UAE VAT and the Exchange Rate: How Currency Conversion Impacts Your Business

Understanding VAT and Foreign Currency Transactions

The Federal Tax Authority (FTA) introduced Article 69 of Federal Decree-Law No. (8) of 2017 in April 2018 to clarify the treatment of currency exchange rates for VAT purposes. This regulation took effect on May 17, 2018, ensuring consistency in VAT calculations involving foreign currency transactions.

Using Central Bank Exchange Rates for VAT

When businesses issue tax invoices in currencies other than AED, they are required to use the UAE Central Bank’s published exchange rates to convert these values into UAE Dirhams (AED) for VAT calculations. This ensures accuracy and standardization in VAT reporting.

For tax invoices issued before May 17, 2018, exchange rates from reliable sources such as Thomson Reuters or the UAE Central Bank were acceptable. However, post-implementation, businesses must strictly adhere to the official rates.

Key considerations:

• Exact exchange rate: The conversion must match the published rate, including the specified number of decimal places.

• Daily updates: Exchange rates are updated Monday to Friday based on prevailing rates at 6 PM UAE time.

• Holiday adjustments: If financial markets are closed due to a holiday, the last available exchange rate at 6 PM on the previous business day should be applied.

VAT on Imports and Customs Exchange Rates

The customs department converts import values into AED for import declarations, which automatically populates Box 6 of the VAT return. If the exchange rate used by customs differs from the UAE Central Bank rate, businesses can use the customs exchange rate when calculating VAT on imports.

Companies engaged in foreign currency transactions must assess the impact of these VAT regulations on their operations. Ensuring the correct exchange rate is applied can help businesses accurately calculate input VAT recovery and maintain compliance with UAE VAT laws