VAT Overview THE LAW. VAT will be enforced from 1 January % unified rate on Goods & Services across 7 GCC States. Page 2

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1 1 2 3 of VAT in UAE

2 VAT Overview THE LAW Unified Agreement for VAT provides a framework for all of the GCC members to follow National law each GCC country will enact their own law to implement the tax, based on the Unified agreement. Unified Agreement heavily based on European Law VAT will be enforced from 1 January % unified rate on Goods & Services across 7 GCC States Page 2

3 KEY CONSIDERATIONS

4 Taxable supplies - What is subject to VAT? In principle, every supply of goods and services provided by a business is subject to VAT, unless: There is a specific exemption; or The transaction is considered falling outside the scope of the VAT system Page 4

5 Types of supplies within the GCC VAT regime Page 5

6 VAT is an input and Output Tax Businesses collect the VAT on their sales (output tax) and pay it on purchases (input tax) from other businesses. This effectively turns them into tax-collecting agencies. The VAT moves up the value chain until the customer ultimately pays the entire cost of the VAT. Illustrative Regular Sale Price Sale Price + 5% VAT Sale at origin Step 1 Step 2 Step 3 $ 100 Downstream supply Chain $ 200 End customer $ 1000 $ 105 $ 210 $ 1050 Who Pays? When the end customer buys the product, the 5% VAT is added to the final sale price ($ 1050) effectively making the end consumer pay the full cost of the VAT. VAT collected by Seller Credit from previous stage $ 5 -$ 0 $ 10 -$ 5 $ 50 -$ 10 The difference between output tax in sales price and input tax in purchase price is VAT. TOTAL VAT COLLECTED $ 50 Page 6 11/6/2017 6

7 What is payable to the government is based on the NET VAT position of the entity Business charges VAT on sales (Output tax) Less Business pays VAT on purchases (Input tax) Equals Net VAT (Output tax Input tax) Positive Payable to the Tax Authority Negative Refundable by the Tax Authority Page 7

8 Taxable supplies The standard rate of VAT Sale of goods to customers based in the same member state as the supplier 5% VAT 5% VAT Supplier charges VAT at 5% Purchases: Intermediary claims back VAT Sale to customers: Consumer pays VAT of 5% on the final price 5m + 250k 10m + 500k Page 8 VAT return: VAT on sales: 500k VAT on purchases: - 250k Net VAT payable: 250k

9 Taxable supplies The zero rate of VAT Export of goods to customers based outside of GCC 5% VAT 0% VAT Supplier charges VAT at 5% Purchases: 5m + 250k Intermediary claims back VAT Sale to customers: 10m + 0 VAT Consumer does not pay any VAT Page 9 VAT return: VAT on sales: 0 VAT on purchases: - 250k Net VAT refundable:250k

10 Exempt supplies Rental of Office Space 5% VAT No VAT Landlord charges VAT at 5% Purchases: 5m + 250k Bank cannot claim back VAT Exempt provision of financial services: 10m Consumer does not pay any VAT 250K is not refundable and is a cost for the bank Page 10

11 VAT KEY FACTS The Basic Principles Summarized VAT is charged on sales (Normally referred to as output tax and outputs ) VAT is paid on purchases (Normally referred to as input tax and inputs ) INPUTS Company OUTPUTS The OUTPUT TAX is collected from customers and paid to the government The INPUT TAX is paid to your supplier and claimed back from the government Page 11

12 VAT KEY FACTS Filing VAT returns pay and claiming VAT VAT is declared monthly or quarterly The output tax is paid over minus input tax The VAT declaration (NB the VAT return will require additional data) Output tax 1000 Input tax (400) payable 600 Page 12

13 VAT KEY FACTS The scope of VAT: Taxable supplies made by taxable persons in the course or furtherance of a business Imports of goods Reverse charges Scope Taxable supply Supply Supply of Goods Supply of services Taxable person Person Business (economic activity) Definition Any transaction on which VAT is charged at zero or standard rate Anything done for consideration Transfer of ownership of tangibles, finance leases, real estate Anything that is not goods, includes refraining from doing something A person who is or should be registered for VAT Company, partnership individual, unincorporated body An activity being practiced continuously and regularly, including commercial, industrial, agricultural, professional, service activities, or any usage of material and non-material property and any similar activity. Page 13

14 VAT KEY FACTS Who has to register? Registration threshold: 375,000 AED Voluntary registration: 187, ,000 AED Calculation based on: Look back over past 12 months; or Expected turnover for next 12 months VAT grouping possible Registration open since October 2017 Large entities deadline is 31 st October 2017 Other deadlines are falling in next couple of weeks Page 14

15 VAT KEY FACTS Basic principles of VAT recovery VAT recoverable if: Its is incurred in connection with taxable supplies; In the course or furtherance of the business. VAT is not recoverable if it relates to: Exempt supplies Non-business activities VAT that relates partly to taxable supplies: Apportioned ( partial exemption ) I N P U T T A X EXEMPT TAXABLE PART TAXABLE PART EXEMPT BLOCKED PART CLAIM CLAIM Evidence (tax invoice) will be required Page 15

16 THE REVERSE CHARGE

17 VAT Reverse charge A business buys services from overseas Seller A Services (VAT zero) Price 100 Reverse charge (Applies Input & Output tax) Buyer UAE KSA Buyer s VAT declaration (for illustrative purposes assume no other sales or purchases) Output tax 5 Rev charge Input Tax (5) Rev charge plus input tax Payable ZERO REVERSE CHARGE The reverse charge ensures VAT is paid in the buyer s country. It ensures the buyer can gain no advantage by buying from a foreign supplier For most businesses it is a paper exercise with no VAT cost. For a business that cannot claim all of its VAT the reverse charge will create a real cost. Page 17

18 INTERNATIONAL TRADE

19 VAT Movement of goods Sales between GCC countries Business to Business sales Reverse charge for buyer Business to consumer seller charges VAT (Obligation to register if above threshold of USD 100,000 Export sales (i.e. to buyers outside GCC) Zero-rated all customers Page 19

20 VAT Movement of goods (B2B) - example UAE KSA Seller Buyer Goods No VAT in UAE Reverse charge in KSA Seller will need evidence of export to support zero-rating Page 20

21 VAT Movement of goods Local stock UAE KSA Seller INVOICE Buyer As goods are located in KSA when allocated to customer the seller makes a supply in KSA Goods Seller must register for VAT in KSA Page 21

22 VAT International Services Place of supply of services basic rule B2B place where the customer belongs (reverse charge kicks in) B2C place where the supplier belongs Exceptions to the basic rule Land where the land is located Catering and hotels - location Telecoms where the service is enjoyed Events where the event takes place Page 22

23 FREE ZONES

24 VAT Free Zones What do we know? Information coming in from the FTA Clarity on free zones in coming weeks Possible outcomes Relief for gated zones? Likely outcomes Reliefs for international trade and movement of goods and passengers Relief for un-gated zones to be seen Page 24

25 WHAT SHOULD BUSINESSES BE DOING NOW?

26 Standard Impact of VAT on Businesses Cash flow Need for additional cash flow considering treatment of CAPEX input credit, applicability of VAT on unbilled consumption, payment delays, etc. Also need to take into consideration tax payment due dates, refunds, cash collection lead time, etc. Contractual agreements Updates to T&Cs of all commercial agreements to factor VAT Business Community readiness Customer and suppliers will need to register, meet Tax authorities requirements and provide mandatory information to ADWEA VAT function Deployment of VAT function responsible for ensuring tax compliance VAT Readiness Intercompany transactions Grouping of inter companies to minimize VAT impact. Pricing and invoicing of transactions that falls outside the grouping. IT systems Enablement of standard tax engines and updates to respective systems to capture input and output tax e.g. Maximo, Customer care and billing, Oracle Governance Updates to policies, processes and controls for VAT impacted areas (e.g. accounting, SCM, etc) Change management / training Significant amount of training and change management needs to be performed to customers, suppliers and employees Page 26

27 Page 27 Questions?