VAT IN UAE: All that glitters is... taxable (will that apply in the UAE?)

Based on the UAE VAT Law, investment in precious metals is zero-rated.

The UAE's gems and jewellery sector plays a massive role in the country's economy, with over 20 per cent of the world volume of sales of precious metals accounted for by Dubai alone.
Official statistics show that the gold trade through the UAE in particular was valued at $31.6 billion (Dh116.1 billion) at the end of the third quarter of 2016, making it the second-biggest contributor to Dubai's non-oil foreign trade.
According to the World Gold Council (WGC), India is one of the largest gold jewellery exporters in the world. In FY 2015-16, Indian gold jewellery shipments came to $8.6 billion, with around half delivered to India's largest jewellery export destination, the UAE.
The UAE government has increasingly lent its support to the gems and jewellery sector over the recent years, by providing specialised trading venues and safe environment for conducting commercial transactions of precious metals, such as the gold souqs, Gold & Diamond Park and special economic zones like the Dubai Multi Commodities Centre (DMCC). The DMCC serves the entire gold value chain, from research and refining to trading and investing; no other gold centre in the world offers such a complementary industry cluster effect. Innovations include the Dubai Gold and Commodities Exchange; DMCC Tradeflow, a trade finance product; regional gold options trading; a Shariah-compliant hedge fund product; and the Dubai Good Delivery Standard, the only international standard for one-kg gold bars of 0.995 purity.
Similarly, due to the favourable legislations and tax benefits such as exemption from value added tax (VAT) and profit tax that entrepreneurs have enjoyed in the past, the final cost of precious metals remained considerably reasonable, hence spurring consumer interest. Other measures such as state control and imposition of compulsory standards of quality conformance have ensured the quality of the selling products is maintained. Another game-changer for the industry was the introduction of the global Shariah gold standard in 2016. Until recently, there was a lack of international consensus among scholars on the Shariah treatment of contemporary gold products. The fact that investing in gold is now fully compliant with Shariah principles is truly ground-breaking for Islamic investors and the gold industry at large. Currently, the available pool of Islamic finance worth is valued at around $6.5 trillion, hence the importance of tapping into this market.
All these measures have worked together to prop up the gems and jewellery sector, however, this is about to be impacted, with the planned introduction of VAT and excise taxes on non-essential goods, in January 2018.
Based on the UAE VAT Law (Article 45.8), investment in precious metals is zero-rated. The GCC VAT Framework Agreement (Article 35) gives more specification as to the refining rate of such precious metals of no less than 99 per cent and its validity for trade in the world's bullion market. The precious metals referred here are gold, silver and platinum. Although the UAE VAT Law states that, further definition on the specification of these precious metals and prerequisites to qualify these metals for investment purpose, will be specified in the executive regulations of the VAT Law, one should not expect that jewellery is included in this category.
The purity level of most precious metals in a jewellery item is rarely at 99 per cent and the jewellery, in its original form, cannot be traded in the world's bullion market. Thus, consumers should expect that the jewellery items are to be taxed at standard rate of five per cent in the UAE as of January 1, 2018.
Things do not look so different from the standpoint of the jewellery manufacturers when they purchase the precious metals as the raw materials of their merchandise. Since the purpose of such purchase is most likely not for investment purpose, the precious metals purchased shall be acquired with five per cent VAT.
Generally, consumers can expect to see significant increases in the prices of certain gems and jewellery, that will be subject to both VAT and excise tax. The extra fees may, in effect, discourage some consumers from making unnecessary purchases.
Another factor that is expected to impact the sector is the recent introduction of Goods and Services Tax (GST) in India, the UAE's largest trade partner and the second largest gold consuming market globally. Significant uncertainty is involved in the introduction of GST in terms of how the tax will be offset against other import duties. However, some experts agree that GST will have implications on gold trade, but it should not curb demand for gold nor change how it is regarded as a safe-haven commodity.
The writer is Crowe Horwath's tax lawyer. Views expressed are his own and do not reflect the newspaper's policy.