Introduction
Have you ever walked into a retail store, found an item you liked at what seemed like a reasonable price, only to be surprised at the checkout counter when the cashier asked for 5% more due to "VAT"?
If so, you're not alone. This article explores the VAT rules in the United Arab Emirates ("UAE") regarding whether businesses are legally permitted to display prices exclusive of VAT, and examines the practical and strategic considerations involved.
General Rule: VAT Must Be Included in Displayed Prices
The UAE tax legislation clearly regulates the treatment of VAT in advertised and displayed prices. A combined reading of Article 38 of Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments ("VAT Law") and Article 27(1) of Cabinet Decision No. 52 of 2017 on the Executive Regulation of the VAT Law, and its amendments ("VAT Executive Regulation") reveals a general principle: prices for taxable supplies must be advertised or published on a VAT-inclusive basis.
Although the law explicitly applies to "displayed" and "advertised" prices, the Federal Tax Authority ("FTA") appears to interpret the rule broadly, applying it even to prices stated in private agreements. This interpretation is likely based on the notion that prices set out in contracts are still "displayed," albeit to a single recipient, a view reinforced by Article 80(2) of the VAT Law.
Accordingly, unless an exception applies, VAT must be included in all displayed or advertised prices for taxable supplies.
The rationale behind this legislative policy is likely twofold: to promote transparency and to protect consumer rights by ensuring that customers are aware of the final price they are expected to pay.
Exceptions to the General Rule
Despite the general rule, the VAT Executive Regulation sets out specific circumstances where prices may (or must) be displayed exclusive of VAT. These exceptions, found in Articles 27 and 70(6), are summarized below:
- Optional – Supplies of goods or services for export may be displayed exclusive of VAT, provided the exclusion is clearly stated.
- Optional – Supplies to VAT-Registered businesses may be displayed exclusive of VAT, provided the exclusion is clearly stated.
- Mandatory – Supplies of "concerned goods and services" subject to the Reverse Charge Mechanism under Article 48(1) of the VAT Law must be priced exclusive of VAT.
- Mandatory – Supplies of crude or refined oil, unprocessed or processed natural gas, or pure hydrocarbons subject to the Reverse Charge under Article 48(3) of the VAT Law must be priced exclusive of VAT.
Legal Consequences of Non-Compliance
Failure to comply with the rules on VAT-inclusive pricing can expose a business to unforeseen tax liabilities and administrative penalties.
- Unintended VAT Liability
A business that fails to properly indicate whether a price is VAT-inclusive or -exclusive may find itself bearing the VAT cost unexpectedly. Consider the following example:
A VAT-registered airline contracts with a VAT-registered consultancy firm to provide services for AED 1,050,000, with no mention of VAT in the contract.
The consultancy firm assumes the price is VAT-exclusive (since the customer is VAT-registered).
The airline assumes the price is VAT-inclusive (due to the absence of an explicit exclusion).
Under UAE law, to benefit from the optional exception for VAT-exclusive pricing, the supplier must clearly identify the price as exclusive of VAT. Since this was not done, the consultancy firm remains liable to pay AED 50,000 in VAT to the FTA – an amount not priced into the original agreement.
- Administrative Penalties
In addition to the VAT liability itself, businesses may face penalties for failing to display VAT-inclusive prices. Under Cabinet Decision No. 40 of 2017 on Administrative Penalties, and its amendments, Table 3 imposes a penalty of AED 5,000 for non-compliance with the pricing display rules.
This penalty was reduced from AED 15,000 pursuant to Cabinet Decision No. 49 of 2021, but remains applicable per violation.
Strategic Business Considerations
Some businesses may be tempted to accept the AED 5,000 penalty as a minor cost in exchange for displaying seemingly lower prices to attract customers. However, this approach carries serious commercial risks, including:
- Reputational Damage: In a market increasingly aware of tax compliance, a reputation for violating tax law can undermine customer trust and damage long-term brand equity. Tax transparency is now a key expectation among UAE consumers.
- Loss of Customer Loyalty: A loyal customer is like a fruitful tree. After the initial acquisition cost, loyal customers continue to generate returns. However, a customer who sees a price displayed and is later asked to pay more at checkout (due to "VAT") is unlikely to return, as their expectations were not met.
Displaying VAT-exclusive prices without proper disclosure not only breaches the law but also alienates customers, ultimately working against long-term business success.
Conclusion
The UAE's VAT legislation mandates that displayed and advertised prices must, as a general rule, be inclusive of VAT – an obligation designed to promote transparency and protect consumers. Non-compliance, whether due to oversight or strategic intent, can lead to unexpected tax liabilities, administrative penalties, and reputational damage, particularly in a market where tax awareness is steadily rising. Ambiguities in pricing can also give rise to legal disputes if VAT treatment is not clearly agreed upon and documented.
Given the complexity and evolving nature of the VAT framework, businesses are strongly advised to review their pricing practices and ensure alignment with the law. Accurate legal and tax guidance is not only essential for avoiding penalties but also for maintaining customer trust and securing long-term commercial success. Getting this right is not just a matter of compliance, but a matter of good business.
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Our tax and financial crimes team, led by our Head of Tax and Financial Crimes, Mohamed El Baghdady, has successfully advised and represented clients across various industries, including, but not limited to, consumer goods and retail, services, real estate, oil & gas and banking and finance, before the Government authorities, tax tribunals and courts. Our clients have been successful in multiple tax disputes before the committees and courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
