Headline Verdana Bold. VAT Implementation VAT landscape in the UAE and the GCC

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1 Headline Verdana Bold VAT Implementation VAT landscape in the UAE and the GCC 17 February 2017

Agenda Tax Reforms in the Middle East Topic Background Content Introduction to tax reforms in the Middle East VAT fundamentals VAT basics and mechanics VAT impacts Common

3 Agenda Tax Reforms in the Middle East Topic Background Content Introduction to tax reforms in the Middle East VAT fundamentals VAT basics and mechanics VAT impacts Common business impacts A successful VAT implementation Walking through the key components of an implementation project 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 3

4 Background Introduction to tax reforms in the Middle East 4

Introduction to GCC Tax Reform Today s news The GCC Treaty We understand that the Member States have signed the common VAT Framework Agreement that will set the main VAT principles to be adopted UAE

5 Introduction to GCC Tax Reform Today s news The GCC Treaty We understand that the Member States have signed the common VAT Framework Agreement that will set the main VAT principles to be adopted UAE Saudi Arabia Qatar Kuwait Bahrain Oman Domestic Legislation Each individual country is also expected to develop its own domestic legislation to implement the Framework Agreement 2 3 year implementation period is expected across the GCC countries following the signing of the Framework Agreement, the GCC Treaty Certain sectors likely to be exempted (e.g. healthcare and education) Estimate of 94 zero-rated products 2017 Deloitte & Touche (M.E.). All rights reserved VAT Implementation 5

Introduction to GCC Tax Reform Overview Increasing number of statements of intent issued Treaty announced Domestic legislation preparation UAE, KSA, Oman implement Any remaining countries

typically takes 18 24 months from the time a decision is made to the implementation of a VAT system Although it is not clear when VAT will be implemented in each of the Gulf states, we can expect

6 Introduction to GCC Tax Reform Overview Increasing number of statements of intent issued Treaty announced Domestic legislation preparation UAE, KSA, Oman implement Any remaining countries implement Ongoing planning behind the scenes GCC countries examine impacts Any remaining countries examine current need, examine decisions All countries implement by 2020 It typically takes months from the time a decision is made to the implementation of a VAT system Although it is not clear when VAT will be implemented in each of the Gulf states, we can expect for progress to be fast We expect a staggered implementation, with all members working toward an agreed deadline, with some moving faster 2017 Deloitte & Touche (M.E.). All rights reserved VAT Implementation 6

7 VAT fundamentals Mechanics of VAT 7

Introduction VAT stands for Value Added Tax VAT is a tax on the supply of goods and services VAT is NOT a tax on profits or on payments Most countries have VAT or an equivalent tax system (e.g. GST or Sales/Use Tax) Sales taxes can be either single-stage or multi-stage.

8 Introduction VAT stands for Value Added Tax VAT is a tax on the supply of goods and services VAT is NOT a tax on profits or on payments Most countries have VAT or an equivalent tax system (e.g. GST or Sales/Use Tax) Sales taxes can be either single-stage or multi-stage. VAT is a tax on each stage of the supply chain 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 8

9 Think about it this way.a VAT registered supplier in the course of its business makes a supply of goods or services in the UAE in return for consideration (e.g. payment) VAT is chargeable where VAT stands for Value Added Tax The W Who? Issue Who is the supplier, and who is the customer? VAT registered? Overseas? Are they acting in the course of furtherance of business? What? Is it a supply of goods or services? Is it one supply, or multiple supplies? Where? The place of supply determines: which jurisdiction s VAT laws apply? what VAT liability applicable (e.g. standard, zero-rated or exempt)? When? When do I need to account for the VAT and/or recover the VAT as the case may be? In either case, what documentation do I need to satisfy the authorities? What Value? The value question VAT is determined by reference to the value of the supply, the nature of the supply and the rate applicable to it 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 9

10 Output tax Output A business makes supplies of goods (or services) for 100 Output tax normally due on these supplies (unless exempt, zero-rated or outside the scope ) Supplier charges VAT (of 5) on the supplies (usually adds it) Supplier accounts for the VAT by paying it to the tax authorities Tax Authorities Price =100 VAT = 5 Supplier goods Purchaser, or Recipient VAT =5 paid 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 10

Input Tax VAT charged to a business on its purchases of goods and services Paid to its supplier as part of the purchase price (price includes VAT) VAT incurred for business purposes is input tax and

11 Input Tax VAT charged to a business on its purchases of goods and services Paid to its supplier as part of the purchase price (price includes VAT) VAT incurred for business purposes is input tax and is recoverable if it has been incurred in the course of making taxable supplies Evidence is required to claim input tax Input Tax Authorities Price =100 Supplier goods Purchaser, or Recipient VAT =5 paid VAT = 5 Input Tax credited 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 11

12 Worked example taxable supply chain Sells goods Sells goods Manufacturer Retailer Customer AED 20, ,000VAT AED 30, ,500VAT Payment of AED 1,000 VAT Repayment (credit) of AED 1,000 VAT Payment of AED 1,500 VAT Tax authority Manufacturer 20,000 Sale VAT charged on sale VAT recoverable on purchases Net payable to tax authority 1,000-1,000 Retailer 30,000 VAT borne by customer? 1,500 1, , Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 12

13 Input tax deduction and recovery Standard-rated (5%) Input Tax Credit (ITC) Taxable Supply Zero-rated ITC Exempt No ITC Non-taxable Supply Out-of-scope Possible ITC 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 13

14 Worked example exempt supplies Sells goods Sells services Supplier Bank Customer Payment of AED 1,000 VAT AED 20, ,000VAT No repayment (credit) AED 30,000 - No VAT charged Tax authority Supplier 20,000 Sale VAT charged on sale VAT recoverable on purchases Net payable to tax authority 1,000-1,000 Bank 30, Customer Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 14

15 Accounting for VAT VAT incurred on costs Recoverable Cannot allocate directly Irrecoverable Taxable supplies Exempt supplies Taxable & exempt supplies e.g. overheads 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 15

Accounting for VAT VAT incurred on costs Cannot allocate directly

17 Accounting for VAT Accounting and payment Businesses act as unpaid tax collectors and account for and pay VAT monthly or quarterly usually (electronically) Errors can lead to significant penalties (throughput is important) Tax authorities undertake risk-based audits to detect error and fraud VAT Payment VAT return and payment processes A Supply B AP data VAT invoice AR data VAT Return Expense data/other $ Payment/ Refund request Tax Authority performs basic data checks and carries out audits 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 17

18 Accounting for VAT VAT returns VAT returns submitted periodically together with payment Normally three months or monthly Authorities sometimes have discretion to accept alternatives VAT return submission and payment determined country by country Electronic VAT return submission and payment possible in most countries Additional reporting requirements could arise for intra-gcc trade Penalties Incorrect, incomplete or missing VAT returns = Tax authority estimation Penalties for errors or failure to file and/or pay likely, and likely to be significant 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 18

19 Place of supply Place of supply rules will determine the country in which VAT is chargeable Goods Basic rule: is that the place of supply is the location of goods when the supply takes place Services Basic rule: Business to Business (B2B) - place of supply is where the recipient belongs Business to Consumer (B2C) - place of supply is where the supplier belongs 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 19

Reverse Charge UK company supplies legal services to UAE company Value of services = AED 4,000 UAE company remits AED 4,000 to UK company UAE company accounts for VAT under the reverse charge: Output

20 Reverse Charge UK company supplies legal services to UAE company Value of services = AED 4,000 UAE company remits AED 4,000 to UK company UAE company accounts for VAT under the reverse charge: Output tax charge of AED 200 Input tax deduction of AED 200 (subject to normal rules and assuming fully recoverable) UK Co. Legal services 4,000 AED UAE Co. O/T = 200 AED I/T = 200 AED Reverse charging = same result as if purchasing locally Tax Authority 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 20

21 Time of supply The time of supply determines the tax point This fixes the time at which VAT registered businesses are required to account for the VAT on the supplies they make The tax point should be stated on the VAT invoice There can be more than one tax point for a supply Continuous supply of services, payment or invoice issued 2 Advanced tax point 1 Basic tax point Payment Invoice Supply Goods are made available to customer Services are performed 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 21

22 VAT Impacts 22

23 VAT Impacts general impacts Long term contracts Tax points after implementation date? Requirement to charge VAT Unless grandfathering Is there a contractual right to charge VAT? Prices presumed to be VAT inclusive unless a VAT clause is included If no ability to charge VAT in addition, the VAT becomes a cost to the supplier Pricing Will businesses increase prices by 5 percent (provided the contract allows it)? Market sustainable pricing? Will businesses absorb some of the cost Competitive environment in the lead-up to the introduction of VAT Cash flow Even if VAT is recoverable businesses will need to consider the cost of pre-financing VAT on purchases prior to recovering on the next VAT return 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 23

24 VAT Implementation Impacts across the value chain Effect on demand Pricing strategies Impact on current pipeline and inventory Sales & Marketing Systems review and changes for VAT compliance Information System Suppliers End of current business tariffs and charges Preference for VAT Vendors to maximise ITCs Use of self-billing/other billing best practices to maximise credits VAT impact on contracts Current contracts Future contracts Legal VAT system requirement Customers Pricing modelling Structure of offers/financing Support mechanisms and incentives Strategy Finance & Administration VAT impact on corporate plans e.g. restructuring, new projects and transactions Clarification of issues and treatment with tax authorities Interaction with your Supply Chain Internal / Human Capital Education and communication training Impact on cash flow Identification of transactions and VAT liability Maximisation of VAT input tax credit on purchases Registration & compliance Need to be more involved 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 24

25 VAT implementation a successful project 25

26 Our deliverables Our work VAT Implementation An overview of our approach - The 5 Phases Phase 1: Impact assessment Phase 2: response strategy & roadmap Phase 3: to-be planning & preparation Phase 4: Implementation & test Phase 5: post- Implementation review We look at your business as a whole and examine how it may be impacted from a VAT perspective across three key dimensions (people, processes and technology) and in respect of three key challenges (organizational, operational and financial) We work with you to develop an appropriate response that the business should adopt with respect to its new operating environment. We work with you to plan this out so that you know what you need to do when and, importantly, how you need to go about it This phase represents a major part of our overall joint effort. We first assist you to define the program of change to be effected in an orderly manner and then in implementing the changes and prepare for the new operating state. We also address the key documentation that is required subsequently To ensure they key objective of VAT compliance is achieved, we assist in training staff on their new obligations so that they know how to use the new documents and processes that has been implemented. We assist with testing the changes to establish whether they are fit for purpose We help the business in reviewing the first VAT return to ensure that reflect the desired results. We make use of various techniques of testing, and in some cases may use data analysis to review the return so that the risk to that correct VAT position has not been adopted in the returns submitted to the authorities is minimized Business Leader Workshop Response strategy Project plan VAT technical position summary Review of first VAT return Relevant business facts summary VAT impacts summary Roadmap Transaction mapping & process re-design Systems requirements matrix Cash-flow & pricing analysis (optional) Internal VAT governance manual Training plan and bespoke modules Test review observations and technical support Post-implementation training (optional) Document templates IT configuration 2017 Deloitte & Touche (M.E.). All rights reserved. VAT Implementation 26

27 This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.) would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients most complex business challenges. To learn more about how Deloitte s approximately 225,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter. Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is a leading professional services firm established in the Middle East region with uninterrupted presence since Deloitte provides audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,300 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has also received numerous awards in the last few years which include best employer in the Middle East, best consulting firm, the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW), as well as the best CSR integrated organization Deloitte & Touche (M.E.). All rights reserved.

Value Added Tax in the GCC. Insights by industry Volume 1 Introduction. Ninety years in the Middle East

Value Added Tax in the GCC. Insights by industry Volume 1 Introduction. Ninety years in the Middle East Value Added Tax in the GCC Insights by industry Volume 1 Introduction Ninety years in the Middle East Deloitte Value Added Tax in the GCC Introduction Introduction 04 05 Deloitte Value Added Tax in the