VALUE ADDED TAX (VAT) Post Implementation Audit and Assurance to Board Audit Committee 12 DECEMBER 2017 0
VAT in UAE Supplies are either : Exempted Taxable ( 5% or Zero %) Maintenance of Books of Accounts/Records for 5 years/ 15 years (Real Estate) VAT shall be levied from 1 January 2018 Registrants must file Online Tax Returns Registrants must comply with Law to avoid strict penalties from Federal Tax Authority (FTA) FTA has a right to perform Tax Audit Returns must capture details of supplies made and received Penalties for violation is upto 3 or 5 times of tax amount and imprisonment FTA has a right to conduct Tax assessment 1
Likely Compliance Requirements COMPLIANCE REQUIREMENTS CHECKLIST Option for Voluntary Registration Available 2 Registration started from 1 st October 2017 4 Group Registration permissible 6 1 3 Every person exceeding Threshold Turnover limit to Compulsory Register Threshold limit likely to set at AED 375,000 5 Penal Consequences if liable to register but not registered 7 One Registration for one entity within Member state 2
Likely Compliance Requirements PAYMENT OF TAXES & FILING OF RETURNS Payment of Tax is net of output less input 2 Filing of Return also mandatory for disclosure of procurement and Supply transactions, Emirate wise 4 Non compliance may lead to Penal implications 6 1 3 5 7 Every taxable person liable to pay taxes due at end of Tax period Refund option (Excess Recoverable Tax) in some cases available Payment & Return Filing likely to be on E Platform (Arabic?) Likely Tax period to be 3 months or less 3
Likely Compliance Requirements INVOICE & RECORD KEEPING Prescribed particulars to be printed on invoice (Executive Regulations) Books of Accounts and Records to be maintained To be preserved for 5 years 2 4 6 1 3 5 4 Every taxable supply has to be supported by invoice Invoice to be valid document for claim of credit by Buyer Additional Records may be suggested
Possible Areas of Impact Pricing Strategy: Determine pricing considering the deduction for VAT on inputs, additional working capital cost, competition pricing, etc. Billing and collections: Invoicing and contractual changes for supply impacted by VAT. Procurement strategy: Considering VAT levy, timing for high value procurements should be decided pre VAT implementation vs. post VAT implementation, purchases from within GCC or outside GCC, etc. Contracts /arrangement: Revisit contracts entered with vendors & customers in GCC and outside GCC and determine whether VAT would be available. Credit consideration: Negotiate credit period with suppliers and customers considering the VAT transitional period and timing for payment of VAT. Businesses will need to amend systems, processes and procedures and will need to ensure they comply with the new requirements, such as for example: Accounting and Reporting Technology Supply Chain Program Management Advocacy Compliance Indirect Tax Assessment 5
Typical Change Journey 01 Sept to 31 Oct 2017 01 Nov to 15 Dec 2017 01 Jan to 28 Apr 2018 START ANALYZE Implementation & Training IT Implementation TEST Post Roll Out Formation of VAT task force; Planning and initiation Conducting impact assessment Including all functions; IT systems Gap analysis VAT Registration; Implementing Recommendatio ns Conducting functional and compliance Coding the tax masters; Configuring formats; Coding tax logics Performing user acceptance test; Verifying the tax logics; Extracting sample reports and documents Mapping system performance; Monthly reconciliation of VAT liability and VAT input tax; Maintaining records training 6
Over 150bn in VAT is lost every year, with around 50bn estimated to be a result of crossborder VAT fraud Internal Auditors cover internal controls over VAT process as a part of their Internal Audit Plan 7
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Parameters to be Considered Strategic Change in Business strategy Relationship with Tax Authority (Additional Stakeholders) Relationship with Customers and Suppliers Response to public when non compliance disclosed People and Organization Changes Strategic Operational Transaction level compliance (Volume of Transactions & Complexity of Transactions) Number of Incidents / Complaints Manual Processing Changes in Products / Services Process Changes Technology Changes M&A Outsourcing / Centralization Financial Financial VAT RISK AREAS Operational 9 Financial Penalties for Non compliance Loses for amount should be recovered for input tax or charged for output tax Managing Working Capital Source: Phenix Consulting Group
Audit Issues Illustrative 10 Source: Phenix Consulting Group
Audit Objectives Businesses comply with the articles set out in UAE VAT Law. Objectives System automated Tax Invoices are appropriately raised, capturing all required VAT information. Correct amount of VAT is collected and deposited with the Federal Tax Authority. TO ENSURE Books of accounts and records are maintained in order to accurately and completely report VAT. Appropriate VAT clauses are entered into contracts and agreements. Understand supply chain model and relevant VAT risks and opportunities (using SMEs) 11
Areas of Focus Finance Department IT Department Reconciliation of general ledger with VAT Returns. Monitoring of procedures and internal controls to support reporting and compliance. Appropriate levy of VAT on applicable supplies. Payment of VAT and filling of VAT Returns on a timely basis. Issuance of VAT invoices capturing all mandatory details as required by applicable VAT Law. Reviewing product/services set up in accounting systems to ensure correct VAT rates have been set for Customer Invoices. HR Department Ensuring employee s employment contracts capture payments and allowances provided to them appropriately. In case of any reimbursements, ensuring an audit trail of supporting evidence. Procurement Department Obtaining vendor information details from a VAT perspective to keep the Vendor master file updated. Verification of VAT detailed of supplier invoices received before payment processing Legal Department Ensuring VAT clauses are appropriately included in the contracts entered into with the Vendors/Suppliers/Service Providers, including any addendums needed to pre VAT period contracts. 12
Common Questions Audit Committee Do we have VAT strategy? Are KPIs defined? What is our appetite? Do we have a Robust Compliance Framework 13
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