VAT IN UAE THE BEGINNING.. November 2017 British Centres for Business Hoshedar Cooper, Associate Partner
Contents: GENERAL CONCEPT OF VAT OVERVIEW OF UAE VAT AMBIT OF SUPPLY Exempt Supplies; Zero Rated Supplies; Out of Scope Supplies; Deemed Supplies PLACE OF SUPPLY Contents: DATE OF SUPPLY VALUE OF SUPPLY INPUT TAX - RECOVERABLE VAT VAT ADJUSTMENTS REVERSE CHARGE VAT COMPLIANCES VAT INVOICES AND DOCUMENTATION
GENERAL CONCEPT OF VAT
VALUE ADDED TAX (VAT) What is VAT Consumption tax on value added to the goods & services Designed to tax only value addition on each stage Borne by final consumers Pros of VAT Relatively simple to comply and easier to enforce Helps checking tax Loopholes Broad based Better integration into global trade practices / transparency Cons of VAT Increased cost of businesses Burden on final consumers Taxed uniformly across not higher tax for higher income earners VAT Process Elements Output Tax - VAT due on any sale/supplies - is a percentage of the sale price/supply consideration Input Tax - Tax paid to vendors / suppliers - Taxable person is entitled to recover all the tax already paid at preceding stage Tax Payout Output Tax less Input Tax Impact of VAT - Tax is paid only on the value added at each stage of production and distribution
General Concept of VAT INPUTS OUTPUTS Procurement of Goods Leases on warehouses and offices Business Sale of Goods (electronics) Procurement of Utilities & Business Services VAT on Inputs = Input Tax Claimed input tax Tax Payout VAT on Output = Output Tax
Example Business entity Sales (AED) (Invoice) Value Addition (AED) Tax on Output (Invoice) (AED) Tax on Input (AED) Net Tax Paid (AED) Supplier 20.00 20.00 1.00 0 1.00 Manufacturer 50.00 30.00 2.50 (1.00) 1.50 Wholesaler 70.00 20.00 3.50 (2.50) 1.00 Retailer 100.00 30.00 5.00 (3.50) 1.50 VAT Collected by the government 5.00
OVERVIEW OF UAE VAT
CURRENT STATE OF AFFAIRS Where We Stand Now!!! A The Road Ahead!!! B Issuance of Federal Law in UAE for establishment of the Federal Tax Authority; Release of VAT Framework Agreement by GCC aimed at introducing a region-wide value added tax system in 2018; Finalization and issuance of VAT Executive Regulations; Go-live date Issuance of Federal Law in UAE concerning Tax Procedures Issuance of Federal Law in UAE relation to Value Added Taxation system Commencement of VAT registrations; VAT rollout by 1 January 2018
OVERVIEW OF UAE VALUE ADDED TAX (VAT) Scope of Tax Tax shall be imposed on every Taxable Supply, Deemed Supply made by the Taxable Person and on Import of Concerned Goods Goods and Services Goods to mean physical property that can be supplied including real estate, water, and all forms of energy Services defined to mean any supplies other than goods; Supply of Goods Transfer of ownership of the Goods or the right to use them to another Person according to what is specified in the Executive Regulation of UAE Decree-Law Contract between two parties entailing the transfer of Goods at a later time, pursuant to the conditions specified in the Executive Regulation of UAE Decree-Law Taxable Person: Registrations, Rate and Tax Groupings: Taxable person means Any Person registered or obligated to register for Tax purposes Valuation of Supply Decree provides for valuation of following supplies: 1) Supply against monetary consideration; 2) Supply against Non-monetary consideration; 3) Valuation of Import of goods and services; 4) Valuation in case of Related parties and deemed supplies Supply of Services A supply of Services shall be every supply that is not considered a supply of Goods, including any provision of Services specified in the Executive Regulation of UAE Decree-Law. Proposed Mandatory threshold for registration is AED 375,000 and Voluntary threshold is AED 187,500.The rate of tax is 5%. In relation to registration, Tax group means two or more Persons registered with the Authority as a single taxable person for Tax purposes
VAT IMPACT ON BUSINESS FRAMEWORK Changes in vendor master, customer master; Creation of VAT receivables ledgers, VAT payable ledgers, VAT adjustment accounts; Changes in periodic MIS Reporting Technology Suppliers Supplier s communication on VAT awareness; Registration and compliances; Account reconciliations; Preference for VAT registered vendors Customers Customer s communication on VAT awareness; Registration and compliances; Account reconciliations Impact of VAT on inward supplies cash flows; Impact on tax credits attributable to exempted supplies; Reverse charge mechanism compliances Purchase VAT IMPACT Legal Implications Impact of VAT on long term contracts and commitments; Impact of VAT on short term contracts; Impact of VAT on transitional activities Impact of VAT on pricing; Impact of VAT on discount and incentive structure; Interaction with key dealers and customers; Sales Strategic decisions Impact of VAT on business restructuring plans; Impact of VAT on direction of supply chains; Interaction with tax authorities; Strategic tax positions and opinions there on.
Specific Rules and Concepts UAE VAT Types of supply Standard, Exempt, Zero Rated, Deemed, Out of Scope Place of supply - Place of supply rules will determine whether a supply is made in the UAE or outside the UAE for VAT purposes Time of supply - Place of supply rules will determine the point in time when tax needs to be paid Value of supply Tax determination base shall be in accordance with valuation rules as prescribed Tax Rates Standard rate for standard supplies of 5%, 0% for Zero-rated Supplies Apply all rules and concepts to analyse and prepare for fully compliant VAT regime
AMBIT OF SUPPLY
EXEMPT SUPPLIES Exempted supplies are supplies on which no Tax is charged and for which associated Input Tax is not recoverable pursuant to the provisions of the UAE VAT Law; Exemptions should be applied strictly as they are an exception to the normal rule that VAT should be charged; The following supplies shall be exempt from UAE VAT. However, the exemptions shall be subject to Executive Regulations of UAE Decree-Law. The Executive Regulations of UAE Decree-Law shall specify the controls and conditions of exemption of supplies mentioned here-in Specified financial services Residential properties (other than zero rated supplies) Local Passenger Transport Bare Land
ZERO RATED SUPPLIES Zero - rated supplies of both goods and services are subject to 0% rate of VAT; Taxpayer have right to an input tax recovery on the corresponding procurements/expenses on which VAT has been paid; The following supplies shall be zero-rated from UAE VAT and shall be subject to conditions (if any) to be specified Executive Regulation of UAE Decree: Export of Goods or Services Supply of air, sea and land means of transport for the transportation of passengers and Goods Supply of Goods and Services related to the supply of the means of and which are designed for the operation, repair, maintenance or conversion of these means of transport. International Transport of goods and passengers Supply or Import of investment precious metals The first supply of residential buildings within (3) years of its completion The first supply of buildings specifically designed to be used by Charities The first supply of buildings converted from non-residential to residential Supply of crude oil and natural gas Supply of educational services and related Goods / Services owned / funded by Federal / local authority Supply of preventive and basic healthcare Services and related Goods and Services
OUT OF SCOPE SUPPLIES Shipment of Goods / Ship To Location / Delivery of Goods Transaction between Vendors and Company (UAE) is outside scope of UAE VAT; Customer (KSA, Other GCC countries, Rest of the world) Vendors (Rest of the world) Transaction between Company (UAE) and Customer is outside scope of UAE VAT; Place of supply is outside the UAE as the goods are outside the UAE when sold; Company (UAE) is entitled to recover VAT incurred on costs as the supply would have been taxable if it had been made in the UAE Commercial Bill to Customers by Company Company UAE Bill To Location by Vendors
DEEMED SUPPLY: EXPLAINED BY SPECIFIC INCLUSIONS AND EXCLUSIONS Deemed Supply- Inclusions Deemed Supply- Key Exclusions A supply of Goods or Services, which constituted the whole assets of a Taxable Person or a part thereof, but are no longer considered to be as such, provided that the supply was made without Consideration;- GIFT The TRANSFER by a Taxable Person of Goods that constituted a part of his business assets from the State to another Implementing State (i.e. The GCC States that are implementing a Tax law pursuant to an issued legislation), or from the Taxable Person s business in an Implementing State to his Business in the State, except in the case where such transfer: a) Is considered as temporary under the Customs Legislation, b) Is made as part of another Taxable Supply of these Goods, A supply of Goods or Services for which Input Tax may be recovered but the Goods or Services were used, in part or whole, for purposes other than Business, and such supply shall be considered as deemed only to the extent of the use for non-business purposes; Goods and Services that a Taxable Person owns at the date of Tax Deregistration If no Input Tax was recovered for the related Goods and Services. If the supply is an Exempt Supply. If the recovered Input Tax has been adjusted for the Goods and Services pursuant to the Capital Assets Scheme If the value of the supply of the Goods, for each Recipient of Goods within a 12-month period, does not exceed the amount specified in the Executive Regulation of UAE VAT-Law, and the Goods were supplied as samples or commercial gifts. If the total Output Tax due for all the Deemed Supplies per Person for a 12-month period is less than the amount specified in the Executive Regulation of UAE VAT-Law.
VAT: PLACE OF SUPPLY
PLACE OF SUPPLY Place of supply rules will determine whether a supply is made in the UAE or outside the UAE for VAT purposes: If the supply is treated as made outside the UAE: no UAE VAT will be charged If the supply is treated as made in the UAE: VAT may be charged Goods Services Basic rule: The place of supply is the location of goods when the supply takes place; Basic rule: the place of supply is where the supplier has the place of residence
VAT: DATE OF SUPPLY
DATE OF SUPPLY GOODS / SERVICES Earliest Of IN CASE OF GOODS Transfer under the supervision of Supplier : Date on which goods were transferred Transfer not under the supervision of Supplier : Date on which customer takes the possession of goods IN CASE OF SERVICES Date on which Services were completed Date of receipt of payment from customer Date on which VAT Invoice is issued Date of receipt of payment from customer Date on which VAT Invoice is issued NOTE : All Advances will be taxable under VAT when received
DATE OF SUPPLY SPECIAL CASES In case of PROGRESSIVE BILLING Continuous Supplies Earliest of: a. Date of issuing Tax Invoice b. Date of payment due as shown in the invoice c. Date of receipt of payment Provided that the above does not exceed 12 months from date of provision of Goods & Services Date Of Supply Special Cases SALE ON RETURN/CONSIGNMENT BASIS Earliest of: a. Date on which goods are accepted by Customer b. Date not later than 12 months after the date on which the goods were transferred / placed at the disposal of Customer REVERSE CHARGE MECHANISM Date on which the Goods are Imported under Customs Legislation ASSEMBLY OR INSTALLATION Date on which the Assembly or Installation is completed DEEMED SUPPLIES The date of Deemed Supply of Goods or Services is the date of their supply, disposal, change of usage or the date of Deregistration VOUCHER : Date of issuance or supply thereafter VENDING MACHINES: Date on which funds are collected from the machines
VALUE OF SUPPLY :
VALUE OF SUPPLY The value of supply of Goods or Services for Consideration shall be as follows: If the entire Consideration is monetary, the value of the supply shall be the Consideration less the Tax; If all or part of the Consideration is not monetary, the value of the supply is calculated as the overall monetary part plus the market value of the non-monetary part of the Consideration; The Executive Regulation of this Decree-Law shall specify the rules to determine the market value; The Import value of Goods consists of the customs value pursuant to Customs Legislation, including the value of insurance, freight and any customs fees and Excise Tax paid on the Import of the Goods; The value of the supply or Import of Goods or Services between Related Parties shall be considered equal to the market value in certain circumstances; The value of the supply in the case of a Deemed Supply when the Taxable Person purchases Goods or Services to make Taxable Supplies but does not use those Goods or Services for that purpose, will be equal to the total cost incurred by the Taxable Person to make this Deemed Supply of Goods or Services
VAT Input Tax Credit
VAT Input Tax Credit : Input tax recovery conditions Recipient must be a taxable person and must be registered for VAT The goods or services have been acquired for an eligible purpose Input Tax can now be recovered Recipient must receive and retain a tax invoice evidencing the transaction The amount of VAT which the recipient seeks to recover must have been paid in whole or in part, or intended to be paid in whole or in part Certain incurred VAT is specifically blocked from being recoverable as input tax regardless of whether the above conditions have been met. For e.g. -Expenses for nonbusiness/private purposes; -Expenses attributable to exempt supplies
VAT : CARRY FORWARD OF RECOVERABLE INPUT TAX
VAT Input Tax Credit : Carrying forward the Excess of Recoverable Tax Subject to Executive Regulation, the Taxable Person shall carry forward any excess of Recoverable Tax to the subsequent Tax Periods, in the following cases 1 If there remains any excess for any Tax Period after being carried forward for a period of time, the Taxable Person may apply to the Authority to reclaim the remaining excess i.e. Refund of Taxes If the Taxable Person s Recoverable Input Tax set forth in UAE VAT Law exceeds the Output Tax payable for the same Tax Period 2 The Executive Regulation of UAE VAT Law shall specify the time limits, procedures and mechanisms of returning any remaining excess to the Taxable Person If the Tax paid to the Authority by the Taxable Person exceeds the Payable Tax. 3 The carried forward input tax can be offset against Payable Tax or any Administrative Penalties imposed under UAE VAT Law or Tax Procedures in subsequent Tax Periods until such excess is fully utilized
VAT : ADJUSTMENTS
VAT ADJUSTMENTS VAT adjustments can be triggered due to following reasons: Post Sales discounts; Post purchase discounts; Rebates and incentives accruing post purchase-sale transaction; Sales returns; Purchase returns; Bad Debts; The Tax VAT adjustments shall have an impact of either reducing or increasing final tax liability
SUNDRY WRITE-OFFS on account of BAD DEBTS SUPPLIER Transaction written-off RECIPIENT Supplier s Obligations Recipient s Obligations A supplier may reduce the Output Tax in a current Tax Period to adjust the Output Tax paid for any previous Tax Period if all of the following conditions are met: a) Goods and Services have been supplied and the Due Tax has been charged and paid; b) Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier; c) More than six months has passed from the date of the supply; d) The Registrant supplier has notified the Recipient of Goods or Services of the amount of Consideration for the supply that has been written off The Recipient of Goods/ Services shall reduce the Recoverable Input Tax for the current Tax Period related to a supply received during any previous Tax Period where the Consideration has not been paid and all of the following conditions are met: a) The registered supplier reduced the Output Tax and the Recipient of Goods/ Services has received a notification from the supplier of the Consideration being written off; b) The Recipient of Goods and Recipient of Services received the Goods and Services and the relevant Input Tax was deducted; c) The Consideration was not paid in full or in part for the supply for over six months.
VAT : REVERSE CHARGE MECHANISM
REVERSE CHARGE MECHANISM UNDER VAT VAT registered purchaser has to account for VAT in respect of supplies Typically used for cross-border transactions to relieve a non-resident supplier from the requirement to register and account for VAT in the country of the purchaser; The purchaser will account for VAT on its normal VAT return and he may be able to claim that VAT back on the same return, subject to the normal VAT recovery rules; It will apply in UAE in the situations where a VAT registered person imports goods or services into the UAE which would be subject to VAT if purchased in the UAE Consultant (USA) Reverse Charge Service Fees : AED 5000 VAT @ 5% : AED 250 Client (UAE) Supplier is not registered in UAE Recipient shall firstly pay tax under reverse charge and then recover the tax paid
VAT : COMPLIANCE
VAT Obligations : VAT returns filings and payments Online Submissions of VAT Returns Submission methodology is online and only in very limited circumstances (and at the sole discretion of the FTA), the VAT return can be filed on paper; Clarity is awaited on whether returns would be filed on monthly basis or quarterly basis Deadlines for submission and payment The due date will be within the month following the end of the return period and announced by the Executive Regulations Where the due date falls on a weekend or national holiday, the deadline shall be extended to the first following working day Late Submission Late submission or payment can result in a penalty levied by the FTA(AED 1,000 for the first time & AED 2,000 in case of repetition within 24 months)
VAT Obligations : VAT returns filings and Payments Taxable Persons will be required to report details of the value of supplies made in each Emirate on their VAT returns EMIRATE WISE REPORTING The mechanism for the allocation of supplies made in each Emirate will be announced in the Executive Regulations REPORTING OF ERRORS Where an error has been made on a VAT return submitted within the last 5 years, then the taxable person must disclose this error to the FTA within 30 days of becoming aware of the error Depending on the nature of the error and the amount of tax under / over declared, the adjustment to take account of the error could be made: a) either on the next tax return due for submission b) via a separate voluntary disclosure to the FTA In case of any error, It is recommended that errors in VAT returns are corrected as quickly as possible
Illustrative Penalties-VAT Violation Penalty in AED Failure by the Taxable Person to display prices inclusive of Tax 15,000 Failure by the Taxable Person to notify the Authority of applying Tax based on the margin Failure to comply with conditions & procedures related to keeping the Goods in a Designated Zone or moving them to another Designated Zone Failure by the Taxable Person to issue the Tax invoice or an alternative document when making any supply Failure by the Taxable Person to comply with the conditions & procedures regarding issuance of electronic Tax invoice/credit notes Failure by Taxable Person to issue a Tax Credit note or an alternative document. Failure by Taxable Person to submit a registration application within the timeframe specified in Tax Law 2,500 Higher of 50,000 or 50% of tax chargeable in respect of the goods. 5,000 for each tax invoice/alternative document 5,000 for each incorrect document 5,000 for each tax credit note/document 20,000
VAT : REGISTRATIONS
VAT REGISTRATION Who is Mandatorily required to Register for VAT? Every taxable PERSON RESIDENT OF MEMBER STATE (as per Law currently member state means UAE and KSA) Whose annual Taxable supplies in the Member State exceeds mandatory threshold limit over the previous 12 months or is expected to exceed mandatory threshold in the next thirty 30 days Every taxable PERSON WHO IS NOT A RESIDENT OF MEMBER STATE (as per Law currently member state means UAE and KSA) Shall register for Tax if he makes supplies of goods or services, and where no other Person is obligated to pay the due Tax on these supplies in the state Mandatory Registration Threshold is AED 375,000 No threshold applies to Non Resident Taxable persons Note : The Executive Regulations shall specify the Time Limits within which a person has to inform the FTA about his liability to register for Tax and effective date of Tax Registration
VAT REGISTRATION Who can Voluntarily Register for VAT? The person who proves, at the end of any given month that Total Taxable Supplies OR Expenses Subject to Tax During the previous 12 month period or the coming 30 day period has exceeded the Voluntary Registration Threshold Voluntary Registration Threshold is AED 187,500
Registration Deadlines for VAT Category Entities with a turnover exceeding AED 150 million Entities with a turnover exceeding AED 10 million Timelines Before 31 st October 2017- (passed) Before November 30, 2017 All other entities By December 4, 2017
VAT : INVOICES
VAT Invoices : General Note Provisions of UAE VAT Law lay down conditions and Requirements for Issuing Tax Invoices : a) A Registrant making a Taxable Supply shall issue an original Tax Invoice and deliver it to the Recipient of Goods or Services; Tax Invoice Written/Electronic document which records the details of a taxable supply made b) A Registrant making a Deemed Supply shall issue an original Tax Invoice and deliver it to a Recipient of Goods or Services if available or keep it in his records if there is no Recipient of Goods or Services Invoice must be issued within 14 days of the date of supply Only a VAT registered business can issue a tax invoice c) The Executive Regulation of this Decree-Law shall specify the following: Data to be included in the Tax Invoice; The conditions and procedures required to issue an electronic Tax Invoice; Instances where another Person may issue a Tax Invoice on behalf of the registered supplier Invoices issued and received should be kept for a minimum of 5 years
Contents of VAT Invoices : General Note As per the provisions of Article 56 of GCC VAT Framework : Each member state shall determine the contents of the tax invoice and the deadline for issuing it, provided that the tax Ministerial Committee shall at least determine the minimum details that have to be included in the tax invoice Each member state can allow the issuance of simplified invoices in accordance with the conditions & modalities determined by such states Tax invoices can be issued in any currency provided that the tax value is expressed in the currency of the member state where the place of supply takes place, and this shall be on the basis of the official exchange rate prevalent in such state on the tax due date. Sequential number which uniquely identifies the document Quantity goods / services supplied, the rate of VAT and amount payable, in AED The Name, address and Tax Registration Number of the supplier Amount of VAT expressed in UAE AED The time of supply (only if different from the invoice date) The date of issue of the invoice
Likely Contents of VAT Invoices as per UAE VAT Law 1 Sequential Numbering 7 Rate of Discount and monetary value of Discount 2 Date of issue of invoice 8 Total Taxable value in AED on which tax is payable 3 Name, Address and Tax Registration Number of Supplier 9 Gross Invoice amount payable in AED, Net Invoice amount payable in AED 4 Name, Address and Tax Registration Number of Recipient 10 Total amount of VAT expressed in AED together with exchange rate and the source of that rate 5 6 Description of Goods / Services Supplied Quantity Supplied, Unit Rate, VAT Rate, VAT payable in AED If the supply is in a currency other than the AED, then for the purposes of the Tax Invoice, the amount stated in the Tax Invoice shall be converted into the AED according to the exchange rate approved by the Central Bank at the date of supply.
Likely Contents of VAT Credit Notes as per UAE VAT Law 1 Sequential Numbering 2 Date of issue of Tax Credit Note 3 Name, Address and Tax Registration Number of Supplier 7 VAT invoice Serial Number to which the Tax Credit Note relates 4 Name, Address and Tax Registration Number of Recipient 8 Brief explanation of the circumstances giving rise to issuing the Tax Credit Note 5 Description of Goods / Services Returned 6 Quantity Returned, Unit Rate, VAT Rate, VAT reversed in AED
VAT : RECORD KEEPING AND DOCUMENTATION
Record Keeping (1/2) 1 Accounting Records and any information necessary to verify entries, including, but not limited to: Annual Accounts, General Ledger, Purchase Register, Invoices issued and received, Credit notes, Debit notes 2 Additional records required for specific taxes Different taxes may require different records to be kept in order for taxpayers to be compliant, for example, a VAT account. 3 Any other information as directed by the FTA that may be required in order to confirm, the person s liability to tax, including any liability to register
Record Keeping (2/2) 1 Invoices, Debit notes and Credit Notes: All tax invoices and alternative documents related to receiving the goods or services; All received tax credit notes and alternative documents received; All tax invoices / tax credit notes and alternative documents issued ; Records of adjustments or corrections made to accounts or Tax Invoices 2 Additional records of : All supplies of imports / exports of goods and services; Goods and services that have been disposed of or used for matters not related to business; Goods and services purchased for which the input tax was not deducted Taxable persons for VAT must in addition retain the following records for at least 5 years 3 VAT Account: VAT due on taxable supplies (incl. those pursuant the reverse charge mechanism); VAT due after error correction or adjustment ; VAT deductible after error correction or adjustment; VAT deductible for supplies or imports
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