Background, Definition, and Motive
Value Added Tax (VAT) is an indirect tax levied on supplies. More than 150 countries around the world have already implemented the VAT including Canada, Australia, New Zealand, Singapore and many European countries. The average rate of VAT around the world is 17% and Hungary has the highest VAT rate of 27 percent amongst OECD nations. GCC have entered a treaty to introduce and implement VAT and Excise across the GCC to create a wider scope of revenues for the Government. All the countries in the region shall prepare and implement their legislation for VAT based on the basic principles set out under the treaty. The Kingdom of Saudi Arabia (KSA) and United Arab Emirates (UAE) will be introducing VAT with effect from 1st January 2018. The rate of VAT in UAE will be on a lower side around 5 percent.
Meaning ofInput and Output of VAT
As per the definition provided in Article 1 of the Federal Decree Law no. (8) of 2017 on Value Added Tax of the UAE Input Tax is the “Tax paid by a Person or due from him when Goods or Services are supplied to him, or when conducting an Import”. It is the tax paid by the manufacturer or the producerwhen procuring raw materials that add value to their finished product. The registered persons are eligible to claim VAT deductions on the input tax paid for delivering the supplies. It is important to note here that, only the input tax incurred in producing or delivering the taxable supplies is allowed to be deducted.
However, if the business is producing exempt supplies, it cannot claim the deduction for input tax incurred on producing or delivering these exempt supplies. If the business is producing both the exempt as well as the taxable supplies, only the input tax incurred for producing and delivering the taxable supplies can be claimed for deduction. In a case, where it is not possible to ascertain the input tax paid on taxable supplies, the business should deduct partial tax in proportion to the final supplies forming part of taxable supplies.
As per the definition provided in Article 1 of the Federal Decree Law no. (8) of 2017 on Value Added Tax of the UAE Output Tax is the “Tax charged on a Taxable Supply and any supply considered as a Taxable Supply”.
A person must be registered with the tax authorities for collecting VAT for charging VAT on its supplies. All the registered persons are liable to charge VAT on their supplies and maintain records e.g. Invoice issued, delivery receipt etc. as specified under the law. A VAT registered business must charges VAT on the invoices issued for the sale of its goods or services as per the rate applicable in the state. The standard rate in UAE is five percent. VAT on sales is specified in the invoice raised against the customer. It is notable that output tax shall apply even when goods are withdrawn for personal use of the business owners or management.
The tax liability of the taxable person is the difference between the input tax paid and output tax charged on the supplies.
Meaning of Supplies, Goods and Services
Supplies include all the taxable goods, services or transactions that are taxable either at standard rate or zero tax or exempted from the purview of VAT. The taxable supplies include:
Goods and Services
Any product that sold for cash or other consideration is goods and services.
Goods are tangible, i.e., they have a physical attribute.
Services are intangible, i.e., they do not have the physical attribute.
Rates – Standard, Exempt and Zero
The standard rate for VAT is kept at 5% across GCC. All the supplies shall be subject to VAT at the rate of 5% if they do not fall under the zero rated or exempt category.
Impact of VAT in UAE and Gulf Economy
VAT system in UAE shall be a federal law. Important terms e.g. taxable person, economic activity, input and output tax, reverse charge, tax group, place of supply etc. shall have the same definition for all GCC nations as defined in GCC VAT treaty. UAE shall also use the same. The GCC treaty makes use of reverse charge mechanism extensively, which is justifiable also as they are making a law for multiple countries same in line with European Union.
Planning and Analysis
VAT is a tax which infuses itself with the operations of the business. It is not a tax that is paid at the end of the year or after deduction of profit or loss calculation. As it becomes an integral part of the purchase or sale of goods, there arise a need for careful planning and analyzation of your business.
Systems that need to be placed, checked and replaced
Check whether the existing IT systems are compatible with the function of VAT. If not, there should be a reconfiguration process implemented to funnel those changes into the system. Many enterprises would have to reconfigure their system to not only for VAT related documentation e.g. details to be mentioned in the invoices, timelines for maintaining records etc. but also for ensuring compliance in terms of calculation and filing of returns and payments to be made to the Government. Changes are to be implemented not only in the IT and ERP process but also in the workforce.
The business can follow these steps to bring about a system change:
After the implementation of the VAT system in the business,
the business has to keep up with the following requirements:
Ascertain cash flow and organize them in a manner where the business does not feel the pinch of a restricted cash flow.
It is crucial to understand the difference between the exempt, zero rated and standard rate supplies as they have a huge impact on the VAT liability of the business.
The supplies subject to standard rate of tax in the state are included in this category, In GCC countries, the standard rate is at 5%. Similarly, as in case of zero rated supplies, the supplier can claim the credit for input tax paid in producing and delivering these supplies. Companies should carefully evaluate its supplies and catagorize supplies and assign the VAT rates according to the classifications. Even the ERP systems are to be tuned to this adjustment for effortless transactions and their related billing. The business should use a platform that provides clear and concise differentiation between the supplies. While billing zero rated and standard rated supplies or exempt and standard rated supplies, specific care should be taken to apply the specified rates for each product.The accounting software should be set to identify these differences, but the supplies classification of these supplies must be done manually by the company accountants.
Zero Rated Supplies
The applicable rate of tax on these supplies is zero. However, the supplier of these supplies are allowed to claim the credit of input tax paid in process of producing and delivering these supplies. The states can decide about the supplies they want to keep zero rated for the purpose of tax. Article 45 of the Fedral Decree – Law no (8) of 2017 of UAE deals with zero rated supplies.
In UAE, following supplies are zero rated:
These supplies are not subject to VAT. The supplier of these supplies are not allowed to deduct input tax for incurred in producing and delivering these supplies. Article 46 of the Federal Decree – Law no (8) of 2017 of UAE deals with exempt supplies. Basic necessities e.g. healthcare, education etc. are generally kept as exempt supplies from taxes.
In UAE, following supplies are kept as exempt:
The To-Do list for the business can be classified under following categories:
Price Structure and Profit Margins
VAT shall impact the pricing structure and profit margins to factor the VAT in all the invoices raised by business. A critical analysis will be required for this to ensure that business will face the least impact by preparing customized pre-and post VAT scenarios for every business.Also, increase in price may result in result in decline in customer spending. It will be challenging to maintain the same.
Restructuring of Business Model
Information and records to be maintained
The authority mandatorily requires all VAT registered entities to maintain their financial statements and cash flows. They shall have proper evidence of all the transaction, copy of invoices for purchase, records of payments received and payment made.
How to do accounting for VAT related supplies, goods and services?
VAT impacts cash flow, the import/export considerations, and the intra GCC transactions.
Cash Flow and VAT
VAT registered business need to regulate their cash flow in a manner which makes the business to be in a liquid position. The business needs to plan its steps accordingly so that the deferred payment made on VAT is compensated by the immediate collection of VAT receivables from the customers.Collection and payment of VAT on time to avoid any adverse effect on your cash flow.
Customs and VAT
While importing goods from other countries, the business should consider the other duties and taxes that will be levied on the goods inclusive of the VAT that is applicable. The importer should assess and specify the amounts incurred from VAT and the taxes calculated under other duties and taxes clearly to avoid any adverse impact on the cost structure.
Intra GCC transactions
While transacting between the GCC countries additional care is to be taken on the accounting for the VAT payable if the business is a customer or the VAT receivable if the business is the seller. It is anticipated that there will be specific rules applying to these transactions. The businesses are advised to adopt detailed recording and reporting while transacting within the GCC countries.
VAT and Government Supplies
When goods supplied to the government, it is ordinarily not treated as a course of business. Government is a not a taxable person and falls under the exempt category of VAT. However, VAT is said to have an impact if the goods or services supplied by the statutory or local authorities as they might be similar to their course of business.However, VAT is not applicable if the supplies are in the notion of fulfilling their regulatory and enforcement requirements. The Government will likely be treated as an “exempt person.” The taxable person supplying taxable goods or services to the Government will likely not be required to charge VAT. The executive regulation expected to be issued by the Ministry of Finance (UAE) is should throw more light on this topic.
Layout of VAT Invoice
The taxable persons should maintain a proper record of invoices issued and the invoices shall specifically have mentioned the following information:
Point of charging VAT
VAT registered businesses charge and add VAT to goods or services they supply. VAT registered business can also claim Input VAT for the goods or services purchased to for business purpose with some exceptions like the purchase of raw materials or consumables used in the production of business.
The points where VAT is charged are specified in Article 25 of the VAT law decree:
Rules for Mandatory and Voluntary Registration
All the entities have total annual turnover of AED 375,000 are mandatorily required to be registered for VAT. The entities whose total annual turnover of AED 187,500 have the option to voluntarily register themselves for VAT.
Calculation of threshold limits
Non-Established taxable persons are also required to be registered for VAT.
Rules for De-Registration
The entities shall de-register themselves from VAT in the following conditions:
Detailed executive regulations for De- registration are still awaited.
The branches of a company operating in multiple locations shall come under same group and shall have a single VAT Registration number. This is going to be an intricate issue and more clarification is awaited from the authority.
Liabilities of VAT registered entities
VAT is a tax which is self-assessed by the VAT registered entities. It must be recorded and assessed by the enterprise and report its obligations and claim its benefit under the VAT law. The other requirements of the VAT registered entities are:
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date.
Treatment of Input and Output Tax
VAT registered businesses charge output VAT during a sale or pay Input VAT while sourcing materials for the production of their goods. The business can reclaim the VAT incurred for the goods and services that were bought for the business purpose. In the case of import, VAT is charged at the pointof entry on the homeland, and there will be additional customs duties that apply to the goods imported.
Penalties for non–compliance
The authority has majorly classified violations under two categories viz. administrative and tax evasion violations. Administrative violations will include non-maintenance of proper books and records and tax evasion violations shall be where the assessee willingly attempt to evade his tax liabilities. The detailed punitive provisions are will be mentioned in executive regulations, expected to be released soon. The punitive provisions are expected to be very stringent and includes prosecution of violators. The Federal Tax Authorities (FTA)’s can visit business for inspection of their records and books
If a person is aggrieved regarding his VAT liabilities, he shall file an appeal within 20 working days. The authority shall response within 20 working days of receipt of appeal. If he is not satisfied with the decision of the authority, he can appeal to the appeal committee within 20 working days. The appeal committee shall consist of one judge and two tax experts.If he is not satisfied with the decision of appeal committee, he can approach court within 20 working days and the decision of courts shall be binding on the parties.
IMC is a cross border advisory firm focusing on the AMEA (Asia, Middle East, and Africa) markets. We specialize in corporate advisory services, global mobility services, private client and family advisory, international tax, corporate finance, mergers and acquisitions, investment advisory and business support and outsourcing solutions. IMC has been operating in GCC for over 10 years. We have a dedicated “VAT in GCC” team set-up in Dubai, UAE.
How can IMC assist you?
IMC’s comprehensive approach to tax advisory comes from a thorough understanding of ground realities and decades of experience of serving clients around the world. You can trust us your partners in successful adoption of VAT practices in your business and being 100% compliant. Our team is involved at every stage of the process followed by a post adoption review and continuously updating you about the amendments in the laws. IMC can assist as follows:
Assistance in Implementation
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