VAT- Exempt. Partial-Exemption status and remittance houses

The UAE is the sixth top remittance-sending country in the world, with the country's expatriates sending more than Dh70 bn in one year to friends and families back home by 8 million expatriates in the UAE which account for more than 70 per cent of the labour force in the country and therefore, with the aforementioned, how would VAT impact the remittances outflow in the UAE for both the consumers and the remittance businesses?

The UAE VAT rules model the European Union countries exempt financial service firms, including the remittance houses. This means that those firms cannot charge VAT on the remittance services charged to their consumers and cannot deduct the input VAT they have paid on their purchases simply because they are VAT exempt.

The VAT-exempt status may also put remittance houses at a disadvantageous position in the UAE as most of the supplies they purchase such as rent, security services, are expected to be subject to standard VAT rate. This may further impact the pricing on the services for their customers, that is, the effect may be more than the actual five per cent standard VAT rate.

Based on the latest information from the Ministry of Finance, it is planned that financial services will be subject to a narrow exemption model. Fee-based financial services will generally be subject to the standard rate (5 per cent) of VAT. Fees charged on remittance services can be categorised as "fee-based financial service". The forex gain or loss for the remittance houses within their supply chain may not be subject to VAT.

Last but not the least, it's important to note that the concept of VAT on remittance services shall not be mistaken with tax on remittances. If remittance services would be subject to standard VAT rate, the VAT due will be based on the fee charged and not the amount of the remitted money. Thus, the eventual impact of VAT on remittance services can be very small in comparison to taxes on the amount remitted.

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