24 Apr VAT Briefing Highlights
Value Added Tax (VAT) is an indirect tax levied on supplies. 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. It is advisable for the organizations entering long term agreements with their clients, shall have clear clauses about restructuring in cost and prices and terms payment of VAT, post implementation of VAT.
All the supplies of goods and services will be categorized into three categories:
- Supplies chargeable at a Standard Rate of 5%: 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 below two categories. Renting and Buying of commercial property is an example of supplies chargeable at 5%.
- Supplies chargeable at Zero percent: The lawmakers understand that certain necessary items should be charges at lowest possible rate to ensure that it will not burn a hole in the pockets of residents. Necessary goods and services e.g. healthcare and education are kept under this category. The countries can have their own list of items to be charged at zero percent rate.
- Exempt Supplies: The goods and services that will not be subject to VAT are exempt supplies. Local passenger transport, renting and buying of residential property are kept under this category. It is important to note here that the companies providing exempt supplies shall not be required to register for VAT and cannot claim any input credit for the VAT paid on purchases.
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.
The detailed rules for supply of goods and services are under the drafting stage and shall be majorly divided into following categories:
- Basic Rules for Goods – Depends upon the location of goods when supply took place
- Special Rules for Goods – Shall be applicable to cross border supplies and for the goods where location of goods cannot be ascertained e.g. Electricity, Water.
- Basic Rules for Services – Shall be applicable on starting point of Service
- Special Rules for Services – Shall be applicable for cross border supplies and electronic supply of services.
Registration for VAT
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
- Total values of supplies made in current month and eleven preceding months
- Expected value of supplies in subsequent thirty days
- Exempt supplies shall be excluded when calculating value of supplies
- Non-Established taxable persons are also required to be registered for VAT.
Treatment of Imports and Exports
Import of goods for transshipment to GCC shall be chargeable to VAT. The taxpayer should get himself registered in the country where goods and services are supplied to avail the credit. However, if the purchaser is registered, the supplier will not be required to register himself and can take the benefit and the supplies can be charged on a reverse charge basis. Reverse charge is allowed for all intra GCC transactions. It is important to note here that if a GCC country have not introduced VAT, then it will be considered as a non GCC country for VAT purposes.
With an aim to promote exports, the UAE lawmaker have made export outside GCC a zero-rate supply.
Mandatory maintenance of Books and Records
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. Further, the entities should maintain a proper record of invoices issued and the invoices shall specifically have mentioned the following information:
- Unique Invoice No.
- Date of Issue
- Time of Supply
- Name, Address and TRN of Supplier
- Quantity of goods and terms of services supplied
- The amount should be in AED for if in foreign currency the rate of exchange and its source.
As mentioned above the GCC VAT treaty uses reverse charge extensively and it is allowed for all intra GCC transactions. Also, the payment of VAT to be done by suppliers for the supplies made to offshore person under reverse charge. Also place of supply of goods and services plays a key role in determining the tax liability and whether the liability lies with the supplier or with the purchaser.
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.
Treatment of Certain Supplies in UAE
Supplies chargeable at Standard Rate are:
- Oil and Gas
- Buying and Renting of Commercial Property
Supplies chargeable at Zero Rate are:
- Education and Healthcare
- International transport of goods and passenger and supply of related goods and services
- Charity Buildings
- Export of goods and services
- Investment precious metals
- Local Passenger Transport
- Residential Buildings
- Bare Land
- Some specific financial services
Filing of Returns and Refunds
The GCC treaty allow member nations to have their own time framework for filing of returns from a monthly to yearly basis. In the UAE, VAT returns will be required to filed in every three months. The returns shall be filed in 28 days after end of quarter. All the filing and payment of VAT will be through electronic mode. No cash or cheque payments will be accepted by the authorities. Refunds will also be credited through electronic modes only.
Refunds will not be allowed to tourists. However, international organizations and diplomatic bodies can get refund according to the agreements and arrangements between UAE Government and their home countries.
Conditions for availing VAT Credit
As discussed earlier, the returns shall be filed on a quarterly basis and all the payments of VAT should be made to authority on a quarterly basis. The entities can avail input credit of the tax paid on purchases of raw material and capital goods in determining their tax liability. However, it is important to fulfil the below mentioned conditions for availing input credit:
- The recipient of supplies shall be a taxable person
- The VAT should be correctly charged in the invoices
- The supplies are supplied for eligible economic purpose only
- Proper evidence of the transaction is available in the records.
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.
Violations and Punitive Provisions
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 assess willingly attempt to evade his tax liabilities. The punitive provisions are in drafting stage and 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.
De- Registration for VAT
The entities shall de-register themselves from VAT in the following conditions:
- Cessation of Economic Activity
- Cessation of taxable transactions
The value of taxable transaction falls below the voluntary registration threshold.
Detailed regulations for De- registration are still awaited.