VAT IN UAE GENERAL UNDERSTANDING
Introduction of VAT Value Added Tax (VAT) is an indirect tax on consumption. It applies to most goods and services. VAT is levied on business transactions, i.e. on goods and services supplied in the course of business. The Gulf Cooperation Council (GCC) States are expected to adopt a standard VAT system with a single rate applying to most goods and services and potentially some limited exceptions such as basic food items, healthcare and education. Currently five countries in the Middle East region have adopted VAT or similar broad based consumption tax system (General Sales Tax (GST)). Countries with VAT/GST system Countries with no VAT/GST system Egypt Jordan Yemen Lebanon Palestinian Libya Iraq Syria GCC (Saudi Arabia, Kuwait, UAE, Oman, Qatar, Bahrain)
Chargeability of VAT VAT is levied at each stage in the chain of production and distribution and is collected by businesses on behalf of the VAT authorities. VAT is ultimately paid by the end consumer. A simplified example of VAT:
Frequently Asked Questions (FAQ) Why VAT in GCC? Governments have been considering the need to diversify income sources and this is even more the case given the developments negatively affecting revenues in the region due to reduced income from oil revenues. VAT is seen as an effective tool in raising revenue to achieve government objectives whilst preserving the neutrality for businesses. If designed and operated correctly and efficiently it can provide significant revenues with limited administrative costs and impact on business. Implementation date of VAT in GCC It is expected that GCC States will most likely introduce VAT latest by 1 Jan 2018 or 1 Jan 2019. UAE is implementing VAT wef 1 Jan 2018. Rate of VAT? It is expected that the standard rate of VAT will be 5%.
FAQ Contd Will VAT apply to everything? Some exceptions may apply mainly driven by socio economic policy considerations. For example, some items may be subject to VAT at 0% (zero-rated), such as basic food where no VAT applies but the related VAT incurred on purchases can be deducted. Other areas such as healthcare and education may be exempt from VAT where VAT will not apply and the related VAT incurred on purchases cannot be deducted. What about imports / exports of goods? Based on general VAT principles, VAT will apply to goods imported into the GCC and this will be payable at the time and place of import. Exports of goods to countries outside the GCC territory will not be subject to VAT (generally zero rated).
FAQ Contd What about VAT incurred on costs? Where a business is engaged in the supply of goods and services that are subject to VAT (at either the standard or the zero rate) VAT incurred on costs can generally be deducted. Where a business is engaged in the supply of goods and services that are exempt (this may be in areas such as healthcare, education, etc.) VAT incurred on costs generally cannot be deducted. Will VAT be a cost to the business? Where businesses are engaged in the supply of goods or services that are subject to VAT (including at the zero rate) they will be entitled to reclaim VAT incur on costs. Where businesses are engaged in activities that are exempt from VAT and cannot reclaim VAT incurred on costs, VAT will be a cost to the business (as suppliers will charge VAT that business cannot reclaim).
Impact on Business How will VAT impact the businesses? While VAT is charged and collected by businesses on behalf of the Government and as such should not be considered as a cost. There will be an additional burden in terms of administration and compliance with the new legislation. The complexity of a specific VAT solution will depend on the nature of the business. Businesses will need to amend their systems and procedures to ensure compliance with the new requirements. For example: Charging VAT on supplies at the correct rate Calculate VAT deductible on purchases Calculate net amount of VAT to pay/ refund Submit VAT returns with required information within the prescribed time limit Pay the net amount of VAT due within the prescribed time Keep the correct documentation in relation to invoices, records, accounts, VAT returns, etc.
Impact on Business Contd Will VAT affect prices / margins? VAT is a tax on consumption and is levied on the price charged to the customer. Therefore it is expected that prices will increase by the amount of VAT. However, it is ultimately a matter for suppliers to determine the price of their goods / services. The price will need to take account of VAT, i.e. whether you charge 100 or 105 the amount will be deemed to include VAT. If the supplier does not increase the selling price when VAT is introduced then this will affect margins as VAT will be due on the amount received.
Preparation for VAT Do I need to start preparing for VAT? What should I be doing now? There is a relatively short time to consider the implications of the introduction of VAT and to make the necessary changes. The amount of work required will depend on the size and complexity of business and it is essential to consider the impact now and determine how best to deal with it. At this stage, and until there is more clarity on the VAT legislation, we recommend you: Understand how VAT impacts your business and assess the capability of existing systems to cater for VAT Identify a VAT implementation strategy and create a project team to manage implementation Undertake an initial review and determine a plan / timeline for implementation Identify contractual arrangements that need action Identify business transactions including intra GCC transactions and inter company transactions
Complexity of VAT Transaction Categories for VAT Purchases and sales by a business could fall into three categories for VAT purposes: Standard rate @5% - Majority of goods and services are expected to fall within this category. Zero rate (0% but still a taxable supply for VAT purposes) - This will apply to the export of goods. Exempt from VAT (No VAT charged also no VAT recovery on purchases) - This is applied to many services offered by health care, educational institutions. Location for VAT Chargeability Further the location of the supply plays an important part in determining the jurisdiction in which VAT needs to be accounted for and by whom. Under normal rules the place of supply in a B2B and supply of services is where the customer is located. For example, when a consultant in Dubai provides professional advice to a business customer in Oman, the place of supply is likely to be treated as Oman and as such the Dubai based consultant would not charge VAT. Instead, the business in Oman would self account for Oman VAT under the reverse charge mechanism.
Integration/ Automation for VAT Extent of integration of current business processes GCC organizations especially SMEs are managing many of their financial processes like employee expenses, inter company invoices and petty cash transactions outside their core transactional finance system. The introduction of VAT is very likely to encompass these types of transaction and so businesses may have more than just main accounting system to think about. Automation of VAT processes It is important to determine the extent of VAT process automation that an organization wants to achieve immediately (at the beginning of the VAT mandate) and the level of automation desired over the long term. As an example, an organization may be focused on automating the majority of processes as part of an initial implementation but may defer automation of more complex transactions that demand increased resources until current processes have been fully established.
Managing an effective VAT implementation An effective implementation for VAT in the GCC relies on a number of factors. The relative importance of these will vary depending on how far the implementation has progressed. Before implementation Ensure full understanding of the requirements and communication to all relevant stakeholders. Understand whether the finance system will be customized in any way. Business should have a clear view on the processes needed to support the systems implementation. During implementation It is important to ensure that the right skills and knowledge are available at all stages of implementation. Ownership of the various stages of an implementation should be agreed (Design, Build and testing). Communicate clearly and regularly with the process owners on impact at different stages of the implementation. After implementation Training and support has to be provided so this should be planned for in advance. Continuous improvement of the system whether through improved automation processes or better supporting processes. Ownership of system and data maintenance should be managed within tax, finance and IT departments.
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