VAT has been set at 5 per cent on a host of products, but certain segments have been exempted.
The final VAT regulations announced last month have helped clear the air for investors and companies in the UAE. Set to be introduced across the Gulf countries, VAT has been set at 5 per cent on a host of products, but certain segments have been exempted, such as basic consumer goods, healthcare and education, etc.
The new law also assigns responsibilities to eligible resident taxable persons including non-residents and investors and their agents as well as nominated representatives who will have to register and ensure specified compliance.
Here are five things you need to know about the revised tax law:
- All taxable persons are required to register under the respective country’s law i.e., VAT and excise, and apply for a Tax Registration Number (TRN) within a stipulated time frame once the new laws are published in UAE, which is expected soon.
- There has to be the registration and appointment of tax agents and/or a legal representative, who will be responsible for all compliances and for tax payable on behalf of their principals.
- There are strict penalties for non-compliance including prison terms for key management personnel/owners,who is responsible for compliance and also fines up to five times of the tax due and payable by each taxable person and/ or entity, who is in default including any wilful default of any tax provisions.
Step 1: VAT Advisory services which will consist of:
- Identification and analysis of the VAT impact on your business
- Outline the VAT registration obligations and steps for applying for a VAT registration number.
- Review and amendment of contractual arrangements with customers and suppliers in order to properly map out all transaction types.
- Analysis of IT system and accounting requirements.
- Ensure that business is structured in such a manner as to avoid unnecessary cash outflow or absolute VAT costs arising, particularly on intercompany transactions.
Step 2: VAT Implementation:
Based on the outcome of the 1st step, our finance and tax teams will be available to implement changes in your IT systems and throughout your organization.
- We will make sure that the relevant books and records are maintained in the appropriate manner.
- Ensure that the accounts payable function evidences that Input VAT paid is recovered where permitted as quickly as possible.
- Ensure that the accounts receivable function understands when Ouput VAT should and should not be charged, and it is accurately accounted for at the correct rates.
- Update of the invoice templates to ensure that all relevant information for VAT Invoices are included.
- Assist with the VAT registration with the competent authority.
For small SMEs, we can provide a set-up of a simple accounting systems and implementation of VAT rules, through our outsourced accounting services.
For larger SMEs, we can assist your finance team with the implementation and provide outsource CFO or Finance Manager services on a monthly basis in order to strengthen your team.
Step 3: VAT Training and Post Implementation Support.
We understand that change can be a difficult thing that is why we will deliver tailored VAT training for your teams to assist with the transition in to VAT. Our specialist VAT advisory team will also be on hand to provide post implementation support and guidance during the project to ensure all agreed deliverables are delivered.
Step 4: VAT Compliance
- Advise on the application of the rules, especially on available exemptions, VAT treatment of intra-GCC transactions, imports and exports;
- Preparation and filing the VAT returns
- Assistance in claiming VAT refunds
- Update of the invoice templates to ensure that all relevant information for VAT Invoices are included.
- Assessment of the VAT implication related to: new business models, elaborated supply chains, asset purchases and transfers, M&A, etc.
[/vc_column_text][/vc_tta_section][vc_tta_section title=”VAT IN UAE IMPORTANCE OF ACCOUNTING RECORDS” tab_id=”1520096258465-9dad9061-de08″][vc_column_text]
Consultation and Guidelines
Value Added Tax (VAT) is a tax on consumption and it applies to almost all goods and services. As most of the management of the companies might be aware of the fact that as part of diversifying the economy and revenue generation, the GCC governments have decided to adopt Value Added Tax (VAT). UAE is also going to adopt VAT which applies to almost all goods and services except basic food items, healthcare, and education. Though the burden normally lies on the ultimate consumer the business entities need to change the systems, processes, and procedures to comply the new legal requirement which is expected to be implemented by the government effective from 1st Jan 2018.
Normal requirements under VAT system the companies have to comply:
- At the time of purchase of goods or availing of services – Ensure that in the case of taxable items whether tax has been properly charged (input tax)by the supplier and details given in the invoices.
- At the time of sale or provision of services – Apply the rate on the sale value and reduce the amount of input tax to arrive the amount to be paid.
- Make the payment of tax computed and due within stipulated date to Govt.
- Filing the VAT returns to the Govt authorities by providing the relevant information requested by the GOVT, within the stipulated period.
- Maintain proper stock, invoices, accounts, VAT returns, and other relevant records to justify the tax paid at the time of purchase.
The above requirements demand more control and safety on stock, invoices, and records, ensure proper filing system, modification/ upgradations of software, compliance of due dates for collection, payment, and remittance of tax, filing of VAT returns to govt etc. Then the role of the accountant will be very important for the compliance of VAT. Maintenance of accounts and records is also important as per new company law etc.
Requirement of New Commercial Company Law No.2 of 2015
As per Article 26 of the Company Law – every company shall keep the accounting records for a period of 5 years from the end of financial year of the company.
Article 348 – For failure to keep the accounting record to explain the entity’s transactions ( Fine Aed 50,000 to Aed 500,000).
Article 349 – If the company fails to keep the accounting records for the period stipulated (5 years). (Fine will be Aed 20,000/-to 200,000/- will be imposed.[/vc_column_text][/vc_tta_section][vc_tta_section title=”VAT FAQ’s” tab_id=”1520097383160-cbd85f2e-ff63″][vc_column_text]1) Why is the UAE implementing VAT?
The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide our country with a new source of income which will contribute to the continued provision of high quality public services into the future. It will also help government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
2) When will the VAT go into effect and what will be the rates?
VAT will be introduced across the UAE on 1 January 2018 at a standard rate of 5%.
3) How will the government collect VAT?
Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT (also known as output TAX) to all of their customers at the prevailing rate and incur VAT (also known as Input TAX) on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
4) Will VAT cover all products and services?
VAT, as a general consumption tax, will apply to the majority of transactions of goods and services unless specifically exempted or excepted by law.
5) Will the cost of living increase?
The cost of living is likely to increase slightly, but this will vary depending on the individual’s lifestyle and spending behaviour. If your spending is mainly on those things which are relieved from VAT, you are unlikely to see any significant increase.
6) What measures will the government take to ensure that businesses don’t use the VAT implementation as an excuse to increase prices?
VAT is intended to help improve the economic base of the country. Therefore, we will include rules that require businesses to be clear about how much VAT you are paying for each transaction. You will have the required information to decide whether to buy something or not.
7) Who can or will be able to register for VAT?
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
8) What are the VAT-related responsibilities of businesses?
All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case we need to establish whether they should be registered.
VAT-registered businesses generally:
must charge VAT on taxable goods or services they supply;
may reclaim any VAT they’ve paid on business-related goods or services;
keep a range of business records which will allow the government to check that they have got things right
If you’re a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be made online.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to the government. If you’ve paid more VAT than you’ve charged, you can reclaim the difference.
9) What does a business need to do to prepare for VAT?
Concerned businesses will have time to prepare before VAT will come into effect in January 2018. During that time, businesses will need to meet requirements to fulfil their tax obligations. Businesses could start now so that they will be ready later. To fully comply with VAT, We believe that businesses may need to make some changes to their core operations, their financial management and book-keeping, their technology, and perhaps even their human resource mix (e.g., accountants and tax advisors). It is essential that businesses try to understand the implications of VAT now and once the legislation is issued make every effort to align their business model to government reporting and compliance requirements. We will provide businesses with guidance on how to fully comply with VAT once the legislation is issued. The final responsibility and accountability to comply with law is on the business.
10) When are businesses supposed to start registering for VAT?
VAT will come into force on 1 January 2018. Any business that is required to be registered for VAT and charge VAT from 1 January 2018 must be registered prior to that date.
To enable businesses to prepare for introduction of VAT and comply with this registration obligation in time, the electronic registrations will be open for VAT from mid September’2017 . This will ensure that there is no last minute rush from businesses to register for VAT before the deadline.
11) When are registered businesses required to file VAT returns?
Taxpayers must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, should the FTA decide so) within 28 days from the end of the tax period in accordance with the procedures specified in the VAT legislation. The Tax returns shall be filed online using eServices.
12) What kind of records are businesses required to maintain, and for how long?
Businesses will be required to keep records which will enable the Federal Tax Authority to identify the details of the business activities and review transactions. The specifics regarding the documents which will be required and the time period for keeping them will be stated in the relevant legislation (As of now business records will have to be maiintained at least for five years.
13) How long must a taxable person retain VAT invoices for?
Any taxable person must retain VAT invoices issued and received for a minimum of 5 years.
14) How should a business determine the place of supply?
The place of supply will determine whether a supply is made within the UAE (in which case the UAE VAT law will apply), or outside the UAE for VAT purposes. For a supply of goods, the place of supply should be the location of goods when the supply takes place with special rules for certain categories of supplies (e.g. water and energy, cross border supplies). For the supply of services, the place of supply should be where the supplier is established with special rules for certain categories of supplies (e.g. cross border supplies between businesses).
15) Can businesses offset customs duty against VAT payments?
VAT shall be payable in addition to the custom duties paid by the importer of the goods and cannot be deducted. VAT shall be computed on the value that includes the customs duties.
16) How will real estate be treated?
The VAT treatment of real estate will depend on whether it is a commercial or residential property. Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%).
On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within 3 years from their completion will be zero-rated.
17) What sectors will be zero rated?
VAT will be charged at 0% in respect of the following main categories of supplies:
Exports of goods and services to outside the GCC;
International transportation, and related supplies;
Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
Newly constructed residential properties, that are supplied for the first time within 3 years of their construction ;
Supply of certain education services, and supply of relevant goods and services;
Supply of certain Healthcare services, and supply of relevant goods and services.
18) What sectors will be exempt?
The following categories of supplies will be exempt from VAT:
The supply of some financial services (clarified in VAT legislation);
Bare land; and
Local passenger transport
19) Will there be VAT grouping?
Businesses that satisfy certain requirements covered under the Legislation (such as being resident in the UAE and being related/associated parties) will be able to register as a VAT group. For some businesses, VAT grouping will be a useful tool that would simplify accounting for VAT. As intercompany transactions will not attract VAT.
20) Will there be bad debt relief?
VAT registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to bad debt which has been written off by the VAT registered business. The legislation will include the conditions and limitations concerning the use of this relief.
21) Will there be a margin scheme?
To avoid double taxation where second hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second hand goods with reference to the difference between the purchase price of the goods and the selling price of the goods (that is, the profit margin). The VAT which must be accounted for by the registered person will be included in the profit margin. The legislation will include the details of the conditions to be met in order to apply this mechanism.
22) What are the cases that would lead to the imposition of penalties?
Penalties will be imposed for non-compliance.
Examples of actions and omissions that may give raise to penalties include:
A person failing to register when required to do so;
A person failing to submit a tax return or make a payment within the required period;
A person failing to keep the records required under the issued tax legislation;
Tax evasion offences where a person performs a deliberate act or omission with the intention of violating the provisions of the issued tax legislation.
23) Will there be any special schemes for SMEs?
No special rules are planned for small or medium sized enterprises. However, the FTA will provide materials and resources available for these entities to assist them in their enquiries.
24) Will there be transitional rules?
Special rules will be provided to deal with various situations that may arise in respect of supplies that span the introduction of VAT. For example:
Where a payment is received in respect of a supply of goods before the introduction of VAT but the goods are actually delivered after the introduction of VAT, this means that VAT will have to be charged on such supplies. Likewise, special rules will apply with regards to supplies of services spanning the introduction of VAT.
Where a contract is concluded prior to the introduction of VAT in respect of a supply which is wholly or partly made after the introduction of VAT, and the contract does not contain clauses relating to the VAT treatment of the supply, then consideration for the supply will be treated as inclusive of VAT. There will, however, be special provisions to allow suppliers to charge VAT in situations where their recipient is able to recover their VAT but where there is no VAT clause.
25) How will insurance be treated?
Generally, insurance (vehicle, medical, etc) will be taxable. Life insurance, however, will be treated as an exempt financial service.
26) How will financial services be treated?
It is expected that fee based financial services will be taxed but margin based products are likely to be exempt.
27) How will Islamic finance be treated?
Islamic finance products are consistent with the principles of sharia and therefore often operate differently from financial products that are common internationally.
To ensure that there are no inconsistencies between the VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products will be aligned with the treatment of similar standard financial services.
28) Can UAE nationals claim VAT?
A scheme will be introduced to allow a UAE national who is not registered for VAT to reclaim VAT paid on goods and services relating to constructing a new residence which will be privately used by the person and his family. This will allow the recovery of VAT on such expenses as contractor’s services and building materials.
29) Will it be possible to issue cash receipts instead of VAT invoices?
A supplier registered or required to be registered for VAT must issue a valid VAT invoice for the supply. To be considered as a valid VAT invoice, the document must follow a specific format as mentioned in the legislation. In certain situations the supplier may be able to issue a simplified VAT invoice. The conditions for the VAT invoice and the simplified VAT invoice are mentioned legislation.
30) Will there be any VAT that businesses are not allowed to claim?
VAT will not be deductible in respect of expenses incurred for making non-taxable supplies. Furthermore, input tax cannot be deducted if it is incurred in respect of specific expenses such as entertainment expenses e.g. employee entertainment.
31) Under which conditions will businesses be allowed to claim VAT incurred on expenses?
VAT on expenses that were incurred by a business can be deducted in the following circumstances:
The business must be a taxable person (the end consumer cannot claim any input tax refund).
VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
The goods or services acquired are used or intended to be used for making taxable supplies.
VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.
32) Will non-residents be required to register for VAT?
Non-residents that make taxable supplies in the UAE will be required to register for VAT unless there is any other UAE resident person who is responsible for accounting for VAT on these supplies. This exclusion may apply, for example, where a UAE business is required to account for VAT under a reverse charge mechanism in respect of a purchase from a non-resident.
33) Will VAT be paid on imports?
VAT is due on the goods and services purchased from abroad.
In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.
In case the recipient in the State is a non-registered person for VAT purposes, VAT would be paid on import of goods from a place outside the GCC. Such VAT will typically be required to be paid before the goods are released to the person.
34) How will Government Entities be treated for VAT purposes?
Supplies made by government entities will typically be subject to VAT. This will ensure that government entities are not unfairly advantaged as compared to private businesses.
Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. It is likely certain government entities will be entitled to VAT refunds – this is designed to avoid budgeting issues and provide a level playing field between outsourced and insourced activities.
For the supplies provided for government entities, the treatment of such supplies shall depend on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard tax rate, the treatment would remain the same even if it is provided to a government entity.
35) Will Businesses have to report on their business in each of the Emirates?
It is expected that businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate. Guidance will be provided to businesses with regards to this.
It is expected that the rules will be relatively straightforward for most businesses and will be based, for example, for B2C transactions, on the location of the transaction (e.g. in a retail environment, the location of the shop).
36) Will tourists also pay VAT?
Yes, tourists are a significant source of revenue for the UAE and will pay VAT at the point of sale. Nevertheless, we have set the VAT rate deliberately low so that VAT is a limited burden on all consumers.