishes the register of tax agents who may interact with the FTA on behalf of taxpayers, specifies the basic requirements for appointing said tax agents, and sets the standards for maintaining confidentiality by the authority as well as its officers.